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Insurance-personal risk management

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Reference no: EM132902729

Insurance & Personal Risk Management.

Suppose you currently have $223,300 invested in liquid assets and you want to purchase home insurance policy to cover (potential) property damage. There is 10% probability of experiencing a $2,000 damage, 0.95% probability of experiencing a $15,000 damage, and 0.05% probability of experiencing a $200,000 damage.

Part A) If you have a power utility function (i.e., ( )= 1- -11- ) with =1, what is the maximum insurance premium you are willing to pay (reservation price) for a plan that covers all losses with no deductible?

Part B) If the insurance broker gives you an offer to pay $400 as insurance premium but having $1,000 deductible, would you accept the offer? Why?

If you want to use calculator, keep at least 5 digits after the decimal point when rounding the numbers.

Reference no: EM132902729

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