You own a house worth $800,000 on a river. If the river floods moderately, the house will
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You own a house worth $800,000 on a river. If the river floods moderately, the house will be destroyed.
This happens about once every 80 years. If you build a seawall, the river will have to flood heavily to destroy your house, and this only happens about once every 400 years. What would be the annual premium for an insurance policy that offers full insurance? For a policy that only pays 80% of the home value, what are your expected costs with and without a seawall? Do the different policies provide an incentive to be safer (i.e., to build the seawall)?
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Related Book For
Financial Markets And Institution
ISBN: 9781292459547
10th Global Edition
Authors: Frederic Mishkin, Stanley Eakins
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