Question

An auto insurance company concludes that 30% of policyholders with only collision coverage will have a claim next year, 40% of policyholders with only comprehensive coverage will have a claim next year, and 50% of policyholders with both collision and comprehensive coverage will have a claim next year. Records show 60% of policyholders have collision coverage, 70% have comprehensive coverage, and all policyholders have at least one of these coverages. Calculate the percentage of policyholders expected to have an accident next year.

Answer 1

40% of policyholders are expected to have an accident next year

Explanation:

Given the data in the question;

P( collision coverage ) = 60% = 0.6

P( comprehensive coverage ) = 70% = 0.7

Now, we make use of the Law of addition of probability, so

P( collision coverage and comprehensive coverage ) = P( collision coverage ) + P( comprehensive coverage ) - P( collision coverage or comprehensive coverage )

P( collision coverage and comprehensive coverage ) = 0.6 + 0.7 - 1

P( collision coverage and comprehensive coverage ) = 0.3

Now,

P( comprehensive coverage only ) = P( comprehensive coverage ) - P( collision coverage and comprehensive coverage )

P( comprehensive coverage only ) = 0.7 - 0.3

P( comprehensive coverage only ) = 0.4

And

P( collision coverage only) = P( collision coverage ) - P( collision coverage and comprehensive coverage )

P( collision coverage only) = 0.6 - 0.3 = 0.3

Next we make use of the Law of total probability;

P( accident ) = [P( accident ║ collision coverage only) × P( collision coverage only)] + [P( accident ║ comprehensive coverage only) × P( comprehensive coverage only)] + [P( accident ║ collision coverage and comprehensive coverage only) × P( collision coverage and comprehensive coverage only)]

so we substitute in our values;

P( accident ) = [ 30% × 0.3 ] + [ 40% × 0.4 ] + [ 50% × 0.3 ]

P( accident ) = [ 0.3 × 0.3 ] + [ 0.4 × 0.4 ] + [ 0.5 × 0.3 ]

P( accident ) = 0.09 + 0.16 + 0.15

P( accident ) = 0.4 or 40%

Therefore, 40% of policyholders are expected to have an accident next year