There are 3 questions to answer on the captive document. The balance sheet is also attached to answer the qestions. Please be sure that you are able to understand subject matter before accepting the

The CRO of Johnson Bragg Company is trying to find the optimal method of financing its workers’ compensation risk. Johnson Bragg Company is considering three risk financing techniques in order to address this loss exposure: a) retention (something similar to self-insurance); b) traditional third-party insurance; or c) formation of a captive insurance company. Assume all three methods will meet state requirements. Also assume any financial information (balance sheet numbers, loss expectations, etc…) will remain stable for the next decade and that Johnson Bragg Company’s internal rate of return is 10%.

You are asked by Johnson Bragg Company to decide which method of risk management is most appropriate for dealing with Johnson Bragg Company’s workers’ compensation losses over the next 10 years. Use the balance sheet information, as well as the addition information below, to answer each of the following questions related to Johnson Bragg Company and decide which method of risk management is best for Johnson Bragg Company.

Johnson Bragg Company has decided to use the working capital method to determine how much it is willing to retain. It has determined that Johnson Bragg Company is willing to retain 5-10% of working capital for its workers’ compensation risk. Management is adamant that it is not willing to retain any more than that. Johnson Bragg Company has reviewed its workers’ compensation claims history and determined that its workers’ compensation losses are roughly normally distributed with a mean of $100,000 and a standard deviation of $75,000.

Johnson Bragg Company has investigated the captive option. Management has determined that start-up costs for the captive insurance company would be $225,000 and annual premiums will be a level $110,000 over the next 10 years to ensure that the captive has the resources to pay for all workers’ compensation claims.

Johnson Bragg Company also has received a quote from a highly rated third party insurer who is willing to guarantee that Johnson Bragg Company’s insurance premiums will be $150,000 per year for the next 10 years for its workers’ compensation claims.

Question 1. What is the working capital for Johnson Bragg Company as of December 31st, 2017? Current Assets – Current Liabilities
$ 6,000,000.00 – 4,000000 = 2000000

Question 2. What is the maximum amount, in dollars, that Johnson Bragg Company would be willing to retain?

100,000.00 to 200,0000

Question 3. Given Johnson Bragg Company’s workers’ compensation loss distribution, should Johnson Bragg Company retain workers’ compensation losses? Why?

Question 4. Ignoring the retention option discussed in questions 1-3, should the company start a captive or purchase workers compensation insurance from a third party insurance company? Why? Remember, this decision has a 10 year time horizon.

Question 5. Given all of your answers in questions 1 through 4, should Johnson Bragg Company form a captive workers’ compensation insurer, purchases workers’ compensation insurance from a third party insurer, or retain workers’ compensation losses? Why?