Question

15 POINTS!!!

Based on a life insurance company's past data, each year an average of 1/90 policy holders
make a claim of $250; 1/100 policy holders make a claim of $12,000, and 1/400 make a claim
of $17,000. What would the insurance company have to charge per policyholder to break
even?

Answer 1

1. The expected pay-out on each policy is 250 * 1/90 + 12000 * 1/100 + 17000 * 1/400 = $165. So that's what the premium would have to be in order to get a profit of 0.

2. The profit per policy is the premium the company receives minus the expected payout = 350 - 165 = $185.

3. The expected profit on 375 policies would be 375 * 185 = $69375

Explanation: