Question: Q4) Peartree Ltd. Is Valued At £18 Millions And Currently Earns A 15% Return On Capital. Annual Losses From Pure Risks At Peartree Are Usually Around £180,000. For The Forthcoming Year, Peartree’s Insurers Have Quoted An Insurance Premium Of £700,000 To Cover All Losses. REQUIRED: (making Any Necessary Assumptions And Showing All Workings) A) Calculate …

Plz use CORPORATE RISK MANAGEMENT knowledge to answer thequestions

## Transcribed Image Text from this Question

Q4) Peartree Ltd. is valued at £18 millions and currently earns a 15% return on capital. Annual losses from pure risks at Peartree are usually around £180,000. For the forthcoming year, Peartree’s insurers have quoted an insurance premium of £700,000 to cover all losses. REQUIRED: (making any necessary assumptions and showing all workings) a) Calculate Peartree’s opportunity cost of insurance (8 marks) b) Calculate the opportunity cost if management at Peartree set up a £2,400,000 fund to cover potential losses. The fund would be invested at a risk free 5% rate of interest and cost £300,000 to administer. (12 marks) c) Based on the information and your calculations so far for this question, offer your opinions on whether the managers at Peartree should choose the full insurance (as in a)) or the fund (as in b)). (6 marks) a) Explain what information OTHER than that provided is relevant to the situation and how it might influence the decision to insure or self-insure. (12 marks) c) Suggest and explain details of alternative ways that Peartree’s pure loss exposure could be handled that might be more sensible than either full insurance or full self-insurance (12 marks).