A potential customer for a $50,000 fire insurance policy possesses a home in an area that,...

A potential customer for a $50,000 fire insurance policy possesses a home in an area that, according to experience, may sustain a total loss in a given year with probability of 0.001 and a 50% loss with probability 0.01. Ignoring all other partial losses, what premium should the insurance company charge for a yearly policy in order to break even on all $50,000 policies in this area?

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Expert Solution

The premium that the insurance company must charge in order to break even

= $50,000 * 0.001 + $50,000 * 0.5 * 0.01

= $300

orchestra answered 1 year ago

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