You have 1 million worth of equipment at the job site. you want to minizmize you

Question

You have 1 million worth of equipment at the job site. you want to minizmize your risk of direct property damage by taking out an insurance policy. the insurance compnay provides you with the following stats.

Type damage probabilty amount of damage loss %

total 0.02 100

medium 0.08 40

low 0.10 20

no damaage 99.8 0

If the insurance company uses expected value to calculate premiums, then how much would you expect the premium to be , assuming the insurance company adds on 300 dollars for handling and profit?

Explanation / Answer

Expected Damage = (0.02*100%+0.08*40%+0.1*20%+99.8*0%)/100 = 0.072%

Expected Value of Damage = 0.072%*1000000 = $ 720

Expected Insurance Premium = 720 + 300 = 1020

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