Scenario 17.3
Consider the following information:
The probability of a fire in a factory without a fire prevention program is 0.01. The probability of a fire in a factory with a fire protection program is 0.001. If a fire occurred, the value of the loss would be $300,000. A fire prevention program would cost $80 to run.
-Refer to Scenario 17.3. If the fire protection program were not in place, the insurer would not be willing to ensure the warehouse for any amount less than:
A) $80.
B) $300.
C) $3,000.
D) $6,000.
E) $300,000.

Question

Quizplus · Accepted Answer

The expected loss without a fire prevention program is calculated as the probability of a fire occurring multiplied by the value of the loss, which is 0.01 * $300,000 = $3,000. This is the minimum amount the insurer would need to cover the expected loss, not considering any profit or administrative costs.

Scenario 17.3 Consider the Following Information