Question

Atrap and Bracken are two rival insurance companies. Atrap and Bracken have premiums of $150 and $100 and deductibles of $2,500 and $3,500 respectively. The average expense of surgery is $25,000. If after 5 years, 25 of the 1,000 people registered with Bracken have gone through surgery, where does Bracken stand in terms of gains or losses?

Answer 1

Bracken has lost $37,500 over 5 years.

Answer 2

Bracken has incurred a loss of $37,500

Explanation:

People who have registered with Bracken insurance company pays premium of $100. 1,000 people in total have registered with Bracken. In 5 years Bracken would have earned an income of $500,000
`\left ( $100*1,000*5)\right`.

25 among the 1,000 registered have undergone surgery. Average surgery expense is $25,000. $3,500 is deductible. So Bracken's total expense per client is $21,500 (25,000 - 3,500). For 25 patients, it will be $537,500
`($21,500*25)`.

Since expenses of $537,500 is more than income of $500,000, Bracken incurs a loss of $37,500 (500,000 - 537,500) over 5 years.

Therefore, Bracken's loss over 5 years is $37,500