1. Born2Live Insurance Company has asked you to develop a premium for its new 10-year term life insurance policy for non-smokers. The features of this policy are as follows:
- The policy carries a $100,000 death benefit.
- Insureds will pay a single premium at the beginning of the 10-year period.
- All death benefits are paid out at the end of the year in which the deaths occur.
- Born2Live will include a 20 percent load to account for operating expenses and profit.
- Born2Live assumes that it can earn 6 percent on any premium income that it has available to invest.
a. Determine the single premium for a policy that will be issued to a 50 year-old male, given the following mortality statistics for males ages 50-59:
|
Beginning of Year
|
Age
|
Probability
of Death During Year
|
Beginning of Year
|
Age
|
Probability
of Death During Year
|
|
1
|
50
|
.0055
|
6
|
55
|
.0080
|
|
2
|
51
|
.0060
|
7
|
56
|
.0086
|
|
3
|
52
|
.0065
|
8
|
57
|
.0092
|
|
4
|
53
|
.0070
|
9
|
58
|
.0098
|
|
5
|
54
|
.0075
|
10
|
59
|
.011
|
b. Compare and contrast the policy above (10 year term) to one other form of life insurance coverage. Discuss two reasons why the 50-year old male might prefer one policy over the other.
2. A risk manager has collected the following information on employee accidents at PST, Inc.
|
Year
|
# of Accidents
|
Average Cost per Accident
|
|
2013
|
20
|
1225
|
|
2014
|
21
|
1340
|
|
2015
|
19
|
1510
|
He is considering the purchase of a computer-based training program to reduce his worker injury risk in 2016. The training program would cost $20,000 today. It is alleged that the program will reduce the number of employee accidents by 20 percent. The risk manager expects that the program will also reduce the severity of accidents by roughly 10 percent.
a) Evaluate the differences in the firm's before-tax cash flows for the next three years to determine whether the risk manager should invest in the computer-based training program. Note that the risk manager believes that the appropriate discount rate is 5 percent and you may assume losses (accident costs) are paid at the end of the year. What other assumptions did you make to come up with this estimate? (Note: there are several possible answers to this...just be reasonable and show all work.) Should the risk manager invest in this program?
b) For this investment decision, how important are the manager's expectations regarding the benefits of the program and the appropriate discount rate? Explain.