Question

Zurich Insurance Company has a customer, Sir. Roger Federer, who holds a $900, 000 fire insurance policy on his tennis collection. The company estimates that there is a 3% chance that the tennis collection will be destroyed by fire. If the insurance company charges a premium of 36, 000,what is the expected profit for the insurance company? Let C = company’s payout (cost), P = company’s profit.

Answer 1

To calculate the expected profit for the insurance company, multiply the probability of the event happening with the premium charged and subtract the expected payout. The expected profit for the insurance company in this case is $9,000.

Step-by-step explanation:

To calculate the expected profit for the insurance company, we need to multiply the probability of the tennis collection being destroyed by fire (3%) with the premium charged ($36,000). This will give us the expected payout or cost for the insurance company. To find the expected profit, we subtract the expected payout from the premium.

Expected payout = 3% * $900,000 = $27,000

Expected profit = $36,000 - $27,000 = $9,000

Therefore, the expected profit for the insurance company is $9,000.