An insurance company knows that the average cost to build a home in a new California subdivision is $92 comma 297 and that in a

Question

3 years ago

12

An insurance company knows that the average cost to build a home in a new California subdivision is $92 comma 297 and that in a

ny particular year there is a 1 in 41 chance of a wildfire destroying all the homes in the subdivision. Based on these data and assuming the insurance company wants a positive expected value when it sells policies, what is the minimum the company must charge for fire insurance policies in this subdivision?

Business

1 answer:

Marrrta [24] · Answer 1 · 2022-08-30T17:44:24+03:00

Answer:

The minimum the company must charge for fire insurance policies in California subdivision is $2,252.

Explanation:

We have the chance of a wildfire destroying all the homes in the subdivision is: 1/41 or nearly 2.44%.

The minimum the company must charge for fire insurance and still maintain a positive expected value is calculated as:

The average cost to build a home in the subdivision * the chance of a wildfire destroying all the homes in the subdivision = 92,297 * 2.44% = $2,252.

So, the answer is $2,252.

An insurance company knows that the average cost to build a home in a new California subdivision is ​$92 comma 297 and that in a

An insurance company knows that the average cost to build a home in a new California subdivision is $92 comma 297 and that in a