Question

A car insurance company has high-risk, medium-risk, and low-risk clients, who have, respectively, probabilities .04, .02, and .01 of filing claims within a given year. The proportions of the numbers of clients in the three categories are .15, .25, and .60, respectively.(a) What is the probability that a random client doesn't file a claim?(b) What proportion of the claims filed each year come from high-risk clients?(c) What is the probability that a random client who didn't file a claim is low- risk?

Answer 1

Answer:

(a) 0.983

(b) 0.353 or 35.3%

(c) 0.604 or 60.4%

Step-by-step explanation:

a) The probability of a random client does not file a claim is equal to the sum of:

1) the probability of a client being high risk and does not file a claim = P(hr)*(1-P(c_hr))

2) the probability of a client being medium risk and does not file a claim = P(mr)*(1-P(c_mr))

and

3) the probability of a client being low risk and does not file a claim = P(lr)*(1-P(c_lr))

P(not claim) = P(hr)*(1-P(c_hr))+P(mr)*(1-P(c_mr))+P(lr)*(1-P(c_lr))

P(not claim) = 0.15*(1-0.04)+0.25*(1-0.02)+0.6*(1-0.01)

P(not claim) = 0.15*0.96+0.25*0.98+0.6*0.99 = 0.983

(b) To know the proportion of claims that come from high risk clients we need to know the total expected claims in every category:

Claims expected by high risk clients = P(c_hr)*P(hr) = 0.04*0.15 = 0.006 claims/client

Claims expected by medium risk clients = P(c_mr)*P(mr) = 0.02*0.25 = 0.005 claims/client

Claims expected by low risk clients = P(c_lr)*P(lr) = 0.01*0.60 = 0.006 claims/client

The proportion of claims done by high risk clients is

Claims by HR clients / Total claims expected = 0.006 / (0.006+0.005+0.006) =  0.006 / 0.017 = 0.3529 or 35,3%

(c)  The probability of being a client of a particular category and who don't file a claim is:

1) High risk: 0.15*(1-0.04) = 0.144

2) Medium risk: 0.25*(1-0.02) =  0.245

3) Low risk: 0.6*(1-0.01) = 0.594

The probability that a random client who didn't file a claim is low- risk can be calculated as:

Probability of being low risk and don't file a claim / Probability of not filing a claim

P(LR&not claim)/P(not claim) = 0.594 / (0.144+0.245+0.594)

P(LR&not claim)/P(not claim) = 0.594 /  0.983 = 0.604 or 60.4%