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
