Risk Management assignment

Risk Management assignment

Question -2 – Reinsurance helps Heritage to Q3 operating gain despite Irma hit
Figure 2.1. Shown above is a detail of Heritage’s reinsurance program, the impact of
Irma is going to eat through various layers of the company’s reinsurance protection, and
also eat into the
very bottom of its catastrophe bond transactions, with one attaching at $330 million and
the other at $356 million.
References
1st November 2017 – Author: Luke Gallin. Reinsurance helps Heritage to Q3 operating
gain despite Irma hit. https://www.reinsurancene.ws/reinsurance-helps-heritage-q3-
operating-gain-despite-irma-hit/
Narrative
“Property and casualty (P&C) insurance holding company, Heritage Insurance Holdings,
Inc., recorded an operating income in the third-quarter of 2017, with the firm’s gross
losses from hurricane Irma being passed on to its reinsurers. Heritage recorded an
operating income of $1.4 million in Q3, despite hurricane Irma driving gross losses of an
estimated $388 million, of which the company has a retention of $20 million, pre-tax.
The P&C player reduced its catastrophe retention from $40 million to $20 million, on a
pre-tax basis, during its renewal earlier this year, and was one of the main reasons it
reported an operating income and didn’t fall to an operating loss for the period.”
Problem:
Were Heritage (HIH) to experience gross losses of $1.5b this coming year in “all
regions except Hawaii,” how would that loss be divided among HIH, the re-insurers,
and the bond holders?
Question – 3
1. Calculate the answer and
2. use “TreePlan” Software in Microsoft words
Badger Enterprises publishes a satirical magazine, Badger Zone™, which specializes in
publishing embarrassing details of the private lives of politicians. The editors are aware
of a scandalous rumor about a member of Congress and wish to proceed with the story
in a manner that maximizes expected net income. The risk of an expensive libel action
cannot be ignored, and the editors estimate that the effects of such an action will be a
cost of $125,000 net if lost, taking into account possible fines, legal costs, effects on
future sales, and so on, and zero if won. These costs, and the probability of losing,
estimated to be 0.2, are, they believe, independent of whether or not the rumor is true.
However, the probability of the politician suing does depend on whether the rumor is
true, and they estimate that the probability of his taking legal action is 0.3 if the rumor is
true and 0.9 if it is not.
They currently estimate the probability of the rumor being true at 0.5.
They have three possible courses of action:
(1) Dropping the story,
(2) Publishing immediately, or
(3) Hiring a private detective to investigate the rumor further so that after his
report they
could take a decision on whether or not to publish.
The private detective they have in mind would cost $10,000, and he is good but not
infallible.
The probability of his saying the rumor is true is 1.0 if indeed it is true and 0.2 if it is
false. He will definitely answer in one direction or the other, but the probability of being
sued depends only on whether the rumor is true or not.
They estimate extra net income (gross of any costs of legal activity) from increased
circulation if they publish to be $50,000, and this would be independent of the truth of
the story. What should they do? How much should they be prepared to pay for a report
from an infallible private detective

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