Homewo

ork 3 Solutions

TECH
H 638 Risk
k Managem
ment

Chap
pter 3A: Fro
om referencce sources
1. NPV
N
Problem
m
Cash
C
flows sh
hown below with a NPV
V of $1,493 m
million. Notte the year nnumbers shouuld
be year 0, 1, 2,
2 3 and 4 in
n the Table below.
b

2. Decision
D
Treee Problem
Do
D nothing iss the best opttion with a value
v
of $4600,857.

3. Payoff table
Maximax:
M
$500. Pick P1
Maximin:
M
$15
50. Pick P1
Minimax
M
regrret: $150. Pick P1
N1
0
200
400

N2
0
100
150

N3
150
0
275

Max Regr et
150
200
400

Min off Max Regrret

150

Maximum
M
ex
xpected valuee: $283.33. Pick
P P1
Decision
n
Alternativ
ves
P1
P2
P3

Sta
ates of Natu
ure
N1
N2
N3
500
200
150
300
100
300
100
50
25

pected
Exp
value
2283.33
2233.33
58.33

P1 is the bestt choice chossen by all thee methods. So, choose P

P1.
pter 4:
Chap
L
preventiion reduces the
t frequenccy of loss or the number of losses thaat
4. Loss
occur. Loss reeduction red
duces the sev
verity of the loss or the ffinancial imppact. Seat beelts
in
n an automob
bile are a losss prevention
n device, butt the air bags are a loss rreduction
device. Houseekeeping at a business premises
p
is a loss preventtion device, and salvagee
affter a loss is a loss reducction device.
C
trransfers of risk involve trying
t
to havve some otheer entity acccept the risk,, or at
5. Contractual
leeast the finan
ncial conseq
quences of th
he risk. A hoold harmlesss agreement in a contracct is a
prromise by one
o party to accept the risk of anotther, i.e., to hold them harmless for any

losses. Landlords often transfer to tenants the risks of bodily injury on the premises, even
from conditions solely controlled by the landlord.
6. Firms organize as corporations or as limited-liability companies to separate the business
assets from the assets of the organizers. These kinds of organizations enjoy advantages in
law that are not enjoyed by individuals.
7. Risk assumption means that the entity has decided not to
transfer the risk by any means. They will bear the cost of the losses. True self-insurance
involves having the critical number of exposure units, having a loss control mentality,
and having financial resources to pay losses.
8. The greatest advantage of a self-insurance program is that some part, but
not all, of the insurance premium can be saved. The principal disadvantages are the
possibility of having losses larger than expected and the possible costs of services, such
as loss control and claim administration, that would have been handled by an
insurance company.
9. These are key factors in choosing risk-handling techniques. High severity losses, for
example, are never appropriate to retain. The best candidates for insurance are the low
frequency, high severity losses.