HEALTHY FISH LTD

Healthy Fish Ltd. insures against accidents of its motor fleet. The fleet consists of highly specialised, imported refrigerator trucks. Contributing factors to the high number of incidents are the poor conditions of the municipal and provincial roads.

Table 1: Loss experience of the motor fleet over the last five years
Year	No. of vehicles	Average event	loss per	No of accidents	Total cost for the year
1	20		R1,500,000	10	R15,000,000
2	20		R2,200,000	12	R26,400,000
3	25		R1,750,000	15	R26,250,000
4	30		R2,000,000	20	R40,000,000
5	50		R3,500,000	25	R87,500,000

Table 2: Quotations under consideration for the insurance of the motor fleet
Quote number	Quoted annual premium	Annual limit for damage to motor fleet	Deductible
1	R15,000,000.00	R60,000,000	R0
2	R10,000,000.00	R30,000,000	R25,000
3	R8,500,000.00	R25,000,000	R50,000
4	R6,000,000.00	R20,000,000	R70,000
5	R5,000,000.00	R10,000,000	R100,000

Question 1

a. Calculate the optimum deductible according to the total expected cost (TEC) rule Show all calculations. (8 marks)

b. Considering the loss history of the company and your answer above, argue which quote is the most

appropriate for the company. (5 marks)