Question

g Suppose that a person faces a 1/50 chance of her house burning down, which is worth $300,000, a 1/100 chance of requiring a surgery that costs $80,000, and a 1/250 chance of getting involved in an auto accident that destroys her car which is worth $25,000. What is an actuarially fair price for an insurance policy that insures against all those risks

Answer 1

Answer:

$6,900

Explanation:

The fair price for an insurance policy that covers all of the mentioned risks should be determined by the sum of the product of each risks' likelihood by their cost. The policy fair price is:

$P = \frac{1}{50}*\ 300,000+ \frac{1}{100}*\ 80,000+ \frac{1}{250}*\ 25,000\\P=\ 6,900$

The fair price for the policy would be $6,900.