Use the information for the question(s)below.
Your firm faces a 6% chance of a potential loss of $45 million next year. If your firm implements new safety policies, it can reduce the chance of this loss to 3%, but the new safety policies have an upfront cost of $350 000. Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%.
-The value of insurance comes from its ability to reduce the cost of ________ for the firm.

Question

Quizplus · Accepted Answer

Insurance can reduce the cost of potential losses for the firm, which can be seen as a market imperfection. By transferring the risk to an insurance company, the firm can reduce its exposure to losses and potentially save money in the long run.

Use the Information for the Question(s)below