**Insurance Premiums and Risk Management Case Study****Scenario:**Ben owns a $600,000 house and faces an 8% chance of experiencing a fire in any given year. Assume that a fire will result in a total loss of the house. The Lemonade Insurance Company offers Rainie and Ben the same insurance contract, charging them the same premium and pooling them in the same risk group.### Questions:1. **Probability Distribution of Total Losses:** - Calculate the probability distribution of total losses for Lemonade Insurance Company if they sell insurance contracts to both Rainie and Ben.2. **Break-Even Premium Calculation:** - Determine the premium amount that Lemonade Insurance Company must charge each of Rainie and Ben to break even.3. **Purchase Decision at Break-Even Premium:** - Assess whether Rainie will purchase the insurance contract if she is charged the break-even premium, and if Ben would do the same. Provide a brief explanation for each.4. **Risk Assessment:** - Analyze the amount of risk Lemonade Insurance Company faces if they sell contracts to both Rainie and Ben.This case study is designed to help students understand real-world applications of probability, risk management, and actuarial science in the context of the insurance industry.

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Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter1: Accounting As A Form Of Communication

Section: Chapter Questions

Problem 1.1P

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Monique Gonzales just graduated and was hired by a new cybersecurity firm in Colorado. She needs to set up her retirement plan portfolio, Monique has completed the following payoff table for different investment options and estimated the potential profits that could be realized in one month. Monique can use the Hurwicz Criterion strategy to make her decision. Alternatives Answer Mutual Fund Stock Market CDs ➤ Bonds Payoff Table Good Economy 900 5,500 1,800 550 Step 1 of 2: What should Monique's decision be using the Hurwicz Criterion strategy and an à = 0.55? O Mutual Fund OOO State of Nature Fair Economy Poor Economy O Stock Market O CDs 650 4,900 880 440 O Bonds 440 3,100 630 165 Tables Keypad Keyboard Shortcuts
Home and Automobile Insurance Newlyweds Jamie Lee and Ross have had several milestones in the past year. They are newlyweds, recently purchased their first home and now have twins on the way! Jamie Lee and Ross have to seriously consider their insurance needs. A family, a home and now babies on the way, they need to develop a risk management plan to help them should an unexpected event arise. Current Financial Situation: Assets (Jamie Lee and Ross combined): Checking account: $6,300 Savings Account: $23,200 Emergency Fund savings account: $30,500 IRA balance: $36,000 Car: $10,000 (Jamie Lee) and $18,000 (Ross) Liabilities (Jamie Lee and Ross combined): Student loan balance: $0 Credit Card Balance: $4,000 Car Loans: $8,000 Income: Jamie Lee: $50,000 gross income ($37,500 net income after taxes) Ross: $75,000 gross income ($64,000 net income after taxes) Monthly Expenses (combined): Mortgage: $1,252 Property Taxes and Insurance: $500 Utilities: $195 Food: $600…
Home and Automobile Insurance Newlyweds Jamie Lee and Ross have had several milestones in the past year. They are newlyweds, recently purchased their first home and now have twins on the way! Jamie Lee and Ross have to seriously consider their insurance needs. A family, a home and now babies on the way, they need to develop a risk management plan to help them should an unexpected event arise. Current Financial Situation: Assets (Jamie Lee and Ross combined): Checking account: $6,300 Savings Account: $23,200 Emergency Fund savings account: $30,500 IRA balance: $36,000 Car: $10,000 (Jamie Lee) and $18,000 (Ross) Liabilities (Jamie Lee and Ross combined): Student loan balance: $0 Credit Card Balance: $4,000 Car Loans: $8,000 Income: Jamie Lee: $50,000 gross income ($37,500 net income after taxes) Ross: $75,000 gross income ($64,000 net income after taxes) Monthly Expenses (combined): Mortgage: $1,252 Property Taxes and Insurance: $500 Utilities: $195 Food: $600…
Monique Gonzales just graduated and was hired by a new cybersecurity firm in Colorado. She needs to set up her retirement plan portfolio. Monique has completed the following payoff table for different investment options and estimated the potential profits that could be realized in one month. Monique can use the Hurwicz Criterion strategy to make her decision.Payoff Table State of Nature Alternatives Good Economy Fair Economy Poor Economy Mutual Fund 1,0001,000 650650 270270 Stock Market 6,5006,500 4,7004,700 3,3003,300 CDs 1,5001,500 850850 710710 Bonds 650650 270270 205205 Step 2 of 2: What is Monique’s potential payoff based on the the Hurwicz Criterion strategy and an α=0.35α=0.35?
Joe is 30 years old, married, and his wife is expecting their first baby. Joe makes $48,000 per year and has $200 budgeted per month to spend on life insurance. He has started looking at his options and has three choices: BAD WHOLE LIFE BETTER 20-YEAR TERM BEST 20-YEAR TERM $250,000 $500,000 Coverage $250,000 Premium $200/month $13/month $20/month Investments $0 $187/month $180/month Investment Value $34,000 at Age 50 $186,840 $179,847 Investment Value at Age 70 $124,000 $2,222,010 $2,138,835 *Always buy a policy that covers 10-12 times your annual pretax income! R FOUNDATIONS IN PERSONAL FINANCE Life Insurance Plans CHAPTER 9, LESSON 5 PAGE 1 OF 3 1. For each insurance option, how much would Joe pay in total premiums over 20 years compared the amount of coverage he would receive? 2. Which option is the best value for Joe's money? Why? 3. How did Joe arrive at the numbers in the investments row on his chart? 4. Why is Joe thinking about buying life insurance?
Divu fiance
Suppose a company offers a standard insurance contract with a premium (r) of $1,000 and a payout (q) of $10,000. Suppose that Eleanor earns a healthy state income of $30,000, a sick state income of $20,000, and has a 5% chance of becoming ill. From this information, you can determine that the expected profit for the insurance company is likely: O positive O equal to zero O negative
ok t nces Your friend Amber has approached you seeking advice concerning two investment opportunities that she is presently considering. Her classmate Simone has asked her for a loan of $500 to help establish a small business; her neighbor Riley would like to borrow $515 as a personal loan. One year from now, Amber's original investment will be returned in either case, along with $45 of income from Simone or $48 of income from Riley. Amber can make only one investment. Required: a. 1. Compute the ROI of Simone and Riley. 2. Which investment would you advise Amber to make? b. What other factors should you advise Amber to consider before making either investment? Complete this question by entering your answers in the tabs below. Req A1 Req A2 and B Compute the ROI of Simone and Riley. Note: Round your answers to 2 decimal places. Simone Riley ROI % % Show less A
Home and Automobile Insurance Newlyweds Joanne and James have had several milestones in the past year. They are newlyweds, recently purchased their first home and now have twins on the way! Joanne and James have to seriously consider their insurance needs. A family, a home and now babies on the way, they need to develop a risk management plan to help them should an unexpected event arise. Current Financial Situation: Assets (Joanne and James combined): Checking account $4,300 Savings Account $22,200 Emergency Fund savings account $20,500 Retirement Account balance $26,000 Car $10,000(JOANNE) $18,000(JAMES) Liabilities (Joanne and James combined): Student loan balance $0 Credit Card Balance $2,000 Car Loans $6,000 Income: · JOANNE : $50,000 gross income ($37,500 net income after taxes) · JAMES:$75,000 gross income ($64,000 net income after taxes) Monthly Expenses (Joanne and James combined):…
Exercise 4: Insurance Fiona has von Neumann-Morgenstern utility function u(x) VT and initial wealth 640, 000. She faces a 25% chance of losing L = 280, 000. 1. Is Fiona risk averse? 2. What is Fiona's utility if no loss occurs, what is her utility if the loss occurs? What is Fiona's expected utility? 3. What is the cost of fair insurance against the possible loss? Suppose Fiona is able to choose insurance with any coverage z e [0, 1] (i.e. 0 0 C(z) = if z = 0 4. Suppose co = 0 and c1 = 70,000. Is insurance at coverage level z > 0 fair insurance? What coverage level z* would Fiona choose? Explain. 5. Suppose co = 100 and c1 = 70, 000. Is insurance at coverage level z > 0 fair insurance? What coverage level z** would Fiona choose? Explain. (Note that co = 100 is an "avoidable fixed cost" which is only paid if she chooses strictly positive insurance coverage. However, the "marginal cost" of additional insurance, c1 = 70,000, is the same as in the previous part.) 6. Suppose co = 100 and c1…
On a whim you purchased a scratch-off lottery ticket at the gas station. It must have been your lucky day because you won $1,500,000. Being logical and rational you decide to invest the money at 6% for 11 years until you are ready to start a family. At the end of 11 years, how much will your investment be worth? Future Value of $1 Periods 2% 3% 4% 5% 6% 10 1.219 1.344 1.480 1.629 1.791 11 1.243 1.384 1.539 1.710 1.898 12 1.268 1.426 1.601 1.796 2.012 13 1.294 1.469 1.665 1.886 2.133 14 1.319 1.513 1.732 1.980 2.261 15 1.346 1.558 1.801 2.079 2.397 Future Value of Annuity of $1 Periods 2% 3% 4% 5% 6% 10 10.950 11.464 12.006 12.578 13.181 11 12.169 12.808 13.486 14.207 14.972 12 13.412 14.192 15.026 15.917 16.870 13 14.680 15.618 16.627 17.713 18.882 14 15.974 17.086 18.292 19.599 21.015 15 17.293 18.599 20.024 21.579 23.276 $2,847,000 $790,500 $22,458,000 $3,018,000
RISK & RETURN AND PAYOFF TABLES TUTORIAL QUESTION 1 Mr. Nel, an entrepreneur who is currently 55 years old, took early retirement from his business which he had started 30 years ago. He still wants to be involved in investments to keep his mind occupied while on “permanent” holiday. While thinking about investment opportunities, he realised that one of his most consistent expenses is his cell phone bill. He has a MTN and a separate VODACOM contract which he pays monthly. He thought to himself, “Why not invest in the company that I am contributing to on a monthly basis.” He decided to conduct research on the two entities in order to assist him with his investment decision. The following information was gathered regarding the two companies: VODACOM Vodacom is a leading African communications group providing mobile communications and related services to 40.4 million customers. Its mobile network covers calls to a total population of approximately 182 million people across five…

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