the Smith Family Case materials

    Read the Smith Family Case materials   Decide what you will do for Stage 1 -- whether to buy insurance, what kinds, and how much to buy. Remember that the Smith Family considers a potential loss greater than $2,500 to be "Severe" -- in other words, something to be insured. Also, don't consider the "real-world" probabilities -- we will be using the probabilities given in the case. For example, earthquake is a 10% probability in the case, not the much smaller real-world probability. Here are the potential losses, and the insurance decisions required: Stage 1: Homeowners Property and Auto Physical Damage The Stage 1 property-related loss probabilities and RMI decision options are as follows: Probabilities of Potential Losses (All Stated on Replacement Cost Basis) in a Given Stage—Property Fire loss to the Smith’s attached garage resulting in damage estimated at 25 percent of the dwelling’s replacement cost value (assume no personal property was damaged and no loss of use): Loss value (based on replacement cost) Random number 25% of value of dwelling 1–4 No loss 5–20   Theft loss to contents of home, including all of Karen’s jewelry: Loss value (based on replacement cost) Random number $22,000 ($10,000 of which is jewelry)3 1–4 No loss 5–20   Earthquake loss to Smith’s dwelling (do not consider damage to personal property): Loss value Random number Total loss to dwelling plus $18,000 loss of use 1–2 No loss 3–20   Replacement of air filters and cleaning of air ducts of the home’s air conditioning system: Cost Random number $200 1–16 Not required 17–20   Physical damage to Toyota Camry resulting from single-vehicle driving accident where the car scraped by a fire hydrant: Loss value Random number $6,300 1–7 No loss 8–20 Loss Financing Decision Options—Property (Assume an 80 Percent Coinsurance Provision) (1) Property Coverage Purchase HO-3 homeowners insurance on the full value of the dwelling (Coverage A). Coverage on personal property (Coverage C) will automatically be 50 percent of that amount (annual premium = $3,000; deductible = $250 applied once across Coverages A, B, C, and D). OR Purchase HO-3 homeowners insurance on 50 percent of the value of the dwelling (Coverage A). Coverage on personal property (Coverage C) will automatically be 50 percent of that amount (annual premium = $1,500; deductible = $250 applied once across Coverages A, B, C, and D). (2) Personal Property Endorsement Purchase Scheduled Personal Property endorsement with an agreed amount limit on jewelry of $10,000 (annual premium = $2,000; no deductible). OR Do not bother purchasing the Scheduled Personal Property endorsement instead relying on the personal property coverage (i.e., Coverage C) already available through the standard HO-3. (3) Earthquake Coverage Purchase an earthquake endorsement that insures earthquake loss to the dwelling and loss of use (annual premium = $500; deductible = 10 percent of value of insured dwelling). OR Do not bother purchasing any earthquake coverage. (4) Maintenance Coverage Purchase special HO-3 endorsement insuring the costs associated with required maintenance on the home’s air conditioning system (annual premium = $750; no deductible). OR Do not bother purchasing this endorsement and retain the financial costs of this maintenance. (5) Auto Physical Damage Purchase other than collision (“OTC”) and collision automobile physical damage coverage (annual premium = $2,000; $250 OTC deductible; $500 collision deductible). OR Purchase OTC and collision automobile physical damage coverage (annual premium = $1,000; $500 OTC deductible; $1,000 collision deductible). OR Do not bother purchasing any automobile physical damage insurance. The Stage 1 probabilities allow the teams to understand the Stage 1 risks and to use the matrix as a starting point to make their decisions. If these losses occur (based on the random number generated), teams must calculate the losses the property coinsurance penalty, or to consider loss of use as a component of the overall loss, or to calculate ACV of personal property that has been stolen, all of which will affect the Smith family’s net worth.