Question

Based on historical data, an insurance company estimates that a particular customer has a 2.6% likelihood of having an accident in the next year, with the average insurance payout being $1600.

If the company charges this customer an annual premium of $110, what is the company's expected value of this insurance policy?

Answer 1

Answer: $68.4

Explanation:

Given: Annual Premium = $110

Average insurance payout = $1600

Likelihood of having an accident= 2.6% = 0.026 [we divide perecnt by 100 to convert it into decimal]

Then, Expected value = (Annual Premium) - (Likelihood of having an accident) x (Average insurance payout )

= $110 - (0.026) x ($1600)

= $(110-41.6)

= $68.4

Hence, the company's expected value of this insurance policy : $68.4