Answer all please thoroughly, please write out the way you solved the problem
2. Kramerica Company has a small building worth $20,000. The building is subject to physical damages and total destruction as a result of fire. From over 10,000 industry observations, the firm has derived the following probability distribution of fire losses for its building. Loss Amount ($) Probability of Loss 0 5,000 14,000 20,000 0.85 ? 0.05 0.01 Kramerica is considering the following risk management options: [1] [2] [3] Retention Partial insurance Deductible insurance $1,150 Face Amount = $ 16,000; Premium = $1,400 Face Amount = $20,000; Premium = 4 [4] Full insurance $1,460 Deductible per occurrence = $2,000 Face Amount = $20,000; Premium = a. Construct the loss matrix from Kramerica's perspective. Make sure you show loss in the top row and out-of-pocket cost in the bottom row in each cell of the loss matrix. [2 points] b. b. Construct the payout matrix from an insurer's perspective. [2 points] c. What is the AFP for deductible insurance in this case? Show all work. [2 points] d. Assume that the company's decision rule is to pick the option that minimizes TOTAL EXPECTED COST. Can you identify what risk management option is chosen? Why or why not? Make sure that you show all calculations and clearly define TOTAL EXPCTED COST in each case. [2 points] e. Assume that the company's decision rule is to pick the option that minimizes TOTAL EXPECTED COST, what worry value(s) would make deductible insurance preferred to full insurance? Show all work and calculations and explain your numerical answer. [1 point] f. What worry value(s) would make retention preferred to partial insurance? Show all work and calculations and explain your answer. [1 point] 2. Kramerica Company has a small building worth $20,000. The building is subject to physical damages and total destruction as a result of fire. From over 10,000 industry observations, the firm has derived the following probability distribution of fire losses for its building. Loss Amount ($) Probability of Loss 0 5,000 14,000 20,000 0.85 ? 0.05 0.01 Kramerica is considering the following risk management options: [1] [2] [3] Retention Partial insurance Deductible insurance $1,150 Face Amount = $ 16,000; Premium = $1,400 Face Amount = $20,000; Premium = 4 [4] Full insurance $1,460 Deductible per occurrence = $2,000 Face Amount = $20,000; Premium = a. Construct the loss matrix from Kramerica's perspective. Make sure you show loss in the top row and out-of-pocket cost in the bottom row in each cell of the loss matrix. [2 points] b. b. Construct the payout matrix from an insurer's perspective. [2 points] c. What is the AFP for deductible insurance in this case? Show all work. [2 points] d. Assume that the company's decision rule is to pick the option that minimizes TOTAL EXPECTED COST. Can you identify what risk management option is chosen? Why or why not? Make sure that you show all calculations and clearly define TOTAL EXPCTED COST in each case. [2 points] e. Assume that the company's decision rule is to pick the option that minimizes TOTAL EXPECTED COST, what worry value(s) would make deductible insurance preferred to full insurance? Show all work and calculations and explain your numerical answer. [1 point] f. What worry value(s) would make retention preferred to partial insurance? Show all work and calculations and explain your answer. [1 point]
