Question

Acasa Insurance Company offers two plans for home insurance. Plan A has a $750 yearly premium with a $3,000 deductible. Plan B has a $1,200 yearly premium with a $1,000 deductible. Last year, 20% of all policyholders made damage claims. The average claim amount was $6,500.

a) $2,500
b) $3,000
c) $4,000
d) $5,000

Answer 1

Neither Plan A nor Plan B is a good option as both result in a negative net cost.

Step-by-step explanation:

Plan A: Yearly premium = $750, Deductible = $3,000

Plan B: Yearly premium = $1,200, Deductible = $1,000

With 20% of all policyholders making damage claims and an average claim amount of $6,500, we can calculate the total damage costs for each plan:
Plan A: Total damage costs = 20% of total policyholders × average claim amount
Total damage costs = (0.20 × 100) × $6,500 = $13,000

Plan B: Total damage costs = 20% of total policyholders × average claim amount
Total damage costs = (0.20 × 100) × $6,500 = $13,000

To calculate the net cost (premium + deductible - reimbursement) for each plan, we subtract the total damage costs from the premium:

Plan A: Net cost = Yearly premium - Total damage costs = $750 - $13,000 = -$12,250
The net cost is negative, meaning the insurer pays more than the premium.

Plan B: Net cost = Yearly premium - Total damage costs = $1,200 - $13,000 = -$11,800
The net cost is negative, meaning the insurer pays more than the premium.