Scenario 17.4
Consider the following information:
StowUrStuff Storage is located slightly below sea level in a coastal town. It could build and maintain a flood control system around its property at an annual cost of $1000, and if it did so, the probability of a flood's doing $1,000,000 in damage during the year would be .005. With no flood control system, the probability of such a flood would be .01.
-Refer to Scenario 17.4. If the flood control system were not in place, the insurer would not be willing to insure against the flood for any premium less than:
A) $5,000.
B) $10,000.
C) $100,000.
D) $200,000.
E) $1,000,000.

Question

Quizplus · Accepted Answer

To calculate the expected value of the losses, we multiply the probability of the loss occurring by the amount of the loss.

With flood control system:
Expected loss = 0.005($1,000,000) = $5,000

Without flood control system:
Expected loss = 0.01($1,000,000) = $10,000

Without flood control system, the insurer would not be willing to insure against the flood for any premium less than the expected loss of $10,000. Therefore, the best choice is B.

Scenario 17.4 Consider the Following Information