Question: The William Companies WMB owns and operates natural gas pipelines
The William Companies (WMB) owns and operates natural gas pipelines that deliver 12% of the natural gas consumed in the United States. WMB is concerned that a major hurricane could disrupt its Gulfstream pipeline, which runs 691 miles through the Gulf of Mexico. In the event of a disruption, the firm anticipates a loss of profits of $65 million. Suppose the likelihood of a disruption is 3% per year, and the beta associated with such a loss is −0.25. If the risk-free interest rate is 5% and the expected return of the market is 10%, what is the actuarially fair insurance premium?
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