Question

1. Other factors held constant, which type of firm would be more likely to fully retain (self-insure) its workers compensation losses?

(a) A firm with an individual shareholder who owns 50% of the stock versus a firm in which no single shareholder owns more than 1% of the stock.

(b) A trucking firm with 5,000 drivers versus a manufacturing firm with 5,000 workers at a single plant.

(c) A firm with operating profits positively correlated with claim costs versus a firm with operating profits uncorrelated with claim costs.

(d) A firm with a large amount of debt in its capital structure versus a firm with no debt.

Answer 1

The answer to the question will be C. A firm with operating profits positively correlated with claim costs versus a firm with operating profits uncorrelated with claim cost .

The reason is when there is any problem with the workers and if they raise the claim the company needs to pay it and if the operating profits are positively correlated with claim then it will directly effect companies bottom line. Uncorrelated companies bottom line wont affect directly.