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katovenus [111]
3 years ago
14

A potential customer for an $88,000 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. Ignoring all other partial losses, what premium should the insurance company charge for a yearly policy in order to break even on all $88,000 policies in this area?
Business
1 answer:
Ksenya-84 [330]3 years ago
8 0

Answer:

The answer is: In order for the company to break even on all the $88,000 policies in that area it must charge $528 per yearly policy.

Explanation:

In order to calculate what premium the insurance company should charge in order to break even, we must know how much money the company will have to pay during the year.

Fire insurance policy of $88,000

<u>Possible losses             Probability      Money paid by company    </u>  

total loss                              0.001              $88,000

50% loss                              0.01                $44,000

The company will have to pay $88 ($88,000 x 0.001) for a total loss and $440 ($44,000 x 0.01) for a 50% loss, we add them up and get $528.

In order for the company to break even on all the $88,000 policies in that area it must charge $528 per yearly policy.

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Explanation:

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<h2>At the end of the year the supplies expenses will be 9,500 $</h2>

Explanation:

With the help of Preparing Suppllies Account we got the answer

                               <u>  Supplies Account</u>

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