Major Manufacturing faces the following probability distribu…
Major Manufacturing faces the following probability distribution for losses related to worker’s being injured on the job (worker’s compensation) at its manufacturing plant. Probability Distribution: Outcome Loss Amount ($$$) Probability No Loss $0 0.65 Worker sustains Small Injury $7,500 0.30 Worker sustains Major Injury $35,000 0.05 Major Manufacturing is considering implementing a Risk Modification technique for the risk of worker’s injury on the job. If the firm implements this technique: it will reduce the frequency (likelihood) and severity (consequence) of worker’s compensation losses as follows on the below Probability Distribution: Probability Distribution WITH Risk Modification: Outcome Loss Amount ($$$) Probability No Loss $0 0.75 Worker sustains Small Injury $4,000 0.225 Worker sustains Major Injury $15,000 0.025 The Risk Manager for Major Manufacturing is considering three different risk management options for the worker’s compensation exposure: 1) Retention 2) Retention; but implementing the Risk Modification technique The cost of the Risk Modification technique = $3,000 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 = $4,000 The deductible = $1,000 Question #1: Derive the Loss Matrix for Major Manufacturing. 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 the Risk Manager’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 the Risk Manager’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 = $425 RM Option #3: Worry Value for Deductible Insurance = $100 If the Risk Manager’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.