Question

In: Statistics and Probability

Brandybuck Insurance Company (BIC) is deciding whether to insure the lives of those leading a quest...

Brandybuck Insurance Company (BIC) is deciding whether to insure the lives of those leading a quest to Moria. Based on past experience, the probability of surviving such a quest is 96.1%. If BIC charges a premium of 5,878 silver coins and would pay a death benefit of 43,118 silver coins if the insured were to die, what is the expected value of this insurance policy to BIC?

Round to the nearest silver coin as needed. If the expected value is a loss to BIC, enter your answer as a negative number.

Solutions

Expert Solution

The probability of surviving such a quest is 96.1%

The probability the guest dies is 1-0.961 = 0.039

If the guest survives then BIC company will make 5,878 silver coins which is the premium

If the guest dies, then BIC company makes 5,878 - 43,118 silver coins which is -37,240 sliver coins (we have subtracted 5,878 from 43118 since the premium is already paid by the guest and since he died BIC pays 43,118 silver coins)

X (silver coins) 5878 -37240
P(X) 0.961 0.039

So the expected value to BIC = 5878 * 0.961 + (-37240) * 0.039

= 5648. 758 - 1452.36

= 4196.398

The expected value to BIC = 4196.398 silver coins

orchestra answered 2 years ago
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