Decision Making - Choosing Risk Management Options
Assume a firm called Kramerica owns a small airplane worth $550,000. You are the risk manager and have to determine how to manage the property damage risks related to this asset. Use the steps below to begin to design a report for the Chief Risk Office.
Gathering Data:
What data would you need to make your decisions? Be specific.
How much property is worth, frequency, what are converge limits.
How would you use that data to further understand how to determine costs and implement risk financing and risk control?
By using this data you will have basic idea how much it will cost.
Risk Management Options: Describe four, realistic risk management options available to you to manage the property risk. Include two different types of risk financing and two different types of risk control. Be specific. For example, instead of saying “loss reduction”, tell your manager exactly what you think Kramerica should do.
Create a Probability Distribution of Losses: Assume that from the data you gathered on 1,000 small planes, you have the following information: there can be three possible losses: $0, $200,000, $550,000 and 60% of those planes sustain no loss while 10% sustain total loss. Write the table (not graph) probability distribution.
Design and Explain the Loss Matrix:
Create a loss matrix for your decision-making process. (You do not have to fill in the cells yet. Just desing the matrix.)
Explain what the cell at the intersection of $0 and a risk financing option means for Kramerica.
Explain exactly how you will use the loss matrix to make your decision. You do not have to do the math, just explain how you would do it and then how you would use the results.
Defining terms: Define the following terms in your own words.
Insurance Deductible
Insurance Policy Limit
Full Insurance
Partial Insurance