Question

The table shows claims and their probabilities for an insurance company.

Answer 1

Answer:

a) Expected Value of Claims = $32,000

b) Average premium per claim, in order to break-even on claim costs

= $5,333.33

c) To make a profit of $60 per policy (i.e. a total profit of $360 ($60 x 6), it must charge:

= $5,393.33 per policy

Step-by-step explanation:

a) Data and Calculations:

Amount of Claim      Probability   Expected Value

$0                               0.60             $0

$50,000                     0.25             $12,500

$100,000                   0.09                 9,000

$150,000                   0.04                 6,000

$200,000                  0.01                 2,000

$250,000                 0.01                 2,500

Expected Cost of claims =          $32,000

b) Average premium per claim, in order to break-even on claim costs

= Total Claim cost divided by number of policies

= $32,000/6 = $5,333.33

c) To make a profit of $60 per policy (i.e. a total profit of $360 ($60 x 6), it must charge:

Total Claim cost + Total profit / 6 or Average Premium plus Profit per policy =

= ($32,000 + $360)/6 or $5,333.33 + $60

= $32,360/6 or $5,393.33

= $5,393.33