State Farm receives a one-year hurricane insurance premium today of $1,750 from a family in Florida. If there is a hurricane this season and the family’s home is damaged, this insurance policy will

State Farm receives a one-year hurricane insurance premium today of $1,750 from a family in Florida. If there is a hurricane this season and the family’s home is damaged, this insurance policy will pay for all the repairs. Their home is valued at $250,000. Repairs would cost on average a quarter of home value ($62,500 in this case). Assume repairs (if any) would be paid one year from today. There is a 1% chance of hurricane damage in any given year. If the required rate of return for State Farm is 5%, how does writing this policy change State Farm’s wealth?

a)    Decreases by $1,155

b)    Decreases by $464

c)     Wealth is unchanged

d)    Increases by $464

e)    Increases by $1,155