Chapter 9.2, Problem 6E

Flood Insurance A small business owner must decide whether to carry flood insurance. She may insure her business for $2 million for $100,000, $1 million for $50,000, or $.5 million for $30,000. Her business is worth $2 million. There is a flood serious enough to destroy her business an average of once every 10 years. In order to save insurance premiums, she decides each year on a probabilistic basis how much insurance to carry. She chooses $2 million 20% of the time, $1 million 20% of the time, $.5 million 20% of the time, and no insurance 40% of the time. What is her average annual loss?