Question

. There is an 80% probability that Tom will be in good health during the year and incur only $200 in medical expenses, but there is a 20% probability that he will be ill and incur $20,000 in medical expenses. If an insurance company charged Tom an actuarially fair premium, how much would Tom pay for health insurance

Answer 1

The Actuarially Fair Premium that Tom have to pay for hid Health Insurance is $4,160

Step-by-step explanation:

To compute the amount that Tom have to pay for Health Insurance is;

Actuarially Fair Premium = (Probability of actuality ill × Payments incurred) + (Probability of not actuality ill × Payments incurred)

Actuarially Fair Premium = (20% x $20,000) + (80% x $200)

Actuarially Fair Premium = $4,000 + $160

Actuarially Fair Premium = $4,160