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XYZ Insurance isues 1-year policies: i) The probability that a new insured had no accidents last year is 0. 70 ii) The probability that an insured who was accident-free last year will be accident-free this year is 0. 80 iii)The probability that an insured who was not accident-free last year will be accident-free this year is 0. 60 What is the probability that a new insured with an unknown accident history will be accident-free in the sccond year of coverage?

User Sarien
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1 Answer

2 votes

Answer: 0.86 or 86%

Explanation:

To calculate the probability that a new insured with an unknown accident history will be accident-free in the second year of coverage, we can use conditional probability.

Let's define the following events:

A: Insured had no accidents last year

B: Insured is accident-free this year

Given information:

i) P(A) = 0.70 (probability that a new insured had no accidents last year)

ii) P(B | A) = 0.80 (probability that an insured who was accident-free last year will be accident-free this year)

iii) P(B | A') = 0.60 (probability that an insured who was not accident-free last year will be accident-free this year)

We want to find P(B), which is the probability that an insured is accident-free this year, regardless of their accident history last year.

We can use the law of total probability to calculate P(B):

P(B) = P(A) * P(B | A) + P(A') * P(B | A')

P(B) = 0.70 * 0.80 + (1 - 0.70) * 0.60

P(B) = 0.56 + 0.30

P(B) = 0.86

Therefore, the probability that a new insured with an unknown accident history will be accident-free in the second year of coverage is 0.86.

User Bitmusher
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