Question

Suppose a company charges an annual premium of $120 for an insurance policy for minor injuries. Actuarial studies show that in case of an injury claim, the company will pay out an average of $900 for outpatient care and an average of $3000 for an overnight stay in the hospital. They also determine that, on average, each year there are five claims made that result in outpatient care for every 1000 policies and three claims made that result in an overnight stay out of every 1000 policies. What is the expected annual profit of an insurance policy for the company

Answer 1

annual profit per insurance policy 107.4 dollars

Step-by-step explanation:

for every 1,000 insurance policy:

revenue 1,000 x 120 = 120,000

outpatient cost: 5 x 900 = 3,600

overnight cost: 3 x 3,000 = 9,000

Profit: 107,400

We now divide over 1,000 policies:

107,400 / 1,000 = 107.4

Each policy is expected to generate a gross profit of 107.4 dollars