Answer:
The expected value of this insurance policy is kept at $185.2 based on the historical data provided
Step-by-step explanation:
probability/likelihood of having an accident by the customer is = 2.4% which is 2.4÷100 = 0.024 probability :
The cost to the company at 0.024 probability of having an accident
= - $2700 (average insurance payout)
probability of not having an accident by the customer is = 100% - 2.4% = 97.6% which is 97.6 ÷ 100 = 0.976 probability
The cost to the company at 0.976 probability of no accident = $0
The premium paid by the customer annually is = $250
Therefore to get the expected value of the insurance policy (E) will be
(probability of accident) (average insurance payout) + (probability of no accident) (cost of no accident to the company) + premium paid by customer
0.024(-$2700) + 0.976($0) + $250 = $185.2
- $64.8 + $0 + $250 = $185.2