Question

An insurance company charges Ted E. Bear $1400 per year for insurance on his home. The company has predicted that there is a 10% chance that Ted will make a claim on the policy of $5000. Create a probability distribution and determine what the insurance company can expect to make on this policy, on average?

Answer 1

$900

Explanation:

The given parameters are;

The amount Ted pays per year for insurance on his home = $1,400

The value of the insurance policy = $5000

The chance that Ted will make a claim on the policy = 10%

The expected value is given as follows

Incidence Probability(p) Value(v) v × p

A claim is made 0.1 $5,000 - $1,400 = -$3,600 -$360

No claim 0.9 $1,400 $1260

Expected value is $1,260 - $360 = $900

The value the insurance company can be expected to make on average on the policy is $900