The risk managers for XYZ Corp are concerned that its liability risk exposure will impact the likelihood that it will be able to pay its debt service for the coming year from its operating cash flows The risk can potentially be insured, so the issue is how much insurance coverage, if any, should be purchased The Risk Analysts for XYZ have estimated that the number (frequency) of liability claims for the coming year has a Poisson distribution with a parameter of 3 and the average severity of liability costs has a Weibull distribution with parameters 2 and $20 million Frequency and severity are positively correlated with a correlation coefficient equal to 0 3 (Suggestion for all monetary values, use units of 1 million, i e , $1 $1 million) Operating Cash flows Analysts are willing to assume that cash flows from operations, ignoring liability losses, is normally distributed with a mean of $200 million and a standard deviation of $30 million Operating cash flows and the liability risk are not correlated Assume that there are no other sources of uncertainty facing XYZ and ignore taxes Debt Service XYZ has debt service due at the end of the year equal to $40 million The risk manager is trying to decide how much insurance coverage to purchase for the coming year The table below provides three policy options Gen Liab Policy None GL1 GL2 GL3 Deductible 0 40 million 40 million 75 million Limit 0 50 million 75 million 75 million Premium 0 22 million 28 million 15 million Ultimately, the question is which option do you recommend and why The first step is to develop a Monte Carlo simulation model that will provide insight regarding the effects of the various policies on the probability distribution of net cash flows The mock incomplete excel spreadsheet below provides a template on how you could organize your model You need to submit your Risk model After simulating your model, answer the following questions Present a graph of the probability distribution for XYZs liability losses without insurance Be sure to include the expected value, standard deviation, skewness, and 95 th percentile value Present a graph of the probability distribution of XYZs net cash flow without insurance Be sure to include the expected value, standard deviation, skewness, and 5 th percentile value Which policy provides the most coverage Briefly explain Which policy is the most costly Briefly explain Compare GL1 to GL2 Which policy do you recommend Briefly explain Compare your choice from question 5 to GL3 Which policy do you recommend Briefly explain Compare your choice from question 6 to No Insurance Illustrate the probability distribution of no insurance to your choice from 6 using the overlay option in Risk Which do you recommend Briefly explain

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The risk managers for XYZ Corp are concerned that its liability risk exposure will impact the likelihood that it will be able to pay its

The risk managers for XYZ Corp are concerned that its liability risk exposure will impact the likelihood that it will be able to pay its debt service for the coming year from its operating cash flows. The risk can potentially be insured, so the issue is how much insurance coverage, if any, should be purchased.

The Risk: Analysts for XYZ have estimated that the number (frequency) of liability claims for the coming year has a Poisson distribution with a parameter of 3 and the average severity of liability costs has a Weibull distribution with parameters 2 and $20 million. Frequency and severity are positively correlated with a correlation coefficient equal to 0.3. (Suggestion: for all monetary values, use units of 1 million, i.e., $1 = $1 million)

Operating Cash flows: Analysts are willing to assume that cash flows from operations, ignoring liability losses, is normally distributed with a mean of $200 million and a standard deviation of $30 million. Operating cash flows and the liability risk are not correlated. Assume that there are no other sources of uncertainty facing XYZ and ignore taxes.

Debt Service: XYZ has debt service due at the end of the year equal to $40 million.

The risk manager is trying to decide how much insurance coverage to purchase for the coming year. The table below provides three policy options.

Gen Liab Policy	None	GL1	GL2	GL3
Deductible	0	40 million	40 million	75 million
Limit	0	50 million	75 million	75 million
Premium	0	22 million	28 million	15 million

Ultimately, the question is which option do you recommend and why?

The first step is to develop a Monte Carlo simulation model that will provide insight regarding the effects of the various policies on the probability distribution of net cash flows. The mock incomplete excel spreadsheet below provides a template on how you could organize your model. You need to submit your @Risk model.

After simulating your model, answer the following questions:

Present a graph of the probability distribution for XYZs liability losses without insurance. Be sure to include the expected value, standard deviation, skewness, and 95^th percentile value.

Present a graph of the probability distribution of XYZs net cash flow without insurance. Be sure to include the expected value, standard deviation, skewness, and 5^th percentile value.

Which policy provides the most coverage? Briefly explain.

Which policy is the most costly? Briefly explain.

Compare GL1 to GL2. Which policy do you recommend? Briefly explain.

Compare your choice from question 5 to GL3. Which policy do you recommend? Briefly explain.

Compare your choice from question 6 to No Insurance. Illustrate the probability distribution of no insurance to your choice from 6 using the overlay option in @Risk. Which do you recommend? Briefly explain.