Based on historical data, an insurance company estimates that a partic

kiki195ms

kiki195ms

Answered question

2021-12-04

According to past records, an insurance company presumes that a particular customer has a 1.7% chance of having an accident in the next twelve months, with the average insurance compensation being $2700.
If the company charges this customer an annual premium of $190, what is the company's expected value of this insurance policy?

Answer & Explanation

David Tyson

David Tyson

Beginner2021-12-05Added 19 answers

Step 1 
Given: 
A insurance company estimates that a particular customer has a 1.7% chance of having an accident in the next year.
P(Non-Survival)=1.7%=0.017 
P(Survival)=10.017=0.983 
Pay-out=$2700 
The Annual Premium =$190 
Step 2 
The needed predicted value of an insurance policy to the company can be gotten as:
Expected value=[Annual Premium×P(Survival)][(Pay-outAnnual Premium)×P(Non Survival)] 
=(190×0.983)[(2700190)×0.017] 
=144.1 
Thus, the required expected value of this insurance policy is $144.1.

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