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Tutorial 8 Slides

This document provides a tutorial summary and to-do list for an insurance course. It includes reminders about a group project deadline, submission instructions, make-up tutorial details, and practice questions to review chapters 11 and 22 on loss control investment decisions and factors affecting a firm's demand for insurance.

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Edwin Law
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55 views

Tutorial 8 Slides

This document provides a tutorial summary and to-do list for an insurance course. It includes reminders about a group project deadline, submission instructions, make-up tutorial details, and practice questions to review chapters 11 and 22 on loss control investment decisions and factors affecting a firm's demand for insurance.

Uploaded by

Edwin Law
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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TUTORIAL 8

FINA0106B/2342B Insurance: Theory & Practice


Keith Law
School of Economics & Finance
2017 Spring
To-do List
Reminder:
• 2nd Group Project- Project Report on 5 CI policies
 Deadline for Handing in Project Report:
 For Hardcopy: 21 April,2017(Fri), 5:30 pm
 For Softcopy: 21 April,2017(Fri), 11:59pm
 Late submission will be subject to mark penalty
 1 mark deducted from overall score of the Project report for submitting it
(Softcopy version) later than April 21 deadline for each extra 1 day,
 E.g. If a group has submitted softcopy of report at anytime before or at
11:59pm on 22 April,2017, 1 mark will be deducted from overall Project
report score.
 If a group has handed it in at anytime before or at 11:59pm, 23 April,2017,
2 marks will be deducted from overall Project report score. And so on.
To-do List (Cont’d)
• 2nd Group Project- Project Report on 5 CI policies
(Cont’d)
Submit Hardcopy of the Report to Homework Collection
Box, on 9/F, KKL Building (outside tutorial room KK925)

Hand in Softcopy of the Report by sending it to my


designated Gmail Address hku.insurance2015@gmail.com
Rename the file as “Group Number.docx” for easy identification

 E.g. If your group # is Group 1, rename the file [in Word or in PDF]
as “Group 1.docx” or “Group 1.pdf”)
To-do List (Cont’d)
• Public holiday on April 17,2017(Mon)
 Make-up Tutorial Arrangement for Mon 11:30 sessions

Date: 18 April, 2017 (Tue)

Time: 16:30-17:20

Venue: KK1103, 11/F, KKL Blg

• Tutorial Review Question 8


Ch.11 Q.1
How much should the Company spend on safety if it is trying to
maximize firm value? (Ignore time value of money)

Expenditure Expected Injuries Severity


0 10 $10,000
$15,000 7 8,000
30,000 5 7,000
45,000 4 5,000
60,000 3 5,000
75,000 2 5,000
For a quick review on loss control investment decision, please refer to:
• Lecture handout Part 1 Conceptual Framework of Risk, Slides 37-38
Ch.11 Q.1
Answer:

Expenditure Expected Severity ($) Marginal Marginal


($) Injuries Cost ($) Benefit ($)
0 10 10,000 - -
15,000 7 8,000 15,000 – 0 = 10x10,000 –
15,000 7x8,000 =
44,000
30,000 5 7,000 15,000 21,000
45,000 4 5,000 15,000 15,000
60,000 3 5,000 15,000 5,000
75,000 2 5,000 15,000 5,000
Ch.11 Q.4
Identify the main benefits and costs to Lawn-Girl of
installing the new device.
• Benefits:
 Saving in premiums for product liability insurance
 Lower uninsured losses from customer injuries in device operation

• Costs:
 Higher cost due to modified design and manufacturing procedure
 May cause inconvenience to device operator – customer
satisfaction may decline
Ch.22 Q2
Suppose that Company A and Company B are identical in
all respects, except that A is twice the size of B. Which
firm would you expect to purchase more insurance? Briefly
explain.
Answer:
• Company B should purchase more insurance
considering it is inferior to A in the following aspects:
(Higher) cost of capital
(Lower) loss recovery capacity
(Less) diversification
Ch.22 Q5
List the advantages and disadvantages of purchasing an
insurance policy on aggregate property and liability losses
versus purchasing a separate property insurance policy
and a separate liability insurance policy.
Answers:
• An insurance policy on Aggregate property & liability
losses means:
 A policy covering BOTH property & liability losses at the same time
Ch.22 Q5 (Cont’d)
Advantage:
1. Lower premium because:
 Smaller fixed cost for insurer to arrange multiple contracts as 1
single bundle
2. Insured can avoid buying some unwanted/unnecessary
coverage:
 Save a bit insurance cost
Disadvantage:
May be hard for insurer to develop an aggregate policy
 More complicated product to create
 Combining coverage of 2 types of losses into one
SELF PRACTICE
QUESTIONS
Chapters & Questions No.:
Chapter 11: Q.5
Chapter 22: Q.3,4
Ch.22 Q3
Suppose that Company A and Company B are identical in
all respects, except that A has greater financial leverage
than B. Which firm would you expect to purchase more
insurance? Briefly explain.
Answer:
• Company A should purchase more insurance since:

it is more likely to suffer financial distress.

More internal funds are committed to pay back interest.


Ch.22 Q4
Suppose that Company A and Company B are identical in
all respects, except that A is in declining industry and B
is in a growing industry. Which firm would you expect to
purchase more insurance? Briefly explain.
Answer:

• Company B should purchase more insurance:

It has greater need for funds to make new investment, since
more opportunities may arise in a fast-growing industry.

Costly to pay for losses using precious funds, which may


otherwise be invested to generate profits.

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