Insurance is one of the important risk transfer mechanisms. It is governed by a number of important principles including the principle of “pooling”. Evaluate the effect of pooling on the expected loss and standard deviation of loss for two shipowners A and B considering buying ocean marine insurance to cover their two ships, using the following assumptions:

• The two owners have identical ships valued at $1,000,000 each There is a 15% chance of peril will completely destroy any ship Loss to each shipowner is an independent event.

Your answer should include:

- a clear statement of all formulas, steps, and numbers used.

- clear comparison of the numbers before and after pooling, in particular:

i] the expected loss and standard deviation of loss before pooling.

ii] the expected loss and standard deviation of loss after pooling.