Please see attached questions. Please DO NOT ACCEPT if you are not familiar with subject matter. This is a must. It requries knowledge of risk management and insurance. Imperative please. there a

The CRO of Caldwell, Inc. is trying to find the optimal method of financing its workers’ compensation risk. Caldwell, Inc. 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 Caldwell, Inc.’s internal rate of return is 10%.

You are asked by Caldwell, Inc. to decide which method of risk management is most appropriate for dealing with Caldwell, Inc.’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 Caldwell, Inc. and decide which method of risk management is best for Caldwell, Inc.

Caldwell, Inc. has decided to use the working capital method to determine how much it is willing to retain. It has determined that Caldwell, Inc. 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. Caldwell, Inc. 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.

Caldwell, Inc. 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.

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

Information to Know:

• The working capital for Caldwell as of December 31st, 2017 is 2 Million Dollars.
  
  

• The Maximum amount, in dollars, that Caldwell, Inc. would be willing to retain is between $100,000.00 to $200,000.00 (One hundred thousand to Two Hundred thousand dollars).

Please answer the following questions in detail:

Question 1. Given Caldwell, Inc.’s workers’ compensation loss distribution, should NSNPTW retain workers’ compensation losses? Why?

Question 2. 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?

Question 3. Given all of your answers in questions 1 through 4, should Caldwell, Inc. form a captive workers’ compensation insurer, purchases workers’ compensation insurance from a third party insurer, or retain workers’ compensation losses? Why?