Synopsis: Loss Analysis

Synopsis: Loss Analysis

The Worldwide Rental Tool Company faces several potential auto liability losses. This is a basic summary of the frequency and severity of losses to expect in the future. The forecasted loss occurrence for the first half of 2006 is 12.31 and the average amount of each loss will be $6573.97.The maximum probable loss for the first half of 2006 is $8203.62. The total forecasted amount of loss for the first half of 2006 is close to $80,988.8484 assuming that the companies total miles driven will be close to last 4 periods average of 194411.75. The total maximum probable loss is $246,145.2704.

The company's net cash flow average of $90,000 is relatively low when compared to the maximum probable loss they face. The forecasted average of the losses faced by the company in the first half of 2006 are much higher than the given average cash flow. If the company's cash flows are consistent from year to year, then they will have no way of retaining their expected losses and must consider alternative ways to finance losses. They will only be able to cover a portion of their losses in the event they face the maximum probable loss of $246,145.2704. If there are no alternative ways to finance losses then the existence of the company will be severely threatened.

The company can stop their entire delivery operation, but that will result in a total loss of $600,000.00, and even this will not bring their auto liability down to zero. The only effective method to protect against the risks associated with auto liability is for Worldwide to purchase auto liability insurance, and transfer their risks to a second party.

In the event that the company does insure their auto liability risks, they plan on retaining any loss amount up to $25,000. The notion that the company needs insurance for losses higher than $25,000 and up to $3,000,000 is a bad one because the maximum total probable loss is only about $250,000. The per-occurrence loss limit of $100,000 is also high, since the average amount of loss that the company faces is only $6573.97. The company should buy an insurance policy with lower per-occurrence limits and also lower total loss limits.