Question

Insurance policy sells for $1200 1 in 100 file $20000 claims 1in 250 file $40,000 claims 1 in 500 file $70000 claims 20,000 policies sold expected profit or loss

Options:
Option 1: $200,000 profit
Option 2: $500,000 loss
Option 3: $400,000 profit
Option 4: $300,000 loss

Answer 1

To calculate the expected profit or loss, we need to multiply the probability of each claim amount by the corresponding claim amount and then sum up the results.

Step-by-step explanation:

To calculate the expected profit or loss, we need to multiply the probability of each claim amount by the corresponding claim amount and then sum up the results. Let's calculate:

Probability of a $20,000 claim = 1/100 = 0.01

Probability of a $40,000 claim = 1/250 = 0.004

Probability of a $70,000 claim = 1/500 = 0.002

Expected profit or loss = ($20,000 * 0.01) + ($40,000 * 0.004) + ($70,000 * 0.002) - (20,000 * 1) = $200 + $160 + $140 - $20,000 = $500

Therefore, the expected profit or loss is $500.