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Suppose a small fire insurance company insures 10000 homes. Each homeowner pays an annual premium...

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Accounting

Suppose a small fire insurance company insures 10000 homes. Each homeowner pays an annual premium of $1000. Fires are rare, but occur with probability 1 in 100 per year. In the event of a fire, the insurance company must pay out $500,000.

a) Show that an expected value decision maker would enter this business.

b) What would a worst-case scenario decision maker do?

d) How many years must an insurance company operate before the probability of losing money falls below 5%?

e) How much money must the insurance company have hoarded to survive these numbers of years

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