A travel insurance policy for cruise vacations is an option that passengers can choose to purchase...

A travel insurance policy for cruise vacations is an option that passengers can choose to purchase if they are worried they may miss their cruise due to illness or travel complications. For a cruise package that costs $1000, the cruise line offers an insurance policy such that, if the traveler does not make it to their cruise due to illness or travel complications, will refund the passenger the full $1000 dollars cost of their tickets. The policy costs $75. The cruise line knows that historically 5% of passengers will miss their cruise due to illness or travel complications. What is the expected value of the insurance policy for the cruise line? (Hint: setup a probability distribution with the two possible outcomes and calculate the mean.)

Show work please. So confused.

Expert Solution

The two possible outcomes for the insurance company in this distribution will be:

Profit	Probability
$(1000 - 75) = $925	5% or 0.05
- $75	1 - 0.05 = 0.95

Hence,

Expected value for the insurance policy = $925 * 0.05 - $75 * 0.95 = - $25

So the company is expected to have loss of $25 for each policy.

orchestra answered 2 years ago

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