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A potential customer for an $85,000 fire insurance policy
Chapter 3, Problem 27E(choose chapter or problem)
Problem 27E
A potential customer for an $85,000 fire insurance policy possesses a home in an area that, according to experience, may sustain a total loss in a given year with probability of .001 and a 50% loss with probability .01. Ignoring all other partial losses, what premium should the insurance company charge for a yearly policy in order to break even on all $85,000 policies in this area?
Questions & Answers
QUESTION:
Problem 27E
A potential customer for an $85,000 fire insurance policy possesses a home in an area that, according to experience, may sustain a total loss in a given year with probability of .001 and a 50% loss with probability .01. Ignoring all other partial losses, what premium should the insurance company charge for a yearly policy in order to break even on all $85,000 policies in this area?
ANSWER:
Solution 27E
Step1 of 2:
Let us consider a random variable ‘X’ it presents the payout on an individual policy A potential customer for an $85,000 fire insurance policy possesses a home in an area that, according to experience, may sustain a total loss in a given year with probability of 0.001 and a 50% loss with probability 0.01.
We need to find what premium should the insurance company charge for a yearly policy in order to break even on all $85,000 policies in this area.
Step2 of 2:
We have P(X = 85000) = 0.001 and
P(X = 42500) = 0.01.