An engineer decided to make a careful analysis of the cost of fire insurance for his $200,000 home, From a fire rating bureau he found the following risk of fire loss in any year Compute his expected fire loss in any year He finds that the expected fire loss in any year is less than the $550 annual cost of fire insurance. In fact, an insurance agent explains that this is always true. Nevertheless, the engineer buys fire insurance. Explain why this is or is not a logical decision. Outcom No fire loss $10,000 fire loss $40,000 fire loss 200,000 fire loss Probability 0986 0.010 0.003 0.001 a. b.
a)Expected Fire Loss=(0*.986)+(10000*.010)+(40000*.003)+(200000*.001) $ 420 b)This is not a logical decision as it is expected loss and not the actual loss. There is always a chance of having a 200000 loss to a zero loss case.It is just the probability and there is always a chance of having any losses upto $200000
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