Question

The total claim amount for a health insurance policy follows a distribution with density function 1 ( /1000) ( ) 1000 x fx e− = , x > 0. The premium for the policy is set at the expected total claim amount plus 100. If 100 policies are sold, calculate the approximate probability that the insurance company will have claims exceeding the premiums collected.

Answer 1

the approximate probability that the insurance company will have claims exceeding the premiums collected is
`\mathbf{P(X>1100n) = 0.158655}`

Explanation:

The probability of the density function of the total claim amount for the health insurance policy is given as :

`f_x(x) = (1)/(1000)e^{(-x)/(1000)}, \ x> 0`

Thus, the expected total claim amount
`\mu` = 1000

The variance of the total claim amount
`\sigma ^2 = 1000^2`

However; the premium for the policy is set at the expected total claim amount plus 100. i.e (1000+100) = 1100

To determine the approximate probability that the insurance company will have claims exceeding the premiums collected if 100 policies are sold; we have :

P(X > 1100 n )

where n = numbers of premium sold

`P (X> 1100n) = P ((X - n \mu)/(√(n \sigma ^2 ))> (1100n - n \mu )/(√(n \sigma^2)))`

`P(X>1100n) = P(Z> (√(n)(1100-1000)/(1000))`

`P(X>1100n) = P(Z> (10*100)/(1000))`

`P(X>1100n) = P(Z> 1) \\ \\ P(X>1100n) = 1-P ( Z \leq 1) \\ \\ P(X>1100n) =1- 0.841345`

`\mathbf{P(X>1100n) = 0.158655}`

Therefore: the approximate probability that the insurance company will have claims exceeding the premiums collected is
`\mathbf{P(X>1100n) = 0.158655}`