Coastal Convenience Stores faces the following probability d…
Coastal Convenience Stores faces the following probability distribution for losses related to customers sustaining an injury while on the retail store’s premises: Probability Distribution: Outcome Loss Amount ($$$) Probability No Loss $0 0.50 Customer sustains Small Injury $6,000 0.45 Customer sustains Major Injury $25,000 0.05 Coastal Convenience Stores is considering implementing a Risk Modification technique. If the company implements this technique: it will reduce the frequency (likelihood) and severity (consequence) of losses on its retail store premises to the following: Probability Distribution WITH Risk Modification: Outcome Loss Amount ($$$) Probability No Loss $0 0.70 Customer sustains Small Injury $3,000 0.28 Customer sustains Major Injury $12,500 0.02 Carrie is the Risk Manager for Coastal Convenience Stores and is considering three different risk management options for the premise’s liability exposure: 1) Retention 2) Retention; but implementing the Risk Modification technique The cost of the Risk Modification technique = $2,750 If purchased: the frequency (likelihood) and severity (consequence) of the outcomes will be reduced to the second Probability Distribution listed above 3) Purchase Deductible Insurance; but with NO implementation of the Risk Modification technique The premium for Deductible Insurance = $3,500 The deductible = $1,000 Question #1: Derive the Loss Matrix for Coastal Convenience Stores Be sure to include ALL three risk management options; and be sure to display your Loss Amount in the top row, and your Risk Treatment Costs in the bottom row for EACH RM option. (If you would like to use the below template: simply “copy & paste” it into the Answer Box) Risk Management Options Outcome #1 Outcome #2 Outcome #3 RM Option #1 Loss Amount Risk Treatment Costs RM Option #2 Loss Amount Risk Treatment Costs RM Option #3 Loss Amount Risk Treatment Costs X Question #2: If Carrie’s decision rule is to minimize Expected COST – which of the three RM options should she choose? Calculate the Expected COST for each of three RM options. Be sure to show your work and calculations for all three options. And be sure to identify WHICH of the three RM Options she should choose. Question #3: Assume we know Carrie’s Worry Value for all three of the RM options: RM Option #1: Worry Value for Retention = $750 RM Option #2: Worry Value for Retention w/ Risk Modification technique = $410 RM Option #3: Worry Value for Deductible Insurance = $50 If Carrie’s decision rule is to minimize TOTAL COST – which of the three RM Options should she choose? Calculate the TOTAL COST for each of three RM options. Be sure to show your work and calculations for all three options. And be sure to identify WHICH of the three RM Options she should choose.