Question

Oxnard Petro Ltd. is buying hurricane insurance for its off-coast oil drilling platform. During the next five years, the probability of total loss of only the above-water superstructure ($300 million) is 0.25, the probability of total loss of the facility ($800 million) is 0.25, and the probability of no loss is 0.50. Find the expected loss.

Answer 1

The expected loss is $275 million.

Explanation:

Expected loss can be determined as the sum of the product of each possible loss by the its probability of occurence. In this situation, there are only two possible losses listed since the probability of no loss doesn't add any value to the expected loss and should be disregarded.

Expected loss (in millions) = EL

`EL = (300*0.25)+(800*0.25)\\EL = 275`

The expected loss is $275 million.