Question

Suppose there is a 1-in-100 chance that the Golden Gate Bridge will collapse due to a catastrophic event in any given year. The bridge is insured for $5 billion over a 20-year policy, and in the case of collapse, your insurance company will be required to pay out that entire amount. The discount rate mandated by San Francisco agencies is 5%.

1. What is the probability that the bridge does not collapse over the insurance policy period?

2. Use expected monetary value to calculate the present worth of any possible insurance claim, covering all possible years when the bridge could collapse. You only need to consider scenarios when the bridge collapses exactly once.

3. What should you recommend the annual premium payment (revenue to the insurance company) be in order to meet your insurance company’s profit margin target of 10%? Assume no costs other than the possible payout.

4. Now assume that the bridge does not collapse over the 20-year contract. Using the same interest rate of 5%, how much money will your insurance company have at the end of the contract?

Answer 1