Insurance, Inc., a nonlife insurance company, insures customerproperties, including jewelries. The company will insure a...

Insurance, Inc., a nonlife insurance company, insures customer properties, including jewelries. The company will insure a $50,000 diamond for its full value against theft at an annual premium of $400. Suppose that the probability that the diamond would be stolen is 0.005, and let xdenote the insurance company’s profit.

Set up the probability distribution of the random variablex.
Calculate the insurance company’s expected profit.
Find the premium that the insurance company should charge if it wants its expected profit to be $1,000.

Solutions

Expert Solution

(A) Probability distribution for the random variable x is

Profit(x)	P(x)
A	1-0.005 = 0.995
A-50000	0.005

A is the premium charge per policy

(B) Expected profit =

= (A*0.995) + 0.005*(A-50000)

= 0.995A + 0.005A - 250

= (A - 250) dollars

$1000 = A - 250

or A = $1000+$250

A = $1250

Therefore, company should charge $1250 per policy

orchestra answered 1 year ago

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