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i. In each of the above cases (1) to (4), use the 'independent liability' method to calculate the contributions to be made by each insurance company. Explain your answers and show all your calculations. ii. What are the contributions to be made by each insurance company if the 'sum insured' method is used in (b)(i) above? Explain your answers and show all your calculations. From the standpoint of insurance company, analyze the problem(s) created by the 'sum insured' approach.

i. In each of the above cases (1) to (4), use the 'independent liability' method to calculate the contributions to be made by each insurance company. Explain your answers and show all your calculations. ii. What are the contributions to be made by each insurance company if the 'sum insured' method is used in (b)(i) above? Explain your answers and show all your calculations. From the standpoint of insurance company, analyze the problem(s) created by the 'sum insured' approach.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question 2' a. What is 'contribution' in insurance? b. A fire broke out at Dinosaur Toy Shop causing stock loss of $800,000. With regards to insurance protection, Dinosaur Toy Shop has arranged fire insurance policies on stock from two insurance companies. The extracts of the two fire insurance policies are as follows: Highland Insurance Co. Ltd. Subject matter of insurance: both the building and the stock Sum insured: $20,000,000 Building: $18,500,000. stock: $1,500,000. Lakeside Insurance Co. Ltd. Subject matter of insurance: stock Sum insured: HK$6,000,000. It is assumed that the value-at-risk of Dinosaur Toy Shop's stock at the time of loss was: Case (1) $1,000,000 Case (2) $2,000,000 Case (3) $7,500,000 Case (4) $10,000,000 i. In each of the above cases (1) to (4), use the 'independent liability' method to calculate the contributions to be made by each insurance company. Explain your answers and show all your calculations. ii. What are the contributions to be made by each insurance company if the 'sum insured' method is used in (b)(i) above? Explain your answers and show all your calculations. From the standpoint of insurance company, analyze the problem(s) created by the 'sum insured' approach.
Transcribed Image Text:Question 2' a. What is 'contribution' in insurance? b. A fire broke out at Dinosaur Toy Shop causing stock loss of $800,000. With regards to insurance protection, Dinosaur Toy Shop has arranged fire insurance policies on stock from two insurance companies. The extracts of the two fire insurance policies are as follows: Highland Insurance Co. Ltd. Subject matter of insurance: both the building and the stock Sum insured: $20,000,000 Building: $18,500,000. stock: $1,500,000. Lakeside Insurance Co. Ltd. Subject matter of insurance: stock Sum insured: HK$6,000,000. It is assumed that the value-at-risk of Dinosaur Toy Shop's stock at the time of loss was: Case (1) $1,000,000 Case (2) $2,000,000 Case (3) $7,500,000 Case (4) $10,000,000 i. In each of the above cases (1) to (4), use the 'independent liability' method to calculate the contributions to be made by each insurance company. Explain your answers and show all your calculations. ii. What are the contributions to be made by each insurance company if the 'sum insured' method is used in (b)(i) above? Explain your answers and show all your calculations. From the standpoint of insurance company, analyze the problem(s) created by the 'sum insured' approach.
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