## Describing, Evaluating, and Managing Risk

Describing, Evaluating, and Managing Risk 4.3 There is a 1 percent chance that you will have healthcare bills of \$100,000, a 19 percent chance that you will have healthcare bills of \$10,000, a 60 percent chance that you will have healthcare bills of \$500, and a 20 percent chance that you will have healthcare bills of \$0. What is your expected healthcare spending? 4.4 There is a 1 percent chance that you will have healthcare bills of \$100,000, a 19 percent chance that you will have healthcare bills of \$10,000, a 60 percent chance that you will have healthcare bills of \$500, and a 20 percent chance that you will have healthcare bills of \$0. What will your expected insurance benefits be? Would you be willing to buy complete insurance coverage if it cost \$3,712? Explain. 4.5 Instead of complete insurance as in Exercise 4.4, you have a policy with a \$5,000 deductible. What will your expected out-of- pocket spending be? What will your expected insurance benefits be? Assuming that the premium equals 116 percent of expected insurance benefits, do you prefer the policy with a \$5,000 deductible or complete coverage? Explain. 4.6 Your firm, which operates a nationwide system of cancer clinics, has annual profits of \$800 million and cash reserves of \$500 million. Your clinics have a replacement value of \$200 million, and fire insurance for them would cost \$5 million per year. Actuarial data show that your expected losses due to fire are \$4 million. Should you buy insurance? 4.7 Your firm rents a supply management system to hospitals. You have received a buyout offer of \$5 million. You forecast a 25 percent chance that you will have profits of \$10 million, a 35 percent chance that you will have profits of \$6 million, and a 40 percent chance that you will have profits of \$2 million. Should you accept the offer? Explain. 4.9 Your house is worth \$200,000. Your risk of a catastrophic flood is 0.5 percent. Such a flood would destroy your house and would not be covered by homeowner?s insurance. Although you grumble, you buy flood coverage for \$1,200. Are you risk averse or risk seeking? 4.11 Your firm has been sued for \$3 million by a supplier for breach of contract. Your lawyers believe that there are three possible outcomes if the suit goes to trial. One, which the lawyers term highly improbable, is that your supplier will win the lawsuit and be awarded \$3 million. Another, which the lawyers term unlikely, is that your supplier will win the lawsuit and be awarded \$500,000