Principles of Risk and Insurance 1. (1) What are the five components of cost of
ID: 2808148 • Letter: P
Question
Principles of Risk and Insurance
1. (1) What are the five components of cost of risk? How do they relate to one another? (2) Suppose in a firm, the probability of worker injury is- 1/20. The losses from an injury is $100,000. Suppose the cost of residual uncertainty is $3,000 and the cost from other elements of cost of risk is zero. The value of firm without risk is $2 million. What is the value of the firm providing given information? (3) Suppose the firm purchases a full insurance, costing $7,000. What is the value of the firm?Explanation / Answer
five components of risk of cost are as below:
1. Administration cost: cost of managing risk
2. Mitigation Cost: cost of reducing risk
3. Risk Control Cost: cost of operational process while reducing risk
4. Trasfer cost : cost of transfering risk
5. Losses: losses that occur because of risk
this all are interlinked and help in finding the value of value of firm.
Ans 2) Value of firm = Value of firm without risk - cost of residual uncrtainty - injury losses
= 2000000 - 3000 - 1/20 * 100000
= $1993000
Ans 3) Value of firm = value of rirm without risk - insurance cost
= $2 million - $7000
= $1993000
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