Question

The risk manager of Cagle corporation argues that retention should be increased to allow the firm to maintain the use of funds that otherwise would go for premiums until claims are paid. If you were either the risk managers supervisor or on the board of directors, which questions would you ask?

Answer 1

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Answer:

Questions to be asked:

• Did the risk manager actually consider the likely scenario that the time value of money(TVM) would be involved into insurance premiums (i.e., that premiums value would be reduced if we are to take account of the TVM)
• Did the risk manager also consider that the taxes should also be paid on the interest that is earned on the funds retained by the organization to inhibit the losses