Accidents records by an auto insurance company suggest that the probability that an insured driver has...

Accidents records by an auto insurance company suggest that the probability that an insured driver has an accident is

0.05

If an accident occurs, the damage to the vehicle amounts to an average of

$6240.

What premium should the insurance company charge, in order to have an expected profit of

$1000?

On average the insurer should charge

$....

(Round to 2 decimal points.)

Solutions

Expert Solution

The total amount that the insurance company should charge is computed here as:

= expected claim amount + Profit expectations

= Probability of an accident * Average accident claim amount + Average Profit expected

= 0.05*6240 + 1000

= 1312

Therefore $1,312 is the required amount that an insurer should charge.

orchestra answered 2 years ago

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