An insurance policy sells for $1000. Based on past data, an average of

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Answered question

2021-12-05

An insurance policy sells for $1000. Based on past data, an average of 1 in 100 policyholders will file a $15,000 claim, an average of 1 in 200 policyholders will file a $30,000 claim, and an average of 1 in 500 policyholders will file an $80,000 claim. Find the expected value (to the company) per policy sold. If the company sells 10,000 policies, what is the expected profit or loss?

Answer & Explanation

Coldst

Coldst

Beginner2021-12-06Added 18 answers

Step 1
We will make a table using the given information
Amount of claim150003000080000Probability110012001500
So the expected value of the claims is: 15000(1100)+30000(1200)+80000(1500)=460
Step 2
Given that the policies are sold for $1000. And the expected value of claims =$460
So the expected value of the companies profit is =$(1000460)=$540
If the company sells 10,000 policies then the expected profit is =$(10000×540)=$5400000
Answer: Expected value per policy sold =$540
expected profit =$5400000

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