A Risk Manager gets bids from two insurers. The coverages and policy limits are the same for each one. The premiums and deductibles are different.

Company A: $40,000 Premium, $5,000 Deductible (per claim)

Company B: $55,000 Premium, $3,000 Deductible (per claims)

The Risk Manager knows the expected losses from whats happened in the past:

Expected # of Losses Expected Size of Loss

8 $3,000

4 $5,000

3 over $5,000

Assume an interest rate of 4%. Premiums are paid at the beginning of the year and losses at the end. Find the Present Value of each bid:

• Company A (4 points):
• Company B (4 points):
• Which bid will the Risk Manager choose?