Question

Solve the following question using EXCEL Assume that three business owners each own an identical storage building valued at $120,000. Assume that there is a 1% chance in any year each building will be destroyed by a peril (fire), and that a loss to any of the buildings is an independent event. Assuming that: (first case ) Fire events are independent of each other (second case) Each building faces the same types of risks and environmental conditions. Given that, solve the below questions for each case: 1. Use the compound probability of independent events law to find the sample space of the probability of each possible event 2. Find the annual expected loss for each of the insureds. 3. Find the risk of incurrence of losses (Std dev)

Answer 1

Solution 1) Possible events:

Solution 2) Expected loss = 0.99*0 + 0.01*120000 = 0 + 1200 = $1,200

Solution 3) Risk of incurrence of losses (Standard deviation) = Sqrt(0.99*(0 - 1200)^2 +  0.01*(120000 - 1200)^2)

= Sqrt(0.99*(-1200)^2 + 0.01*(118800)^2)

= Sqrt(1425600 + 141134400)

= Sqrt(142560000)

= 11939.8492453

= $11,939.85

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