The WhatMeWorry Company has annual sales of$200 million. Its only production plant is valued at $80 million.
Question:
The WhatMeWorry Company has annual sales of$200 million. Its only production plant is valued at $80 million. There is a 2% chance of an industrial accident that would completely destroy the plant, resulting in a total loss. Partial losses do not occur. The annual premium to insure the plant with a limit of $80 million (and no deductible) would be $2,400,000.
a) Would management of the Company choose to insure or retain the plant accident risk under the Expected Value approach to risk management? Which would it choose under the Minimax Regret approach? Support each of your answers with a matrix of the kind we used in class.
b) Now you are told that management of the company considers a property loss equal to or less than 10% of annual sales to be "tolerable," i.e. it is willing to retain this amount of risk if it is economical to do so. Also, the company's insurance broker has informed management that if it accepts a deductible on the plant insurance policy, the premium will be reduced by $30,000 for every $1 million of deductible. Recommend an insurance program that integrates the Expected Value and Minimax Regret strategies such that WhatMeWo can achieve its risk management objectives at the lowest cost. You must clearly show relevant supporting analysis as demonstrated in class to get full credit.
2) You are presented with the following 2019 financial information for the HiReturns Insurance Company. Calculate the 2019 ROI for HiReturns as shown in class. To get full credit you must clearly show all supporting calculations. (You may round all percentage answers to the nearest 0.1%.)
Premiums: 600 million
Average investment assets: 750 million
Average equity: 300 million
Combined Ratio: 99%
Pretax Investment Return 5.5%
Marginal Tax Rate 36%
Expert Answer:
