RMI 2101 Lecture 7: RMI 2101 Topic 7 Class Notes
3 Nov 2016
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Loss matrix: indicated $ amount associated with each combination of (1) risk management alternatives (2) future states of the world. Loss matrix example 1 - assume 2 future states of the world (loss/no loss) fire. Possible risk management options (1) retention (doing nothing) (2) retention plus additional safety measures - loss prevention that reduces frequency not severity - ,000 (3) full insurance - face amount of ,000 - premium cost of ,000. Expenses from this example: insurance premium, safety program, cost of uninsured losses. Revenue of - no expenses ; taxable income of . Revenue of & of insurance premium ; taxable income of. After tax savings cost - = . After tax savings cost of a tax deductible expenditures of ()(1- tax rate) Probability without safety (options 1 and 3) fire 3% ; no fire 97% Probability with safety (option 2) fire 1% ; no fire 99%
