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#1 [S7] An insurance company charges $150 for a policy that will pay for at most one accident. For a major accident, the insurance company will pay $5000; for a minor accident, it will pay $1000. The $150 premium is not returned. The company estimates that the probability for a major accident is ia 0.005, and the probability ofa minor one is 0.08. s2) tol a) Fill in the items in the table below from the viewpoint of the insurance company. Note that for the insurance company, payouts are considered negative, and premium payments are positive. Show any computations that you might need to perform and explain your reasoning. # of accidents Value to insurance company probability bns bro to sg61e* bns davisn 90 ebtoo sidt 0 (d (alsvsi sonsbino too nigns sit ol slurmot srs diiod yniau eund sd aluoda noi 1N ud est alqm62 9m) 2n 90 sdy iew s 26 10T surd 92do ivel eonsbitn0o 9dtlo g0 6901 b) Using the information in the table above, compute the expected value of the insurance policy to the insurance company. Explain what your result means for the insurance company.

Question

I need help with letter (a)

#1 [S7] An insurance company charges $150 for a policy that will pay for at most one accident. For a
major accident, the insurance company will pay $5000; for a minor accident, it will pay $1000. The
$150 premium is not returned. The company estimates that the probability for a major accident is
ia
0.005, and the probability ofa minor one is 0.08.
s2)
tol
a) Fill in the items in the table below from the viewpoint of the insurance company. Note that for
the insurance company, payouts are considered negative, and premium payments are positive.
Show any computations that you might need to perform and explain your reasoning.
# of accidents
Value to insurance
company
probability
bns bro
to sg61e*
bns davisn 90 ebtoo sidt
0 (d
(alsvsi sonsbino
too nigns sit ol slurmot srs diiod yniau eund sd aluoda noi
1N
ud est alqm62 9m) 2n
90
sdy
iew s
26 10T
surd
92do
ivel eonsbitn0o 9dtlo g0
6901
b) Using the information in the table above, compute the expected value of the insurance policy
to the insurance company. Explain what your result means for the insurance company.
expand button
Transcribed Image Text:#1 [S7] An insurance company charges $150 for a policy that will pay for at most one accident. For a major accident, the insurance company will pay $5000; for a minor accident, it will pay $1000. The $150 premium is not returned. The company estimates that the probability for a major accident is ia 0.005, and the probability ofa minor one is 0.08. s2) tol a) Fill in the items in the table below from the viewpoint of the insurance company. Note that for the insurance company, payouts are considered negative, and premium payments are positive. Show any computations that you might need to perform and explain your reasoning. # of accidents Value to insurance company probability bns bro to sg61e* bns davisn 90 ebtoo sidt 0 (d (alsvsi sonsbino too nigns sit ol slurmot srs diiod yniau eund sd aluoda noi 1N ud est alqm62 9m) 2n 90 sdy iew s 26 10T surd 92do ivel eonsbitn0o 9dtlo g0 6901 b) Using the information in the table above, compute the expected value of the insurance policy to the insurance company. Explain what your result means for the insurance company.
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