Question

An insurance company has written 100 policies for $75,000, 500 policies for $25,000, and 1000 policies for $10,000 for people of age 20. If experience shows that the probability that a person will die at age 20 is 0.0015, how much can the company expect to pay out during the year the policies were written? The company can expect to pay out _____ $ over the year after the policies were written.

Answer 1

The company can expect to pay out $45,000 over the year after the policies were written.

Explanation:

This can be determined as follows:

The probability that a person will die at age 20 = 0.0015

Revenue from 100 policies = 100 * $75,000 = $7,500,000

Revenue from 500 policies = 500 * $25,000 = $12,500,000

Revenue from 1000 policies = 1000 * $10,000 = $10,000,000

Total revenue from all policies = Revenue from 100 policies + Revenue from 500 policies + Revenue from 1000 policies = $7,500,000 + $12,500,000 + $10,000,000 = $30,000,000

Expected amount to pay out during the year the policies were written = Total revenue from all policies * The probability that a person will die at age 20 = $30,000,000 * 0.0015 = $45,000

Therefore, the company can expect to pay out $45,000 over the year after the policies were written.