If the EMV of a risk is $120,000 and transferring the risk would cost $300,000, what is the net value of transferring the risk?

If the EMV of a risk is $120,000 and transferring the risk would cost $300,000, what is the net value of transferring the risk?

• A. -$180,000
• B. $180,000
• C. $0
• D. -$300,000

Answer: (A)

When evaluating risk transfer, you compare how much the risk is worth on average (the EMV) with what it costs to transfer that risk. Here, the EMV of the risk is 120,000, and transferring it costs 300,000. The net value of transferring is 120,000 minus 300,000, which equals -180,000. A negative result means paying more to transfer the risk than the expected loss you’d incur, so transferring is financially unfavorable.

When evaluating risk transfer, you compare how much the risk is worth on average (the EMV) with what it costs to transfer that risk. Here, the EMV of the risk is 120,000, and transferring it costs 300,000. The net value of transferring is 120,000 minus 300,000, which equals -180,000. A negative result means paying more to transfer the risk than the expected loss you’d incur, so transferring is financially unfavorable.