Ricardo paid an annual premium of $1,000 in total liability coverage for his car, including up to $200,000 in bodily injury coverage and $100,000 in property damage coverage. Ten years into his policy, Ricardo caused an accident that resulted in the other driver claiming $60,000 in medical costs and $20,000 in car damage. Ricardo's insurance company paid the claims. Did the benefit of transferring the risk to the insurance company outweigh the cost of the premium?

The benefit of transferring the risk to the insurance company does not outweigh the cost of the premium. The cost of the premium is $230,000 greater than the benefit.

Explanation:

Step 1: Determine the cost of the premium

The total cost of the premium=total liability coverage+bodily injury coverage+property damage coverage

where;

The total cost of the premium=unknown

total liability coverage=annual premium*number of years

total liability coverage=1,000*10=$10,000

bodily injury coverage=$200,000

property damage coverage=$100,000

replacing;

Total cost of the premium=10,000+200,000+100,000=$310,000

Step 2: Determine the benefit of transferring the risk

This can be expressed as;

Total benefits=medical benefit+car damage benefit

where;

medical benefit=$60,000

car damage benefit=$20,000

replacing;

Total benefits=60,000+20,000=$80,000

Total cost of the premium ($310,000) is greater than the total benefits ($80,000) by (310,000-80,000) = $230,000