CAS Exam 6C Spring 2017, Question 10
Study guide: Exam 6C
The following information is provided about a community exposed to flood risk:
- There are 10,000 properties
- All properties are identical and valued at $500,000
- A flood event will cause 25% damage proportional to the property's value
- The market charges insurance premiums that are equal to expected losses
- The Flood Insurance Participation Rate is the percentage of property owners that purchase flood insurance
A government agency is evaluating three flood risk management options:
| Risk Management Option | One-Time Cost of Infrastructure Improvements | Flood Loss Return Period (Years) | Flood Insurance Participation Rate |
|---|---|---|---|
| 1. Not investing in additional infrastructure | $0 | 50 | 50% |
| 2. Building a dike | $100,000,000 | 250 | 75% |
| 3. Building a floodway | $150,000,000 | 500 | 100% |
Evaluate, over a five-year horizon, which of the three options above the government agency should implement.
Part a (3 points)
Answer this question and see the worked solution