Question

An insurance company is setting out its policy for the next year. The chance that a customer (on average) survives another year is 0.96. The policy is sold for $85 per month for the entire year ($85*12 per year). If the customer does not survive another year, the company will pay $200,000 to the beneficiaries. What is the expected value of profit/loss for this company?

Answer 1

Answer:

The expected loss is  $E =$  $6980

Step-by-step explanation:

From the question we are told that

     The  chance that a customer  survives another year is p =0.96

     The rate at which the policy is sold is   r =  $85 per month

      The rate at which the policy is sold per year is   R =  $85 * 12 per year

                                                                                          = $1020 per year

     The amount paid the the beneficiaries is  $A =$$200,000

The expected value of profit/loss for this company is mathematically represented as

            $E = R -[ (1-p)*A]$

substituting values

            $E = 1020 -[ (1-0.96)*200000]$

             $E = 1020 -8000$

             $E =$  - $6980

The negative sign shows that it is a loss