Question

An insurance company insures two drivers, a safe driver and a risky driver. There is an 8.5% chance the risky driver has an accident in a given year, in which case the cost (payout) to the company would be $1,000,000. The safe driver has a 1% chance of an accident, which costs the company $500,000. What is the expected payout (i.e., for accidents) to the company from insuring these two people?

Answer 1

The expected payout will be p(x)X + p(y)Y

E(P) = 0.085(1000000) + 0.01(500000) = 85000 + 5000 = $90000

Hence the expected payout for the company from insuring these two people will be $90000