Calculate the present value of the total cost of risk

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Reference no: EM133349471

Question: Calculate the Present Value of the Total Cost of Risk for the next two years in the following scenario.

Fast Delivery is a regional transport service. The Risk Manager of Fast Delivery considers buying Vehicle liability insurance for the company's rented fleet. The historic information is considered reliable and there is no change anticipated in the business. The cost of renting the fleet is $200,000 for two years (payment is required up-front for the two years). The insurance company has offered a two-year policy which the Risk Manager thinks is a good idea and is prepared to lock in for two years. An annual premium of $100,000 will be paid at the start of each annual term. The driver safety program costs $25,000 annually and is paid at the end of each annual term. All losses, over the $10,000 insurance policy deductible, are estimated to be $80,000 per year and would be covered by the insurance company. The total annual losses under the deductible have averaged $50,000 per year (for the purposes of this scenario assume these losses are incurred at the end of each year). Assume an interest rate of 5%.

Reference no: EM133349471

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