Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Good day please assist with this risk analysis management question if possible do in word add google drive for easy copy and paste and if

Good day please assist with this risk analysis management question if possible do in word add google drive for easy copy and paste and if written well

image text in transcribedimage text in transcribed
a) Provide a reason why a company would prefer to hedge over taking an insurance to minimize on risks. (4 marks) b) Your house is worth $200,000. Your risk of a catastrophic flood is 0.5 percent. Such a flood would destroy your house and would not be covered by homeowner's insurance. Although you grumble, you buy flood coverage for $1,200. Are you being Risky or Risk Averse? Justify your answer. (4 marks) c) There are 200 people of two types on the road: good drivers and bad drivers. Good drivers (G) have a 1% chance of causing an accident while bad drivers (B) have a 5% chance of causing an accident. The proportion of bad drivers is 0.5, so the proportion of good drivers is 0.5. The cost of an accident is $6,000. Good drivers have a willingness to pay for insurance of $200 while bad drivers have a willingness to pay of $400. 1. Suppose the insurance company knows each driver's type. What premium would th insurance company charge each type of driver? (Assume the insurance company breaks even, so the premium is equal to the expected cost.) (4 marks)|l. Now suppose that the insurance company does not know the driver's type. What would the insurance company's expected prot be if it charged premiums based on the indiuidual's selfreported type? [4 marks} III. Now suppose that the insurance company does not know the driver's type. What premiums would the insurance company charge if they did not have any information on the driver's type? Is there a pooling equilibrium? [4 marks]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction To Management In The Hospitality Industry

Authors: Clayton W Barrows, Tom Powers

7th Edition

9780471782766

More Books

Students also viewed these General Management questions

Question

Always show respect for the other person or persons.

Answered: 1 week ago