Classwork 14
Flood Insurance Choices
Scenario ๐ง๏ธ
Imagine you own a house next to a river.
- Each year, there is a 5% chance of a major flood.
- If a flood hits, your house suffers $200,000 in damage.
You are considering three options:
- No insurance
- Partial, subsidized insurance
- Full, risk-based insurance
The Options ๐งฎ
Flood probability: \(5\%\) per year
Damage if flood: $200,000
\[ (\text{Expected annual loss if uninsured}) = 0.05 \times 200,000 = \$10,000. \]
Here are your choices:
| Option | Annual Premium | You Pay If Flood | Description |
|---|---|---|---|
| A | $0 | $200,000 | No Insurance |
| B | $500 | $50,000 | Partial Insurance (substantial loss remains) |
| C | $2,000 | $1,000 | Full Insurance (tiny deductible) |
Your Decision โ
Question: Which option would you choose?
- Raise your hand for:
- Option A โ No insurance
- Option B โ Partial insurance (subsidized NFIP-style insurance)
- Option C โ Full insurance
- Option A โ No insurance
Quick Reflection ๐ญ
- If you chose Option A (No insurance):
- Why did you feel comfortable taking that risk?
- Did the 5% probability feel โsmall enoughโ to ignore?
- If you chose Option B (Partial insurance):
- Why did this balance of premium + loss feel best to you?
- How does the subsidy (cheap premium) affect your choice?
- If you chose Option C (Full insurance):
- Why are you willing to pay more each year?
- How much do you value peace of mind?