The International Maritime Bureau said the waters off Somalia are the world's most dangerous, accounting for nearly a third reported pirate attacks worldwide between January and September 2008. Suppose all boats are insured to $100,000 and pay a premium of $10,000 each. Suppose 10 out of 100 boats are attacked by pirates and these 10 file claims with their insurance. If the insurance company's only costs are the claims it must pay, has the insurance company earned an economic profit?

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The insurance company collects $1,000,000 in premiums ($10,000 from each of the 100 boats). If 10 boats file claims, the insurance company pays out $1,000,000 in claims ($100,000 per boat), leaving them with $0 profit ((Premiums collected - claims paid) = ($1,000,000 - $1,000,000) = $0). Therefore, the insurance company broke even and did not earn an economic profit.

The International Maritime Bureau Said the Waters Off Somalia Are