Insurance Essay

375 Words2 Pages
Chapter 1 Solutions to Questions and Problems 1. (a) The direct losses are the property damage and liability costs. The indirect losses include lost profits from the interruption of the business, additional operating expenses, higher cost of raising additional capital, the value of foregone investment opportunities because the cost of raising external funds reduces the value of investment opportunities, and in the extreme bankruptcy costs. (b) The direct losses are the legal costs and the costs associated with judgments or settlements of claims. The indirect costs include disruption of daily operations as employees deal with lawsuits, damaged reputation with the community and consumers which could in turn increase labor costs and reduce demand for the product. The liability loss also could increase the cost of raising additional capital, cause the firm to forego investment opportunities because the cost of raising external funds reduces the value of investment opportunities, and in the extreme bankruptcy costs. 2. One way to reduce the risk of product liability lawsuits is to reduce the amount of the product that is produced, but not change its design or marketing. In the extreme, the manufacturer could stop production all together. Another way is to make the product safer for consumers either by design changes, greater quality control in the manufacturing process, or by providing warning labels or safety instructions with the product. 3. The risk of being injured in an automobile could be reduced by driving (a) less often, (b) more safely, (c) during times that have a lower likelihood of accidents (daytime during non-rush hour period), (d) less often on dangerous roads, (e) a safer car, (f) at lower speeds, (g) using seat belts, (h) without distractions – not using a phone. 4. The main methods of financing losses are paying losses out of

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