Question

An insurance company charges Ted $1400 per year for insurance on his home. The company has predicted that there is a 10% chance that Ted will make a claim on the policy of $5000. Create a probability distribution and determine what the insurance company can expect to make on this policy, on average?

Answer 1

The insurance company can expect to make $900 on the policy

Explanation:

The given parameters are;

The amount Ted pays per year for insurance on his home = $1,400

The value of the insurance policy = $5000

The chance that Ted will make a claim on the policy = 10%

The expected value is given as follows

Incidence
`{}` Probability Value v × p

A claim is made
`{}` 0.1 $5,000 - $1,400 = -$3,600 -$360

No claim
`{}` 0.9
`{}` $1,400 $1260

Expected value is $1,260 - $360 = $900

The value the insurance company can be expected to make on average on the policy is $900