# Kimberly-Clark Company owns awarehouseworth \$600,000. Ray Van Eperenis the risk manager. Kimberly-Clark faces the risk of fire which would completely…

Kimberly-Clark Company owns awarehouseworth \$600,000. Ray Van Eperenis the risk manager. Kimberly-Clark faces the risk of fire which would completely destroy their building. The probability of a fire is known to be 5%. Kimberly-Clark is considering the following risk management options to address the risk of fire to their warehouse:

(1) Retention [2]Full Insurance for a premium of \$36,000 [3]Safety Program + Retention [4]Safety Program + Full Insurance [premium falls to \$22,000]

The cost of the Safety Program is \$10,000. It has the impact of lowering the probability of a fire from 5% to 3%. However, if a fire does occur it is still a total loss. a.Construct a loss matrix. [4 points]b.What is the actuarially fair premium [AFP] in this case? [1 point] c.What is the AFP when safetyprogramis introduced? [2points]Assume Ray’s worry valuefor retention (WVR) is \$8,000 and his worry value for retention with safety program(WVRS) is \$5,000.d.If Ray decides to minimize TOTAL COST, what risk management option does he choose? Make sure that you show all calculations and clearly define TOTAL COST in each case. [4 points]e.What is Ray’s PMAX for full insurance? [1point]

f.During a meeting, the Chief Risk Officer (CRO) told Ray that the most he would pay for full insurance is \$40,000. What is the CRO’s WVR? [1 point]g.Who is more risk averse, the CRO or Ray? Explain. [1point]

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