American Builders, Inc. has just completed construction of the Freedom Tower - a 250 floor skyscraper located in California, which is now the world’s largest building. This massive tower cost $50 billion to build, and its replacement cost is estimated at $65 Billion. Given its location, there is always the possibility that an earthquake may cause damage to the tower. Gubenator Insurance Company is the primary property-casualty insurance company in California, and is used to dealing with the risk of earth movement. The company has a capital base of $45 Billion, with net surplus of $4 billion. Gubenator has been asked to insure the Freedom tower. Which of the following statements concerning this situation is correct? Group of answer choices

Question Completion:

Group of answer choices:

a. Due to the possibility of earthquake damage, Gubenator should decline coverage for the Freedom Tower.

b. Given the notoriety of the tower and the likelihood of positive press for providing coverage, Gubenator should insure the Freedom Tower.

c. Gubenator has the financial capacity to issue the policy.

d. Gubenator should insure the Freedom Tower only if it can obtain reinsurance for part of the risk from other insurance companies, since a total loss could be catastrophic to Gubenator.

American Builders, Inc (Freedom Tower) and Gubenator Insurance Company

d. Gubenator should insure the Freedom Tower only if it can obtain reinsurance for part of the risk from other insurance companies, since a total loss could be catastrophic to Gubenator.

Explanation:

Option A establishes that the earthquake occurrence is a possibility and not a probability.  That means it cannot be reasonably estimated that an earthquake may occur.  Gubernator exists to insure property against the occurrence of risky events.  It should go ahead and do its business.  And it can spread the risk with other insurance companies through Reinsurance.  Gubernator is not in the business of looking for cheap publicity, so option B is ruled out.  Given that the Freedom Tower will only be one of the many properties insured by Gubernator, we cannot use its current capital to judge its capacity to handle the Freedom Tower; thus ruling out option C.

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