# Question

Daniel-James Insurance Company will insure an offshore Mobil Oil production platform against weather losses for one year. The president of Daniel-James estimates the following losses for that platform (in millions of dollars) with the accompanying probabilities:

Amount of Loss Probability

($ millions) of Loss

0 ............. .98

40 ............. .016

300 ............ .004

a. What is the expected amount Daniel-James will have to pay to Mobil in claims?

b. What is the likelihood that Daniel-James will actually lose less than the expected amount?

c. Given that Daniel-James suffers a loss, what is the likelihood that it is for $300 million?

d. Daniel-James has set the annual premium at $2.0 million. Does that seem like a fair premium? Will it cover its risk?

Amount of Loss Probability

($ millions) of Loss

0 ............. .98

40 ............. .016

300 ............ .004

a. What is the expected amount Daniel-James will have to pay to Mobil in claims?

b. What is the likelihood that Daniel-James will actually lose less than the expected amount?

c. Given that Daniel-James suffers a loss, what is the likelihood that it is for $300 million?

d. Daniel-James has set the annual premium at $2.0 million. Does that seem like a fair premium? Will it cover its risk?

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