Concept explainers
The tables in Exercises 3-4 show claims and their probabilities for an insurance company.
a. Calculate the expected value and describe what this means in practical terms.
b. How much should the company charge as an average premium so that it breaks even on its claim costs?
c. How much should the company charge to make a profit of $50 per policy?
PROBABILITIES FOR MEDICAL INSURANCE CLAIMS
Amount of Claim (to the nearest $20,000) | Probability |
$0 | 0.70 |
$20,000 | 0.20 |
$40,000 | 0.06 |
$60,000 | 0.02 |
$80,000 | 0.01 |
$100,000 | 0.01 |
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