A householder is currently considering insuring the contents of his house against theft for one year. He estimates that the contents of his house would cost him £20,000 to replace.
Local crime statistics indicate that there is a probability of 0.03 that his house will be broken into in the coming year. In that event his losses would be 10%, 20%, or 40% of the contents with probabilities 0.5, 0.35 and 0.15 respectively.
An insurance policy from company A costs £150 a year but guarantees to replace any losses due to theft.