A hurricane bond pays the holder a face amount, say $1 million, if a hurricane causes major damage in the United States. Suppose that the chance for such a storm is 5% per year.
(a) If a financial firm sells these bonds for $60,000, what is the chance that the firm loses money if it only sells one of these?
(b) If the firm sells 1,000 of these policies, each for $60,000, what is the probability that it loses money?
(c) How does the difference between the probabilities of parts (a) and (b) compare to the situation of a life insurance company that writes coverage to numerous patients that live or die independently of one another?