Question

Insurance Company is deciding whether to insure the lives of those leading a quest to Moria. Based on past experience, the probability of surviving such a quest is 99.9%. If it charges a premium of 5,852 silver coins and would pay a death benefit of 67,329 silver coins if the insured were to die, what is the expected value of this insurance policy to the insurance company?

Answer 1

5779 silver coins

Explanation:

The probability of surviving such a quest is 99.9% with premium of 5,852 silver coins.

If the insured were to die, the insurance company would pay a death benefit(incur a loss) of 67,329 silver coins.

The probability that the insured would die = 100%-99.9% =0.1%

Therefore, the expected value of this insurance policy to the insurance company

`=(5,852 X 99.9\%)+(-67,329 X 0.1\%)\\=(5,852 X 0.999)+(-67,329 X 0.001)\\=5778.82\\\approx 5779$ silver coins`

The expected value of this insurance policy to the insurance company is 5779 silver coins.