Assume you have $500,000 that you will not need for living expenses over the next several years. It is currently held in a savings account paying 1% interest per year. You have only one “investment” opportunity, other than leaving the money in the savings account: You can use the money to write an auto insurance policy for up to $500,000 in liability coverage. The policy would last for twelve months and would be for one low-risk driver. If you write the insurance policy, the full premium for the twelve months of coverage will be immediately added to your account. If the person you insure has any auto-related liabilities over the next twelve months, you will be responsible for paying the amount of the liabilities up to a total of $500,000. Regardless of whether you have to pay out on the liability coverage, you will keep the premium you charged to write the policy.

Consider this information as you answer the following questions:

• What is the lowest premium you would be willing to accept to insure one low-risk driver for up to $500,000 for twelve months?
• Approximately how much do you think a traditional car insurance company would charge for this type of coverage?
• Is the premium you would accept higher or lower than what you estimate a car insurance company would charge? Why do you think this is?