Question

Suppose a company charges an annual premium of $475 for a fire insurance policy. In case of a fire claim, the company will pay out an average of $100,000. Based on actuarial studies, it determines that the probability of a fire claim in a year is 0.004. What is the expected annual profit of a fire insurance policy for the company?

$

What annual profit can the company expect if it issues 1000 policies?
$

Answer 1

Explanation:

1)

the expected annual profit of a fire insurance policy for the company is

475-(100000*0.004)=475-400=75$ of average profit

2)

thus, the expected annual profit of the fire company from 1000 advanced policies is

75*1000=75000$