A finished FIN-431 Topic 3 total cost of risk comparison example, pricing two deductibles and full retention on one fleet, with the reserve's capital cost included and deciding the result. Searches like "fin 431 topic 3 assignment example", "fin431 topic 3 sample" and "fin-431 topic 3 example" land here.
What a finished FIN-431 Topic 3 total cost of risk comparison looks like
The finished comparison starts from an illustrative loss distribution: about ten physical damage claims a year, 60 percent averaging 600, 30 percent averaging 2,800 and 10 percent averaging 9,000, so expected losses run 21,000 a year. Under the 1,000 deductible the firm keeps about 7,600 of that and pays a 20,000 premium, 6,600 more than the insurer expects to pay out. Under the 5,000 deductible it keeps about 17,000 and pays 7,000. Retaining everything means 21,000 of losses plus 2,500 to handle claims. Before capital, full retention looks cheapest at 23,500, against 24,000 and 27,600. Each option then needs a reserve sized to the case's bad year, 12,000, 28,000 or 42,000, priced at the firm's capital cost of 10 percent. With that line added the 5,000 deductible wins at 26,800, ahead of 27,700 and 28,800.
How a FIN-431 Topic 3 example is structured
One loss distribution runs through three treatments, kept in parallel. The case's landscaping firm, its trucks and its claim-size distribution come first, every number invented for the exercise. The expected loss calculation follows, weighting each claim band by its share and multiplying by the annual count. Each option then gets the same four lines: losses the firm keeps, the premium, the cost of handling claims, and the capital charge on a reserve. A short passage explains how retained losses are computed under a deductible, with claims below it kept whole and larger ones kept up to it. The loading on each premium is shown as the gap between the price and the insurer's expected payout. A summary table sets the three totals side by side, before and after capital. The recommendation adopts the higher deductible and states the capital cost at which full retention would win instead.
One distribution under three treatments
The same ten claims a year, spread across three size bands, feed every option, so the options differ only in who pays each part of each loss.
Retained losses under each deductible
Claims below the deductible stay whole with the firm and larger ones are kept up to it, giving about 7,600 retained at 1,000 and 17,000 at 5,000.
Loading read from each premium
The 1,000 deductible's 20,000 premium buys 13,400 of expected claim payments, and the example reads the 6,600 difference as the price of that certainty.
Capital behind retention priced
Reserves of 12,000, 28,000 and 42,000, charged at a 10 percent cost of capital, add 1,200, 2,800 and 4,200 to the three options.
The rate that would reverse it
Full retention overtakes the 5,000 deductible only if capital costs less than about 3.6 percent, a threshold the recommendation names beside its choice.
Where marks go in FIN-431 Topic 3
Premiums compared with premiums, and nothing else, cost the most on this topic, since the question is the total cost of a risk and a premium is only one line of it. A comparison that counts retained losses at their expected value and stops has priced the average year while ignoring the bad one the reserve must survive. Leaving out the capital a reserve ties up makes retention look free, which is how full retention appears cheapest here until that line is added. Deductibles applied to the total annual loss instead of to each claim misstate what the firm keeps. Papers that omit claims handling under full retention forget that someone must investigate and pay each loss. Recommendations with no threshold at which the answer changes present a conclusion resting on a 10 percent assumption as though it were fixed.
Get a FIN-431 Topic 3 example written to your instructions
Send the FIN-431 Topic 3 instructions and the rubric your classroom provides, with the loss data or quotes your section assigns. We write a custom example to them, with retained losses computed under each option, premium loadings shown, the capital behind retention priced and the threshold that would reverse the choice stated, in 24 to 48 hours. The first one is free.
FIN-431 Topic 3 questions, answered
What is the total cost of risk?
The full annual cost of carrying and transferring a set of exposures: retained losses, premiums paid, the expense of handling claims and administering the program, and the cost of capital held against losses the firm keeps. It is the figure retention and transfer decisions should compare, since a lower premium that raises retained losses and reserves can leave the firm worse off overall.
Why charge a cost of capital on the reserve?
Because money held against possible losses cannot be used elsewhere in the business. A firm that keeps 42,000 available for a bad claims year gives up whatever that money would have earned in operations, a cost the example sets at the case's 10 percent. Without the charge, retention looks costless beyond its expected losses, and full retention wins comparisons it would otherwise lose.
Should my business raise its deductibles?
The example cannot say. Its firm, claim distribution, premiums and cost of capital are illustrative, set up so that the capital line changes the answer. Any actual choice turns on loss history, quoted terms, cash reserves and lender or contract requirements, and deserves review by a licensed insurance professional. What the example shows is the total cost comparison FIN-431 expects at this point.