Case Study:

Jumbo Shrimp operates ten (10) restaurants (all leased restaurants- no owned buildings) in the coastal area of South Carolina. The restaurants specialize in local seafood and organically grown fruits and vegetables purchased from local farmers. The business has been operating for 20 years.

Jumbo has 25 employees at its business office in Beaufort, and +/- 50 employees per restaurant (525 total), mostly in food prep and service. The restaurants operate from 8:00 am to 10:00 pm each night. However, the highest grossing restaurant (by 50%), located on the beach in a trendy area with a high-income demographic, stays open until 2:00 am.

Jumbo earned a net profit of $12M ($1M for nine restaurants and $3M for the 2 am location) last year on total revenues of $55M ($5M for each of the nine restaurants and $10M for the 2 am location).

Each of the 10 restaurants has $1.5M worth of contents (tenants' improvements, equipment, stock and furnishings).

The president of Jumbo Shrimp compiled a list of situations that could conceivably force the company to require financing over the next twelve months:

Annual Costs (you can assume other details based on the information below -list your assumptions)

• Insurance Premiums - $1.55M total and $75K in self-insured claims and $50K in liability deductibles.
• $500K premium - Broad Form Property Insurance (contents), $1K deductible for all losses except Hurricane. Hurricane deductible is 5% of loss incurred. $15M total limit of insurance for all 10 restaurants ($1.5M each). Replacement Cost included.
• $250K premium - Business Interruption Coverage (Profits). $1M limit for each of the smaller restaurants and $3M for the best performing restaurant. $12M total limit.
• $350K premium - Commercial General Liability Insurance $10M limit, $10K deductible.
• $50K premium - Umbrella Policy $20M Excess of $10M underlying, Self-Insured Retention $10K - Total Liability limit $30M (CGL and Umbrella).
• $100K Premium - Fleet Auto Insurance. PLPD insured. No physical damage for vehicles.
• $300K Premium - Workers Compensation Insurance for all 525 employees.
• $75K Self-Insurance payments per year for the truck operations ($50K for physical damage and $25K for damage to others) per year.
• $50K paid in any given year for small slip and fall claims not paid by the insurance company.

Uninsured and NOT part of the self-insurance program claims last five years:

Theft from office $200K last year.

Freezer Failure last year - $50K for freezer and $150K lost produce).

Interest rate budget

$500K for current year.

Situation:

1. Spoilage and shrinkage consume about 5 percent of the produce ($16,500,000 of produce purchased each year) before it can be sold. Last year their freezer failed and contributed to the insurance claim in 6. Freezer replacement cost $50,000 and $150,000 in food wasted - no boiler and machinery insurance claimed.

Question: How do I calculate probability/severity of this scenario? and what is the best risk financing strategy for this scenario? and please explain why.