Question

ACME insurance company estimates that the probability of the owners’ of a house worth between $120,000 to $170,000 making a claim for $5000 is 0.08, and that the probability of the house and contents being totally destroyed is 0.0041. Should that tragedy happen, the company will have to pay $150,000. The company charges $1300 for the insurance policy.

What is the expected value of this policy to the insurance company?

Round your answer to two decimal places.

Answer 1

The expected value of this policy to the insurance company is $285.00.

Using this formula

Policy expected value=Insurance policy charges-[(Probability × Claim)+(Probability × Claim)]

Let plug in the formula

Policy expected value=$1,300-{(.0041)($150,000)+(.08)($5,000)]

Policy expected value=$1,300-($615+$400)

Policy expected value=$1,300-$1,015

Policy expected value=$285.00

Inconclusion the expected value of this policy to the insurance company is $285.00

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