Skip to content

CMA Final · Strategic Performance Management and Business Valuation · Corporate Risk Management Performance

Surya Textiles estimates a risk event with a 20% probability of occurring in a year and an impact of Rs 50 lakh if it occurs. Insurance covering this risk costs Rs 12 lakh a year and fully covers the loss. Based only on expected monetary value, what is the conclusion?

Expected loss equals 20% of Rs 50 lakh, which is Rs 10 lakh. Since the insurance premium of Rs 12 lakh exceeds this expected loss, insurance is not justified on expected monetary value alone, though risk aversion might still support it.

  1. AExpected loss is Rs 10 lakh, so insurance costing Rs 12 lakh is not justified on expected value aloneCorrect
  2. BExpected loss is Rs 12 lakh, so insurance is exactly break-even
  3. CExpected loss is Rs 40 lakh, so insurance is strongly justified
  4. DExpected loss is Rs 10 lakh, so insurance is justified because premium exceeds it

Explanation

Expected loss = 0.20 x 50 = Rs 10 lakh. Premium of Rs 12 lakh exceeds this by Rs 2 lakh, so on expected value alone insurance is not justified. The last option reasons wrongly that a higher premium justifies buying.

Did you get it right without looking?

One question tells you little. A timed set on Corporate Risk Management Performance shows your real accuracy, how long you take and where you lose marks.

Practise Corporate Risk Management PerformanceFree diagnostic mock

More Corporate Risk Management Performance questions