Question

In a given year there is a 3% chance you will get in a small accident costing around $2000 and 0.1% chance you will get in a major accident costing around $150,000 and a 96.9% chance you will not get in any accident what premium should insurance company charge if they want an average profit of $400

Answer 1

$475

Explanation:

There are 3 possible accident in this question

3% chance of losing $2000

0.1% chance of losing $150,000

96.9% chance of losing $0

Then the expected value that you will lose is:

3%* $2000 + (0.1% * $15000) + (96.9% * $0)= $75

Profit made by subtracting the price with the lose. If the company want average profit $400, the charge should be:

average profit = premium price - average lose

premium price= average profit + average lose

premium price= $400 + $75 = $475