Recognizing that Amazon does not in fact operate in a perfect market, Amazons risk manager uses risk management concepts and tools learned in RMI 300 to analyze how risk management adds value to the company. For questions 4-6, evaluate each of the scenarios independently (i.e. do not use information in question 4 to answer question 5).

A). Suppose Amazons insurer has an in-house legal expert who can reduce the probability of a lawsuit from 0.05 (5%) to 0.025 (2.5%). If the insurers premium loadings add an additional amount to the premium equal to 20% of the losses and loss adjustment expense, how much is the premium for $50 million of coverage? Should Amazon be willing to purchase this insurance?

B). Assume Amazon has a $20 million purchase contract with Sharp, a supplier of unique motion sensors. Sharp faces counterparty risk since it does not have perfect information about Amazons ability to uphold the contract. If Amazon purchases product liability insurance, the company can negotiate better contract terms with Sharp and reduce the cost to purchase the sensors by 8%. How much should Amazon be willing to pay for the insurance?