Question

An insurance company is setting out its policy for the next year. The chance that a customer (on average) survives another year is 0.96. The policy is sold for $85 per month for the entire year ($85*12 per year). If the customer does not survive another year, the company will pay $200,000 to the beneficiaries. What is the expected value of profit/loss for this company?

Answer 1

The expected loss is
`E =` $6980

Explanation:

From the question we are told that

The chance that a customer survives another year is p =0.96

The rate at which the policy is sold is r = $85 per month

The rate at which the policy is sold per year is R = $85 * 12 per year

= $1020 per year

The amount paid the the beneficiaries is
`A =`$200,000

The expected value of profit/loss for this company is mathematically represented as

`E = R -[ (1-p)*A]`

substituting values

`E = 1020 -[ (1-0.96)*200000]`

`E = 1020 -8000`

`E =` - $6980

The negative sign shows that it is a loss