Question

An insurance company charges $800 annually for car insurance. The policy specifies that the company will pay $1000 for a minor accident and $5000 for a major accident. If the probability of a motorist having a minor accident during the year is 0.2 and of having a major accident is 0.05 (and these events are mutually exclusive), what is the insurance company's expected profit on the policy

Answer 1

Answer: the expected profit will be $755 annually.

Explanation: Expected Profit (EP) = Charges (income for the insurance company) - probability of minor accidents X amount payable for a minor accident - probability of mayor accidents X amount payable for a major accident.

800- 1000 (0.2) -5000 (0.05)= 800-20-25= 755