You are a co-op student at Modus Biosystems and have been asked to research whether there are ways to save money on their legal liability insurance. Modus currently pays $75,000 a year for a policy that has no maximum coverage but does have a deductible of $10,000. Your boss, Andre Serrano, says that you should assume the following probabilities for eligible costs per year: 30% chance of $0; 40% of $10,000; 20% chance of $100,000; 5% chance of $300,000; 4.9% chance of $2,000,000; 0.1% chance of $100,000,000. You can find two alternative policies. Policy A has no deductible, a maximum coverage of $5,000,000 and costs $75,000 just like the current policy. Policy B is a lot cheaper ($5,000 a year), but it has a deductible of $200,000 and a maximum coverage of $1,700,000. What are the expected value per year for each of these three policies?

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Expected Value for Each Policy Well calculate the expected value average cost per year for each policy considering the probabilities of incurring diff... View the full answer