An insurance company offers a $180,000 catastrophic fire insurance policy to homeowners of a certain type...

An insurance company offers a $180,000 catastrophic fire insurance policy to homeowners of a certain type of house. The policy provides protection in the event that such a house is totally destroyed by fire in a one-year period. The company has determined that the probability of such an event is 0.002. If the annual policy premium is $379, find the expected gain per policy for the company.

Expert Solution

Let X : gain per policy per year,

Note X = 379 with probability = 1 - 0.002 = 0.998 ;

X = -180000 with probability = 0.002 ;

So, Expected value of X = E(X) = 0.002*(-180,000) + 0.998*(379) = 18.242 $

orchestra answered 2 years ago

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