Question

Flightguard Insurance provides life insurance for commercial air flights. Theyoffer a (“fair insurance”) bet where you are allowed to trade $23 in the good (“alive”) state where there is no plane crash for $200,000 in the bad (“not alive”)state where there is a crash. Let P be your probability of a bad state on a flight.

(i) Given the probability of a bad state on a flight is actually about one in 1.15 million flights, what should the premium be for fair insurance?

Answer 1

(1) fair insurance premium = probability of loss* loss

= (1/1.15 * 10⁶) * 200,000

= $  .1739

= $ .174

( As in bad state, loss will be 200,000, for which insurance is bought )