An insurance policy sells for $600. Based on past data, an average of

3kofbe

3kofbe

Answered question

2021-12-02

An insurance policy sells for $600. Based on past data, an average of 1 in 50 policyholders will file a $5,000 claim, an average of 1 in 100 policyholders will file a $10,000 claim, and 1 in 200 policyholders will file a $30,000 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? Explain

Answer & Explanation

Abel Maynard

Abel Maynard

Beginner2021-12-03Added 19 answers

Step 1
Expected value:
The expected value of a random variable is the sum of the possible values that the random variable can take multiplied with corresponding probabilities.
Step 2
Calculating the expected gain or loss:
The company sells 10,000 policies for $1000. The expected value is calculated as follows:
Expected value=1000×110,000×15025,000×110060,000×1250=310
Thus, the expected profit is $310.
The expected profit for the company is $310 per policy.

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