1. State Farm receives a one-year hurricane insurance premium today of $1,250 from a family in Florida. If there is a hurricane this season and the familys home is damaged, this insurance policy will pay for all the repairs. Their home is valued at $250,000. Repairs would cost on average a quarter of home value ($62,500 in this case). Assume repairs (if any) would be paid one year from today. There is a 1% chance of hurricane damage in any given year. If the required rate of return for State Farm is 5%, how does writing this policy change State Farms wealth?
2. Decreases by $1,155
3. Decreases by $655
4. Wealth is unchanged
5. Increases by $655
6. Increases by $1,155