The CEO of a trucking company tells his insurance agent that he can predict almo

Question

The CEO of a trucking company tells his insurance agent that he can predict almost exactly what the total damage to his trucks will be next year due to driver error, but he can’t afford to cover those damages out of operating funds; therefore, he wants to get insurance to cover all the damages. What is wrong with this manager’s reasoning?

A. No one can predict all the inadvertent dents and scrapes that each of the company’s truck drivers will put on the company’s trucks next year.

B. The insurance company will price its insurance to cover all the expected damage plus its administrative costs plus a profit margin; therefore the annual insurance premium will be 20-30% more than the annual cost for the company to self-insure. If the company can’t afford to pay for the damages out of operating funds, it certainly can’t afford to pay the insurance premiums.

C. The CEO shouldn’t have told the insurance agent his company’s confidential information about damages. He should have made the insurance company do its own prediction and hoped that they underestimated the damage.

D. None of the above.

Explanation / Answer

B. The insurance company will price its insurance to cover all the expected damage plus its administrative costs plus a profit margin; therefore the annual insurance premium will be 20-30% more than the annual cost for the company to self-insure. If the company can’t afford to pay for the damages out of operating funds, it certainly can’t afford to pay the insurance premiums.

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