FINA2342_A_2023_Review Questions 3_Solutions

pdf

School

The University of Hong Kong *

*We aren’t endorsed by this school

Course

2342

Subject

Economics

Date

Nov 24, 2024

Type

pdf

Pages

Uploaded by AmbassadorReindeer3214

1 of 3 THE UNIVERSITY OF HONG KONG HKU Business School 1 st Semester 2023-24 FINA2342_A_Insurance: Theory & Practice Tutorial Review Question #3 Textbook Questions ( Risk Management and Insurance, Harrington & Niehaus) Chapter 11 1 . Sommer Inc. is trying to determine how much to spend on safety equipment for its plant. The first column in the following table gives values for possible expenditures. The second column gives the expected number of worker injuries and the third column gives the expected severity per injury (cost to Sommer per injury) associated with each expenditure level. How much should Sommer spend on safety if it is trying to maximize firm value? Ignore the time value of money. Expenditure Expected Injuries Expected Severity per injury 0 10 $10,000 $15,000 7 8,000 30,000 5 7,000 45,000 4 5,000 60,000 3 5,000

2 of 3 3. Pottier Transportation is trying to decide whether to require its drivers to take a driver safety course. The firm has 100 drivers and the cost of the course per driver is $1,500, which includes the cost to the firm of people not working. If all 100 drivers take the course immediately, the insurance company will reduce the firm’s auto insurance premiums by $80,000 immediately, and by $45,000 in each of the next two years. In the managers’ view, the only benefit of the course is a reduction in insurance premiums. The firm’s chief financial officer says that the appropriate cost of capital is 7 percent. Should the firm require its drives to take the course?

3 of 3 Chapter 26 Q1 Use the following data to estimate the expected total losses for 2021 assuming that the probability distributions of frequency and severity have been and will continue to be stable. Year Frequency of Accidents Average Accident Severity Inflation Rate during Year 2014 33 $1,800 2.0% 2015 25 2,100 1.5 2016 35 3,000 2.5 2017 31 2,800 1.5 2018 29 3,100 2.0 2019 27 3,200 1.8 2020 34 3,500 1.5

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

4 of 3 Chapter 20 Q6. Ambrose Motor Corp. has expected earnings before interest payments for the next year equal to $100 million if it does not lose a product liability lawsuit. Interest and principal payments on its debt equal $60 million, leaving $40 million for shareholders if it does not lose a product liability lawsuit. The probability of losing a product liability lawsuit is 2%, and the expected damage if a suit is lost equals $50 million. If the lawsuit is lost, the firm will be unable to make its promised payments to debtholders and it will have to renegotiate its debt payments. The legal and administrative costs of renegotiations equal $5 million. Should Ambrose Motor purchase a liability insurance policy with a $50 million limit for a premium of $1.2 million? Assuming the utility of the cash flow is In (CF). Case 1: If the company chooses not to purchase insurance, the (free) cash flow to the company will be: (in $million) E(U(CF)) = IN(45) x 2% + IN(100) x 98% = 4.5892 Case 2:If the company chooses to purchase insurance, then the (free) cash flow to the company will become: (in $million) U(CF) = IN(98.8) = 4.5931 Ambrose Motor should purchase a liability insurance.

5 of 3 Example from Lecture 3: Fire Insurance Suppose you own a luxury flat which is valued at $20 million. You figure that the chance of a fire is 0.1 and the damage in case of a fire would be $5 million. Assume the utility of overall wealth of homeowners is represented by ln(𝑊) . 1. What is your optimal amount of insurance you would buy? q* = L = $5M 2) What is the insurance premium per unit of protection to be charged by the insurance company if the insurance market is competitive? 𝝅 = p = 0.1 3) If the insurance market is not competitive, what would be the optimal demand for insurance? The optimal demand for insurance would depend on the unit premium charged by the insurer. The higher the premium charged by the insurer, the lower the demand for insurance.

Related Documents

Ensayo Tipos de regulación gubernamental.docx

International-Trade-Theories-_ppt_.docx

Question 2 new copy (1).docx

_wgu_c211 (3).pdf

Assessment 2 (page 7 of 16).pdf

13.docx

Community Economic Development.docx

221020658753166.docx

Screenshot 2023-11-27 131603.png

Christian White Paper 6pg.docx

Final Milestone-42.pdf

Q3-4.docx

Recommended textbooks for you

Microeconomic Theory

Economics

ISBN:9781337517942

Author:NICHOLSON

Publisher:Cengage

Managerial Economics: A Problem Solving Approach

Economics

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Cengage Learning

Microeconomics: Private and Public Choice (MindTa...

Economics

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:Cengage Learning

Macroeconomics: Private and Public Choice (MindTa...

Economics

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:Cengage Learning

Economics: Private and Public Choice (MindTap Cou...

Economics

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:Cengage Learning

ECON MICRO

Economics

ISBN:9781337000536

Author:William A. McEachern

Publisher:Cengage Learning

SEE MORE TEXTBOOKS

Recommended textbooks for you

Microeconomic Theory
Economics
ISBN:9781337517942
Author:NICHOLSON
Publisher:Cengage
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Microeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506893
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
ECON MICRO
Economics
ISBN:9781337000536
Author:William A. McEachern
Publisher:Cengage Learning