Question

Brandybuck Insurance Company (BIC) 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 85.4%. If BIC charges a premium of 5,533 silver coins and would pay a death benefit of 59,086 silver coins if the insured were to die, what is the expected value of this insurance policy to BIC?
Round to the nearest silver coin as needed. If the expected value is a loss to BIC, enter your answer as a negative number.

Answer 1

Answer:

-3901 silver coins (a loss)

Step-by-step explanation:

Probability of surviving the quest = 85.4% (Gain of 5,533 silver coins.)

If the insured were to die, the insurance company would pay a death benefit(incur a loss) of 59,086 silver coins.

Therefore:

The probability of not surviving the quest = 100%-85.4% =14.6%

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

$=(5,533 X 85.4\%)+(-59,086 X 14.6\%)\\=(5,533 X 0.854)+(-59,086 X 0.146)\\=-3901.37\\\approx -3901 silver coins$

The expected value of this insurance policy to BIC is -3901 silver coins