If There Are 1,000 People, Each of Whom Owns a $100,000

question 49

Essay

If there are 1,000 people, each of whom owns a $100,000 house, and they each stand a 1/1,000 chance each year of suffering a fire that will totally destroy their house, what is the minimum that they would have to pay annually for fire insurance?
E.L.= 0.001($100,000) + 0.999($0) = $100.00.Since the expected loss for each individual is $100 per year, the minimum that each would have to pay is $100.00 a year, in fact, given the probability of 1 in a 1000 homeowners in this group suffering a fire each year, at $100 each, on average, there should be just enough to compensate the person suffering the fire.

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Definitions:

Partially Disclosed Principal

In a transaction context, this refers to a situation where the agent reveals the existence of a principal but does not disclose the principal's identity to the third party.

Mixed Motive Contract

A contract where parties have multiple intentions or purposes behind entering the agreement, not solely based on commercial transactions.

Contract

A legally binding agreement between two or more parties, enforceable by law, with obligations and conditions that need to be fulfilled.

Contract Law

The branch of law dealing with the formation, interpretation, and enforcement of agreements between parties.