Question

Assume that the probability of a driver getting into an accident is 6%, the average cost of an accident is $16,586.05, and the overhead cost for an insurance company per insured driver is $100. What should be this driver's insurance premium?
A. $1276.27
B. $1095.16
C. $1156.43
D. $1166.91

Answer 1

If p = 0.06 represents the probability that a customer will suffer an accident, and each accident costs the insurance company an average of $ 16,586.05.   Then, the expected value of the cost that the insurance company must pay for each driver is:
 $ 16,586.05 * 0.06 = 995,163. This plus the general cost of an insurance company per insured driver that is $ 100 gives a total of $ 1095,163. The answer is option B. The insurance company must request a premium of $ 1095.16