Page 1

Risk Analysis and Insurance Planning (RAIP) Numerical

Risk Analysis & Insurance Planning (RAIP)
All numericals solved herein below are taken from FPSB India's "Sample Paper - Exam 1:- Risk Analysis & Insurance Planning" uploaded on their
website.
Section II; Q#6
A training institute bought 50 computers at a total cost installed for Rs. 25 Lakhs. The set up came into operation on 1st April, 2012. The cost of a
similar new computer in due course declined to Rs. 42,000. The industry norm of the depreciation charged on the computers is 30% on Written
Down Value (WDV) basis. At what appropriate value he should insure the set up on next due date - 1st April, 2013?

Ans: -
























Particulars Rs.
Current Replacement Cost 2,100,000
(-) Depreciation @ 30% 630,000
Value to be insured 1,470,000
Current Scenario:-
1st April, 2012: - 50 computers were bought at Rs. 25,00,000
(i.e. Rs. 50,000 per computer). The said computers have been
used for 1 year (1st April 2012 - 31st March, 2013) &
depreciation to the extent of 30% has been charged on WDV
basis. The current cost (i.e. on 1st April, 2013) for buying one
computer is Rs. 42,000 (it has fallen down from Rs. 50,000 - as
on 1st April, 2012). Thus for buying 50 computers today (i.e. 1st
April, 2013), it will cost us Rs. 42,000 x 50 = Rs. 21,00,000.

Note: - Depreciation at 30% needs to be deducted from the
Current Replacement Cost in lines with the "Principle of
Indemnity" which states that - "The insured should be placed in
the same position as he was prior to the occurance of the loss."
The said computers have already been used for a period of 1 year
& the computers have been accordingly depreciated. If there is
any loss that occurs, the insured should be compensated
accordingly - not allowing him to "profit" from the situation.

Page 2

Risk Analysis and Insurance Planning (RAIP) Numerical
Section II; Q#7
A with profit life insurance policy with a track record of offering bonuses at Rs. 50/1000 sum assured (SA)has a premium differential of Rs.
30/1000 SA from a pure term policy. The pure term cover of 20 years & SA Rs. 12,00,000 is available at Rs. 7,860 p.a. If the loyalty addition is
expected on the 20 year with profit policy is Rs. 235/1000 SA, you evaluate both policies from the perspective of 8% p.a. return on surviving the
term. You find that _____________

Ans: -
Let us first understand what is "Premium Differential". Premium Differential is nothing but the difference in the amount of premium paid on
two policies. In this case, the concerned prospect, has bought two policies - (1) A with profit policy (it could either be a "whole life policy" or an
"endowment policy" or a "money back policy") & (2) A term insurance policy. You'd agree when I say, that, the premium paid under the "with
profit policy" would be more in comparison to the "term insurance policy" (A term insurance is a "pure risk" cover & covers only the risk of
death. It has no "savings element" - as under "whole life", "endowment" or "money back'). So, assuming all other things remain constant (i.e.
period, sum assured etc), the reason of a "premium differential" between the "with profit policy" & the "term insurance policy" is on account of
the "savings element" available with the "with profit policy". Also note that - there could also be a "premium differential" for two individuals on
a same policy with the same sum assured - on account of age, sex, hobbies, health, habits - smoker or non smoker etc. So, it need not be that,
the "premium differential" has to be between two different policies (as in the above case).














Particulars Term
With Profit
Policy
Bonus & loyalty additions (if any) Not Available Available
Savings element Not Available Available
Sum assured to be received on
surving the term
Not Available Available
Sum assured paid on death Available Available
Quick Review between a "term insurance" policy & a "with profit"
policy

Current Scenario: -
Term Insurance
Period of the cover = 20 years (given)
Sum assured (SA) = Rs. 12,00,000 (given)
Premium = Rs. 7,860 p.a. (given)
With Profit policy
Bonus = Rs. 50/1000 SA (given) (i.e. 50/1000 x 12,00,000 = Rs.
60,000 x 20 years = Rs. 12,00,000)
Premium differential = Rs. 30/1000 SA (given) (i.e. Rs. 30/1000 x
12,00,000 = Rs. 36,000)
Loyalty additions = Rs. 235/1000 SA (given) (i.e. Rs. 235/1000 x
12,00,000 = Rs. 2,82,000)
Period of the cover = 20 years (given); Sum assured (SA) = Rs.
12,00,000 (same as the term insurance cover)

Note that, they have asked in the problem to evaluate both the
policies from the perspective of 8% p.a. return on the assumption that
the concerned prospect "survives the term". On surving the term, the
prospect, under the "with profit policy" would receive -
(1) The maturity proceeds (i.e. sum assured); (2) Bonus & (3) Loyalty
additions

Page 3

Risk Analysis and Insurance Planning (RAIP) Numerical




















Total amount received on maturity under "with profit
policy"
Particulars Rs
Maturity proceeds
3
1,200,000
Bonus 1,200,000
Loyalty additions 282,000
Total 2,682,000
Set Begin
1

n 20
i% = ? = Solve 11%
PV
(1)
0
2
PMT = -36000
FV
(20)
= 2682000
P/Y & C/Y 1
Now, we've to first evaluate the return that the prospect has earned by investing in
the "with profit" policy (before we compare the same with the prescribed rate of
return of 8%p.a)

CMPD mode
Notes: -
1. Ins. premiums are always paid at
the "beginning" of the period.
2. The "premium differential" of Rs.
36,000 is taken into perspective to
evaluate the "net return" earned by
investing in a with profit policy vis a
vis a "term insurance" policy.
3. According to FPSB India's solutions
the said maturity proceeds of Rs.
12,00,000 isn't taken into
consideration - we feel that the same
needs to be taken into consideration
as the prospect would receive the
amount on maturity. The issue has
been brought to the notice of FPSB
India & awaiting their response.

Thus the prospect is paying Rs. 36,000 (i.e. premium
differential) extra , in a "with profit" policy to receive
Rs. 26,82,000 on surviving the term (which wouldn't
have been received in a "term insurance" policy)
Thus, the return differential on surviving
the term is: - 11 - 8 = 3% (Final Answer).
Page 4

Risk Analysis and Insurance Planning (RAIP) Numerical
Section II; Q#8
Mr. A has a gross annual salary of Rs. 10,00,000 of which he saves 25% including mandatory savings & voluntary systematic investments.
Another 35% goes towards servicing of housing & car loans & taxes. His financial planner advises him to accumulate 8 months household
expenses in liquid funds. Mr. A changes his job & expects an immediate rise of 30% in his gross income. The incremental effect in his mandatory
savings & taxes would respectively be 1.5% & 3% of his revised gross income. You estimate that other heads would not change materially except
his household expenses which would rise by 8% due to child education. How many months will it take to accumulate the liquid reserves?
Ans: -
Let us first understand the problem & what we are supposed to calculate - Mr. A is earning Rs. X as salary as is incurring some expeneses, say Rs.
Y. The financial planner has asked Mr. A to "accumulate 8 months household expenses in liquid funds" (a prudent measure under "contingency
reserves" policy). Moreover, we've to find out , the "no. of months" that Mr. A will take to accumulate the liquid reserves after meeting all the
expenses.








Present situation of Mr. A (before change
of job)
Rs
Gross Annual Salary 1000000
(-) Savings @ 25% (mandatory & voluntary
investments)
250000
(-) Housing, Car Loans & Taxes @ 35% 350000
Balance
(household expenses)
400000
Situation of Mr. A after the new job Rs
New Salary 1300000 [10,00,000 + (10,00,000*30%)]
[2,50,000 + (13,00,000*1.5%)]
[3,50,000 + (13,00,000*3%)]
[4,00,000 + (4,00,000*8%)]
(-) Savings 269500
(-) Taxes, housing & car loans 389000
(-) Household expenses
1
432000
Balance available to accumulate the
liquid reserves
209500
Notes: -
1. Savings & taxes are increasing by 1.5% % 3% over
the "revised gross income". However, the household
expenses are expected to rise by 8% (it hasn't been
mentioned that the same is on "revised gross
income". So it's directly calculated on the old
household expense of Rs. 4,00,000

- 8 months household expenses = Rs. 4,32,000 x (8/12) = Rs. 2,88,000.
- Therefore, no. of years to accumulate the liquid reserves = Rs. 2,88,000 / Rs.
2,09,500 = 1.374701671
- Therefore, no. of months = 1.374701671 x 12 months = 16.49642005 months
Page 5

Risk Analysis and Insurance Planning (RAIP) Numerical
Section II; Q#9
A businessman bought a piece of land in March, 2002 for Rs. 80,00,000. He got a factory built on the land at a cost of Rs. 90,00,000, the factory
became operational on 1st September, 2005. The land prices have appreciated at 15% p.a. in the period & the construction cost has escalated at
12% p.a. since 2005. At what value the factory should be insured in April, 2013 on Market Value basis if the depreciation on factory premises is
charged at 6% p.a. on straight line method (SLM)?
Ans: -







Current market value of the factory (which will be insured) taking into consideration a depreciation of 6% p.a. on SLM basis.












Set Begin PV
(2005)
-9000000
FV
(2013)

= ? =
Solve

22,283,668.59
n (2008 to
2013)
8
PMT 0
P/Y 1
i% 12% C/Y 1
Set 365 Explaination
Dys 2920 (8 years*365 days)
i% -6 (Dep rate)
PV

(22,283,668.59)
(Revised factory value as on
2013)
SFV = ? 11,587,507.67
(Market value of the factory to
be insured)
Particulars Rs.
Current market value of the factory

22,283,668.59
(-) Dep @ 6% (SLM basis) for 8 years
(22,283,669 x 6%) x 8 years

10,696,160.92
Market value to be insured

11,587,507.67
Method 2: - Logical Method

Current Scenario: -
Cost of land (March' 2002) - Rs. 80,00,000
Cost of factory (Sept' 2005) - Rs. 90,00,000
Escalation of land prices - 15% p.a.
Escalation of construction cost - 12% p.a.
Current date - April' 2013

Revised Factory Value (2013) after escalation of 12% p.a.

Method 1: - SMPL function

Notes: -
1) Although the cost of land has escalated too (to the tune of 15% p.a.), the same isn't taken into consideration because: -
a) Land is a "non-depreciable" & "non insurable" asset
b) The problem has asked us to calculate the amount at which the factory has to be insured.
2) We used the "SMPL function" to calculate the requisite values because the problem states that rate of depreciation is 6% p.a. on "SLM"basis. If
it would have been 6% p.a. on "WDV" basis then we would have used the "CMPD function".
3) Moreover, the given rate of 6% is the "depreciation rate" (and not the interest rate), therefore, we need to insert "-6" in the i% section. The
said amount needs to be "reduced" on the account of depreciation & not increased!

Page 6

Risk Analysis and Insurance Planning (RAIP) Numerical
Section III; Q#4
An executive purchased an annuity for a lumpsum Rs. 85,00,000 when he was 53 years old & had in dependents a non-working spouse of age 48
& a son of age 25. On reaching 60, he expects at least one, himself or his spouse, to survive till 85 years & contracts an immediate annutiy with
return of purchase price at Rs. 10,15,000 p.a. vested againts the purchase price of Rs. 1,61,00,000. What return is expected from the vesting
date?

Ans: -
Let us first understand the problem - Mr. Executive has taken an "immediate annuity" (i.e. the annuity begins immediately on the vesting date)
by paying Rs. 1,61,00,000. He'll receive an annuity of Rs. 10,15,000 p.a. Moreover, he has also taken a "return of purchase price" option [i.e.
whatever amount he has paid to purchase the annuity (i.e. in this case Rs. 1,61,00,000)] would be returned back to the executive or the
nominee, as the case may be, after the completion of the said period.











Set Begin
n
(1)
30
i% = ? 6.73%
PV
(60)
(2)
-16100000
PMT
(3)
1015000
FV
(85)
(4)
16100000
P/Y 1
C/Y 1


CMPD function: - Notes: -
(1) The number of years that has to be taken , will depend upon the highest survival period
from the vesting date to the life expectancy. Here Ms. Executive have a life the expectancy
of 30 years from the vesting date (which is higher than Mr. Executive's - 25 years). Although
some of you may argue that the survival of the son is the highest, annuity can be purchased
on the basis of age of the annuitant or his/her spouse as the case may be.
(2) PV = Amount paid to purchase the annuity. Since amount is "paid", its denoted with a -ve
sign.
(3) PMT = Amount "received" every year as an annuity. Since amount is "received", its
denoted with a + ve sign.
(4) FV = Return of purchase price. Since the purchase price paid for the annuity is received
back, we denote the same with a +ve sign.

<-------------- ----------7 years-----------------------> Vesting Date Life Expectancy
|----------------------------------------------------------------------|---------------------------------------------------------------------|
Mr. Executive 53 60 <--------------------- 25 years ----------------------------> 85
Ms. Executive 48 55 <--------------------- 30 years ----------------------------> 85
Son 25 32
Page 7

Risk Analysis and Insurance Planning (RAIP) Numerical
Section III; Q#5
Mr. A has invested in an instrument for 3 years. The instrument has produced a return of 11%, 15% & 12% in the 3 years. You as Mr. A's advisor
have observed that the ruling inflation in these 3 years respectively was 4% , 7% & 8%. You find the real rate of return which Mr. A has received
as___________________

Ans: -

















Years
Return
(%)
Inflation
(%)
Real Rate (%)
Yr.1 11 4 6.730769231
Yr.2 15 7 7.476635514
Yr.3 12 8 3.703703704
Real Rate of Return = { [ (1 + r) / (1 + i) ] -1 } x 100
Where: -
r = Rate of return; i = Inflation rate
Method 1: - Calculate the "Future Value" of Re. 1
for 3 years

Yr. 1
Set Begin
n 1
i% 6.73%
PV
(0)
-1
PMT 0
FV
(1)
= ? 1.067307692
P/Y 1
C/Y 1

Yr. 2
Set Begin
n 1
i% = ? 7.48%
PV
(1)
-1.06731
PMT 0
FV
(2)
=
?
1.147106
P/Y 1
C/Y 1

Yr. 3
Set Begin
n 1
i% = ? 3.70%
PV
(1)
-1.1471064
PMT 0
FV
(3)
= ? 1.18959182
P/Y 1
C/Y 1

CAGR for 3 years
Set Begin
n 3
i% = ? 5.96%
PV
(0)
-1
PMT 0
FV
(3)
1.189592
P/Y 1
C/Y 1

Notes: -
(1) The Future Value of the first year becomes the Present Value of the next year.
(2) We've calculated the Future Values of all the years taking into consideration the Real Rate of Return
(3) After calculating the FV
(3)
, we calculated the "compounded annual growth rate (CAGR)" thus giving us the answer of 5.96%
Page 8

Risk Analysis and Insurance Planning (RAIP) Numerical
Method 2: - Calculate the "compounded annual growth rate - geometric mean" for the requisite period



















Years
Returns
(Real Rate) (%)
Real Rate in
decimals
Relative
Return
(RR)
1 6.730769231 0.067307692 1.067308
2 7.476635514 0.074766355 1.074766
3 3.703703704 0.037037037 1.037037

CWI = RR
1
x RR
2
xRR
3
x RR
n

CWI = (1.067308 x 1.074766 x 1.037037) = 1.1895918

GM = [(CWI)
1/n
- 1] x 100 = [(1.1895918)
(1/3)
- 1] x 100 =
5.95773205%

Page 9

Risk Analysis and Insurance Planning (RAIP) Numerical
Section III; Q#6
A family's monthly expenditure is Rs. 40,000. The earner accounts for 15% of the expense. He wants to cover his family's inflation adjusted
expenses for the next 40 years considering average inflation at 5.5% p.a. & the investment return at 7.5% p.a. The approximate life insurance
needed is___________________
Ans: -
















Rate of return p.a. 7.50%
Inflation rate p.a. 5.50%
Real rate of return p.a. 1.895735

Amount of life insurance needed
Set Begin
n 40
i% 1.90%
PV
(1)
= ? 11,484,273.30
PMT 34000
FV
(40)
0
P/Y
2
12
C/Y 1

Monthly Expenditure 40000
(-) Personal expenditure @
15%
1

6000
Net of personal expenditure 34000

Notes: -
1) Personal expenditure of the earner
should be deducted & the net of
personal expenses should be considered
for calculating the life insurance
required.
2) The expenditure of Rs. 40,000 are
"monthly" & so we input 12 in the P/Y
function.
Real Rate of Return = { [ (1 + r) / (1 + i) ] -1 } x 100
Where: -
r = Rate of return; i = Inflation rate
Page 10

Risk Analysis and Insurance Planning (RAIP) Numerical
Section III; Q#7
A single mother, aged 33, earns Rs. 7,50,000 p.a. out of which taxes a self expenses account for Rs. 1,50,000 p.a. Her salary is expected to rise by
10% p.a. whereas taxes & personal expenses are likely to rise by 6% p.a. If she expects to work till 58 years, what economic value can you
enumerate on her life, if she is confident of getting a return of 9% p.a. from investments?
Ans: -







Present Value of Salary
Set Begin
n 25
i% -0.9090909%
PV
(1)
=? -20967027.22
PMT 750000
FV
(58)
0
P/Y 1
C/Y 1



Current Scenario: -
Current Age = 33
Age of retirement = 58
Yrs. left for retirement = 58-33 = 25
Current Salary = Rs. 7,50,000 p.a.
Current taxes & self exp = Rs.
1,50,000 p.a.
Growth in salary = 10% p.a.
Growth in taxes & personal exp =
6% p.
Rate of return = 9% p.a.
What are we supposed to calculate? - We are supposed to calculate the "economic value"
(i.e. Present Value) of her life. (i.e. PV of Salary - PV of exp)
Particulars Rate of growth Rate of Invst. Real Rate of Return (%)
Salary 0.1 0.09 -0.909090909
Taxes & personal
exp
0.06 0.09 2.830188679

Real Rate of Return = { [ (1 + r) / (1 + i) ] -1 } x 100
Where: -
r = Rate of return; i = Inflation rate
Therefore, the Economic Value of the prospect is =
PV (salary) - PV (taxes & personal exp) = 20,967,027 -
2,737,432
= Rs. 18,229,595
Present Value of Expenses
Set Begin
n 25
i% 2.8301887%
PV
(1)
=? 2737431.68
PMT -150000
FV
(58)
0
P/Y 1
C/Y 1

Page 11

Risk Analysis and Insurance Planning (RAIP) Numerical
Section III; Q#8
Mr. A had taken a loan of Rs.40,00,000 in July' 2010 at a floating rate of interest of 10% p.a. for a tenure of 20 years from a housing finance
company. The company sent a notice raising the interest rate to 10.75% p.a. effective Jan'2012 thereby increasing the EMI. He decides to
refinance the loan at 10.25% p.a. from a bank which charges a processing fee of 1% of loan sanctioned. What absolute amount he stands to save
in the remaining tenure if the outstanding loan amount as at the end of March 2012 is refinanced so that the new loan terminates as per original
tenure?
Ans: -















Current Scenario: -
Amount of loan = Rs. 40,00,000
Date of applying for the loan = July 2010
Rate of interest = 10% p.a. (floating rate)
Tenure of the loan = 20 years (i.e. 20 x 12 months = 240 months)
Date of increasing the interest rate = Jan 2012 (i.e. he has paid an EMI at 10% p.a. from July 2010 to
Dec 2011 - 18 months)
New interest rate = 10.75% p.a. (the date of refinancing of the loan is "end" of March 2012. That
means, he has paid a new EMI at 10.75% p.a. from Jan' 2012 to March 2012 - 3 months)
Refinanced int rate = 10.25% p.a.
Processing charges = 1% of loan sanctioned
Date of refinancing the loan = "end" of March 2012
What are we supposed to find out: - How much Mr. A has saved by refinancing the loan
Let us first calculate the EMI at a given
interest rate of 10% p.a.
Set
1
End
n 240
i% 10%
PV 4000000
PMT = ? -38600.8658
FV 0
P/Y
2
12
C/Y
3
12

Notes: -
1) Payments towards an EMI is always & always made at the "end" of the period .
2) Since there will be 12 payments (EMI) in a year, P/Y will be denoted as 12.
3) In case of numericals on "loans", even if the problem is silent, the rate of
interest is always compounded monthly, thus C/Y = 12
Rule of thumb for numericals on "loans" / "borrowings" etc
a) Use the "end" function even if the problem is silent
b) C/Y = 12 (compounding will always take place monthly - even if the problem is
silent)
Page 12

Risk Analysis and Insurance Planning (RAIP) Numerical




















Now let us calculate the
"outstanding loan" amount on
Jan'2012 (i.e. when the new rate
change has been made effective)
(Mr. A has paid an EMI of Rs.
38,600.8658 from July' 2010 to Dec'
2011 - i.e. for 18 months)
Set End PMT -38600.866
PM1 1 FV 0
PM2 18 P/Y 12
n 240 C/Y 12
i% 10 Bal = Solve 3898160.27
PV 4000000

Therefore the O/S loan amount as
on 1st Jan' 2012 (i.e. the date of
rate change) is Rs. 38,98,160.269
AMRT function

Let us now calculate the new EMI at a
given interest rate of 10.75% p.a.
Set End
n = 240-18 222
i% 10.75%
PV
(19)
3898160.269
PMT = ? -40515.5594
FV
(222)
0
P/Y 12
C/Y 12

Set End PMT -40515.559
PM1 1 FV 0
PM2 3 P/Y 12
n 222 C/Y 12
i% 10.75 Bal = Solve 3881225.85
PV 3898160.269

Therefore the O/S loan amount
as on 31st March' 2012 (i.e.
when Mr. A opted for
refinancing) is Rs. 38,81,226
Now, the O/S Loan for refinancing (as on 1st April, 2012) = Rs. 38,81,226
Balance period of the loan = 240 - 18 - 3 = 219 months
New rate of interest (on refinancing) = 10.25% p.a.
Processing fee = 1% of loan sanctioned (i.e. Rs. 38,81,226)
Now, Mr. A has paid the new EMI of Rs. 40,515.5594 for 3 months (i.e. Jan 2012 to March 2012)
before opting for refinancing of the loan. So let us now calculate the outstanding loan amount
which has been refinanced

AMRT Function
Page 13

Risk Analysis and Insurance Planning (RAIP) Numerical




















Let us now calculate the new EMI
at a given refinanced interest rate
of 10.25% p.a.
Set End
n = 240-18 -3 219
i% 10.25%
PV
(23)
3881226
PMT = ? -39245.18156
FV
(222)
0
P/Y 12
C/Y 12

Total cash outflow post refinancing: -
Payment of loans (Rs. 39,245 x 219) = Rs. 85,94,655
(+) Processing fee of 1% of Rs. 38,81,226 = Rs. 38,812.26
Therefore, total cash outflow = Rs. 86,33,467

If Mr. A wouldn't have opted for refinancing, then: -
Payment of loans (Rs. 40,516 x 219) = Rs. 88,73,004

Therefore, absolute amount saved on account of refinancing:
Rs. 88,73,004 - Rs. 86,33,467 = Rs.2,39,537 (Final Answer)
Notes: -
Kindly note that, "processing fees" need to be added seperately & shouldn't be
added to the O/S loan amount of Rs. 38,81,226 - which is used to calculate the
"new EMI post refinancing" (i.e. Rs. 39,245)
Page 14

Risk Analysis and Insurance Planning (RAIP) Numerical
Section III; Q#9
A company has a retirement age as 58 years. An employee at age 35 expected increments of 7% p.a. as per company policy when his annual net
earnings were Rs. 6,00,000. After 5 years, he got next cadre and his annual net earnings became Rs. 9,00,000. The increments in the revised
cadre are at 9% p.a. He had purchased a life cover by income replacement method at age 35. What additional cover is required if he expects his
investments to yield 9.5% p.a.
Ans:-















Current Scenario: -
At age 35
Current Age = 35
Age of retirement = 58
Yrs. left for retirement = 58-35 = 23
Annual net earnings = Rs. 6,00,000 p.a.
Expected increments = 7% p.a.
Expected yield = 9.5% p.a.
At age 40 (after 5 years)
Current Age = 40
Age of retirement = 58
Yrs. left for retirement = 58-40 = 18
Annual net earnings = Rs. 9,00,000 p.a.
Expected increments = 9% p.a.
Expected yield = 9.5% p.a.
Age
Exp.
Increments
(%)
Expected
Yield (%)
Real Rate of
Return (%)
Age 35 7 9.5 2.336448598
Age 40 9 9.5 0.458715596

The employee has purchased an insurance cover at the age of 35 by the "income
replacement method" (i.e. human life value - HLV method). At age 40, he wants to
know the additional amount of life insurance cover required

Real Rate of Return = { [ (1 + r) / (1 + i) ] -1 } x 100
Where: -
r = Rate of return; i = Inflation rate
Life insurance, under the HLV method is calculated as -
PV(Income lost) . Let us now calculate the PV of income lost, both at the age of 35 &
40 for us to find out the extra amount of life insurance required

Page 15

Risk Analysis and Insurance Planning (RAIP) Numerical




















Present Value of "net annual
income lost" at age 35

Present Value of "net annual
income lost" at age 40

Set Begin
n = 58-35 23
i% 2.336448598%
PV
(35)
= ? -10830034.76
PMT 600000
FV
(58)
0
P/Y 1
C/Y 1

Set Begin
n = 58-
40
18
i% 0.458715596%
PV
(35)
=
?
-15586286.44
PMT 900000
FV
(58)
0
P/Y 1
C/Y 1

Therefore, extra insurance cover required: -
Insurance amount required (at age 40) = Rs.
1,55,86,286.44
(-) Insurance already purchased (at age 35) =
Rs. 1,08,30,034.76
Therefore, extra insurance required = Rs.
1,55,86,286.44 - Rs. 1,08,30,034.76 = Rs.
47,56,251.68
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Risk Analysis and Insurance Planning (RAIP) Numerical
Section IV; Q#6
A departmental store has rented some space in the mall. The store took insurance of goods housed in the shop for a value of Rs. 2.1 crore. The
surveyor assessed the average value of goods stored at the facility at Rs. 2.5 crore. The store in its quarterly stock taking on 31st Dec, 2012
assessed the value of the goods at landed cost of Rs. 1.8 crore. On 17th jan, 2013 the store had a major fire destroying all goods stored therein.
The store as per sales records had sold goods for Rs. 35 lakhs in the interim, making a profit of Rs. 7.5 lakhs. The admissable amount of claim
should be_________________
Ans:-















Particulars Rs.
(a) Insurance taken for value of goods 21,000,000
(b) Assessed value of goods for which insurer has covered the risk 25,000,000
(c ) Value of goods at landed cost on 31st Dec, 2012 18,000,000
(d) Goods sold to customers till 17th Jan, 2013 3,500,000
(e) Profit made on selling of goods after 31st Dec, 2012 750,000
(f) Landed cost of goods sold after 31st Dec, 2012 (d-e) 2,750,000
(g) Value of goods destroyed for which insurance was taken (c-f) 15,250,000
(h) Admissible amount of insurance claim [g x (a/b)] 12,810,000

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Risk Analysis and Insurance Planning (RAIP) Numerical
Section IV; Q#7
An entrepreneur setting up a leather processing unit purchased a land in 2006 for Rs. 50,00,000 and got specialized construction done in 2007
for Rs. 1.6 crore. In March 2008, the processing plant was constructed at a cost of Rs. 2 crore. The cost of such construction & plant are
escalating at 10% p.a. The corrosive nature of chemicals requires depreciation on plant as well as premises at 15% p.a. on written down value
basis (WDV). As in 2013 what additional reserves should be created by the company apart from depreciation reserves & residual insured value of
plant & premises to reinstate the facility in case it is destroyed in a calamity?
Ans:-















Current Scenario: -
Cost of land (2006) - Rs. 50,00,000
Cost of construction (2007) (premises) - Rs.
1,60,00,000
Cost of processing plant (2008) - Rs.
2,00,00,000
Escalation (inflation) for both plant &
construction (i.e. premises) - 10% p.a.
Dep. rate - 15% p.a. (WDV)
Date at which additional reserves need to
be calculated 2013

To calculate: -
What "additional reserves" should be
created by the company apart from
depreciation reserves & residual insured
value of plant & premises to reinstate the
facility in case it is destroyed in a calamity?
i.e. Additional reserves = Reinstatement
value (-) Dep. Reserves (-) Residual value
of plant & premises

So let us start of by calculating the
required fields one by one.
Cost of construction (premises) as on
2013:-
CMPD function
Set = Begin
n = 2013 - 2007 = 6
i% = 10 (escalation)
PV
(2007)
= -1,60,00,000
PMT = 0
FV
(2013)
= ? = 2,83,44,976
P/Y = 1
C/Y = 1

Cost of plant as on 2013:-
CMPD function
Set = Begin
n = 2013 - 2008 = 5
i% = 10 (escalation)
PV
(2008)
= -2,00,00,000
PMT = 0
FV
(2013)
= ? = 3,22,10,200
P/Y = 1
C/Y = 1
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Risk Analysis and Insurance Planning (RAIP) Numerical




















Therefore, the "reinstatement value" if the company was destroyed by a calamity today will be = Rs. 2,83,44,976 + Rs.
3,22,10,200 = Rs. 6,05,55,176 (FV of premises + FV of plant)

Let us now calculate the total amount of
depreciation on premises using the
"CMPD" mode

Depreciation rate
Residual insurance value
of premises
Let us now calculate the total
amount of depreciation on plant
using the "CMPD" mode

Set Begin
n = 2013 -
2008
5
i% -15%
PV
(2007)
-20000000
PMT 0
FV
(2013)
8874106.25
P/Y 1
C/Y 1

Therefore total depreciation on
plant= Rs. 2,00,00,000 - Rs.
88,74,106.25 = Rs. 1,11,25,893.75

Therefore, total amount of depreciation on plant & premises = Rs. 1,11,25,894 + Rs. 99,65,608 = Rs. 2,10,91,502
Total residual insured value of plant & premises = Rs. 88,74,106 + Rs. 60,34,392 = Rs. 1,49,08,498

Therefore, the "additional reserves" required is = Rs. 6,05,55,176 (-) Rs. 2,10,91,502 (-) Rs. 1,49,08,498 = Rs. 2,45,55,176

Therefore total depreciation on
premises = Rs. 1,60,00,000 - Rs.
60,34,392.25 = Rs. 99,65,607.75

Residual
insurance value
of plant
Set Begin
n = 2013 -
2007
6
i% -15%
PV
(2007)
-16000000
PMT 0
FV
(2013)
6034392.25
P/Y 1
C/Y 1

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Risk Analysis and Insurance Planning (RAIP) Numerical














Those of you, who haven't understood the calculation of the "residual insurance value" & "total depreciation" on plant & premises
calculated above in the CMPD function, can have a look at the logical calculation shown herein below
Residual Value & total depreciation on premises
Years Op. Balance
(a)
Dep @ 15% (WDV)
(b) = (a) x 15%
Cl. Balance
(c ) = (a - b)
2007 16,000,000 2,400,000 13,600,000
2008 13,600,000 2,040,000 11,560,000
2009 11,560,000 1,734,000 9,826,000
2010 9,826,000 1,473,900 8,352,100
2011 8,352,100 1,252,815 7,099,285
2012 7,099,285 1,064,893 6,034,392
TOTAL DEPRECIATION 9,965,608

Residual Value & total depreciation on plant
Years Op. Balance
(a)
Dep @ 15% (WDV)
(b) = (a) x 15%
Cl. Balance
(c ) = (a - b)
2008 20,000,000 3,000,000 17,000,000
2009 17,000,000 2,550,000 14,450,000
2010 14,450,000 2,167,500 12,282,500
2011 12,282,500 1,842,375 10,440,125
2012 10,440,125 1,566,019 8,874,106
TOTAL DEPRECIATION 11,125,894

Residual insurance value of premises
Residual insurance value of plant