Avicenna is a major insurer that offers five-year life insurance policies to 65 year-olds. If the holder of one of these policies dies before the age of 70 years, the company must pay $213,000 the beneficiary of the policy. Avicena executives are considering the possibility of offering these policies to $9,380 each one. Suppose there is a 4% probability that the insured will die before the 70 age of years and a 96% probability that she will live to 70 age. If Avicena executives know they will sell many of these policies, should they expect to make or lose money by offering them? How much would they win or lose? To respond, take into account the price of the policy and the expected value of the amount paid to the beneficiary.
Avicenna is a major insurer that offers five-year life insurance policies to 65 year-olds. If the holder of one of these policies dies before the age of 70 years, the company must pay $213,000 the beneficiary of the policy. Avicena executives are considering the possibility of offering these policies to $9,380 each one. Suppose there is a 4% probability that the insured will die before the 70 age of years and a 96% probability that she will live to 70 age. If Avicena executives know they will sell many of these policies, should they expect to make or lose money by offering them? How much would they win or lose? To respond, take into account the price of the policy and the expected value of the amount paid to the beneficiary.
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter16: Information, Risk, And Insurance
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Avicenna is a major insurer that offers five-year life insurance policies to 65 year-olds. If the holder of one of these policies dies before the age of 70 years, the company must pay $213,000 the beneficiary of the policy. Avicena executives are considering the possibility of offering these policies to $9,380 each one. Suppose there is a 4% probability that the insured will die before the 70 age of years and a 96% probability that she will live to 70 age.
If Avicena executives know they will sell many of these policies, should they expect to make or lose money by offering them? How much would they win or lose?
To respond, take into account the price of the policy and the expected value of the amount paid to the beneficiary.
Transcribed Image Text:4 Avicere can expect to earn money by offering these policies.
In the long run, he is expected to win
pesos with each policy sold.
2 Avicenna can expect to lose money by offering these policies.
In the long run, you are expected to lose
those with every policy sold.
Avicenna is expected not to make or lose money by offering these policies.
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