Average probability of a flood in millvale is approximately

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The Millvale Private Insurance Company estimates that that there are 1000 businesses in Millvale that are facing the possibility of $200,000 in flood damage. Half of the businesses are located along the Allegheny River, like the Millvale Boat House, and half are located on a bluff overlooking the river, like the Millvale Hilltop Restaurant. As a result, the average probability of a flood in Millvale is approximately 1/25. What is the insurance company’s expected payout each year and how much will it need to collect in insurance premiums from the 1000 business owners in order to offer “actuarially fair” insurance (assuming the insurance company has no other costs besides paying claims)?

Reference no: EM13743390

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