Probability, Decision Making, The Planet, and You |
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Earthquakes Part 2
Companies that sell earthquake insurance sometimes combine information about probabilities of earthquakes of various sizes in a region with information about the property damage in that region that is likely to result from each magnitude of quake. The combined information allows them to estimate the probability that losses from a quake will exceed some particular dollar amount in a given time span. For example, a company might discover that it has a 30% chance of a loss exceeding ten billion dollars in the next 20 years, and also a 10% chance of a loss exceeding 100 billion dollars in that same time span.
Exercise
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Exercise 3 |
Suppose that a company discovers that they have sold so much earthquake insurance in a particular region that they have a 10% chance of a loss exceeding 100 billion dollars in that region in the next 20 years. Suppose that their reserve against losses is $85 billion, and that no reinsurance company wants to purchase any of this risk from them. Is this a troubling situation? |
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