Assume that two business owners A and B each own an identical storage building valued

at $8000. Assume there is a 30% chance in any year that each building will be destroyed

by a peril, and that a loss to either building is an independent event.

A

Probability loss

70% $ 0

30% $8000

1. What is the expected loss for each owner ? what is the SD?

2. Suppose instead of bearing the risk of loss individullly, the two owners decide to pool

the loss exposure, and each agrees to pay an equal share of any loss that might occur.

Under this scenario, what is the expected loss for each owner ? what is the SD?

3. Please approve your SD from question 2 using the central limit theorem.

4. If the sample size is 3 million, what is the standard error of the sample mean loss

distribution?

5. Based on the result of question 4, what is the import implication for insurers?

2. Julian, age 40, would like to determine how much life insurance to purchase using the

human life value approach. He assumes his average annual earnings over the next 15

years will be $50,000. Of this amount, $30,000 is available annually for the support of his

family. Julian will generate this income for 15 more years and he believes that 6 percent

is the appropriate interest (discount) rate. What is Julian's human life value?

Answer rating: 100% (QA)

Lets address each question step by step 1 Expected loss and standard deviation for each owner For both owners A and B the expected loss is calculated as the sum of the product of the probability of lo... View the full answer