Question

An insurance policy sells for $1000. Based on past data, an average of 1 in 50 policyholders will file a $10,000 claim, an average of 1 in 100 policyholders will file a $25,000 claim, an average of 1 in 250 policyholders will file a $60,000 claim. Find the expected value (to the company) per policy sold. Hint: make sure you use all of the numbers in this problem.

Answer 1

Answer:

Expected value = $550

Explanation:

Expected value = Sales price of policy - policy holder price - Average policy payment - expected claim

Expected value = 1,000 - 10,000[1/250] - 25,000[1/100] - 60,000[1/250]

Expected value = 1,000 - 40 - 250 - 240

Expected value = 1,000 - 450

Expected value = $550