An insurance policy sells for $700. Based on past data, an average of

jippie771h

jippie771h

Answered question

2021-12-04

An insurance policy sells for $700. Based on past data, an average of 1 in 50 policyholders will file a $5,500 claim, an average of 1 in 100 policyholders will file a $10,000 claim, and 1 in 200 policyholders will file a $25,000 claim. What is the expected value of each policy the insurance company sells?

Answer & Explanation

Hiroko Cabezas

Hiroko Cabezas

Beginner2021-12-05Added 18 answers

Step 1
Let us make a table for the claims and the probabilities
claim55001000025000probability1/501/1001/200
So the expected claim is:
5500(150)+10000(1100)+25000(1200)=335
Step 2
Given that the insurance policy sells for $700. And we got that expected value of the claim is =335
So, the expected value of each policy the insurance company sells =700335=365
Answer: $365

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