Assume that a risk manager would like to purchase property
insurance on a building. She is analyzing two insurance coverage
bids. The bids are from comparable insurance companies, and the
coverage amounts are the same. The premiums and deductibles,
however, differ. Insurer A’s coverage requires an annual premium of
$70,000 with a $3000 per-claim deductible.
Insurer B’s coverage requires an annual premium of $25,000 with a
$9,000 per-claim deductible. The risk manager wonders whether the
additional $55,000 in premiums is...