Assume two business owners each own an identical storage building in Manama valued at BD 70,000. Further assume there is a 5% percent chance in any year that each building will be destroyed by peril, and that a loss to either building is an independent event. However, instead of bearing the risk of loss individually, the two owners decided to pool (combine) their loss exposures, and each agrees to pay an equal share of any loss that might occur.

Requirements;

a. Calculate the expected loss for each of the business owner.

b. Estimate the objective risk before the pooling.

c. Estimate the objective risk as a result of the pooling.

d. Events may also be mutually exclusive. Events are mutually exclusive if the occurrence of one event precludes the occurrence of the second event. Mutually exclusive probabilities are additive. If the probability that a building will be destroyed by fire is 3 percent and the probability that the building will be destroyed by flood is 2 percent, then what will be the probability that the building will be destroyed by either fire or flood?