Question

In: Economics

An insurance company insures two drivers, a safe driver and a risky driver. There is an...

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?

Solutions

Expert Solution

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

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

An insurance company believes that 30% of drivers are careless. The probability that a careless driver...
An insurance company believes that 30% of drivers are careless. The probability that a careless driver will have an accident in any one-year period is 0.4. The probability that a careful driver will have an accident in any one-year period is 0.2. Find the probability that a driver will have an accident next year given that she has had an accident this year.
In any given year, an insurance company believes the following: -0.6 of drivers are safe. -0.25...
In any given year, an insurance company believes the following: -0.6 of drivers are safe. -0.25 of safe drivers wear seatbelts -0.10 of unsafe drivers wear seatbelts -0.10 of safe drivers experience an accident in a year -0.20 of unsafe drivers experience an accident in a year -Given a driver experiences an accident, the driver has probability 0.01 they will be taken to the hospital if they were wearing a seatbelt -Given a driver experiences an accident, the driver has...
Insurance, Inc., a nonlife insurance company, insures customerproperties, including jewelries. The company will insure a...
Insurance, Inc., a nonlife insurance company, insures customer properties, including jewelries. The company will insure a $50,000 diamond for its full value against theft at an annual premium of $400. Suppose that the probability that the diamond would be stolen is 0.005, and let xdenote the insurance company’s profit.Set up the probability distribution of the random variablex.Calculate the insurance company’s expected profit.Find the premium that the insurance company should charge if it wants its expected profit to be $1,000.
Insurance companies know the risk of insurance is greatly reduced if the company insures not just...
Insurance companies know the risk of insurance is greatly reduced if the company insures not just one person, but many people. How does this work? Let x be a random variable representing the expectation of life in years for a 25-year-old male (i.e., number of years until death). Then the mean and standard deviation of x are μ = 48.7 years and σ = 10.3 years (Vital Statistics Section of the Statistical Abstract of the United States, 116th Edition). Suppose...
Insurance companies know the risk of insurance is greatly reduced if the company insures not just...
Insurance companies know the risk of insurance is greatly reduced if the company insures not just one person, but many people. How does this work? Let x be a random variable representing the expectation of life in years for a 25-year-old male (i.e., number of years until death). Then the mean and standard deviation of x are μ = 52.4 years and σ = 12.1 years (Vital Statistics Section of the Statistical Abstract of the United States, 116th Edition). Suppose...
Insurance companies know the risk of insurance is greatly reduced if the company insures not just...
Insurance companies know the risk of insurance is greatly reduced if the company insures not just one person, but many people. How does this work? Let x be a random variable representing the expectation of life in years for a 25-year-old male (i.e., number of years until death). Then the mean and standard deviation of x are μ = 52.5 years and σ = 10.1 years (Vital Statistics Section of the Statistical Abstract of the United States, 116th Edition). Suppose...
LOAN COMMITMENTS. Chara&McAvoy Inc., can choose one of two projects: safe and risky. The safe project...
LOAN COMMITMENTS. Chara&McAvoy Inc., can choose one of two projects: safe and risky. The safe project yields $139 with probability .95 and zero with probability .05, whereas the risky project yields $160 with probability .60 and zero with probability .40. Each project requires an investment of $100, which Chara&McAvoy must borrow. The bank can make only an unsecured loan, and cannot observe the firm’s choice of project. Everyone is risk neutral, and the risk-free rate is zero. Now suppose the...
A car insurance company suspects that the younger the driver is, the more reckless a driver...
A car insurance company suspects that the younger the driver is, the more reckless a driver he/she is. They take a survey and group their respondents based on age. Of 217 respondents between the ages of 16-25 (Group 1), 183 claimed to wear a seat belt at all times. Of 398 respondents who were 26+ years old (Group 2), 322 claimed to wear a seat belt at all times. Find a 95% confidence interval for the difference in proportions. Can...
ash Riprock is a cost analyst with a Safe Insurance Company. Safe is applying standards to...
ash Riprock is a cost analyst with a Safe Insurance Company. Safe is applying standards to its claims payment operations. Claims payment is a repetitive operation that could be evaluated with standards. Dash used time and motion studies to identify an ideal standard of 36 claims processed per hour. The Claims Processing Department manager, Henry Tudor, has rejected this standard and has argued that the standard should be 30 claims processed per hour. Henry and Dash were unable to agree,...
Suppose that an insurance company insures more than one million individuals with a policy that the...
Suppose that an insurance company insures more than one million individuals with a policy that the company actuaries believe will net them an average profit of $20$20 per month per policy (total premiums collected minus payouts for claims and overhead, divided by the number of such policies that they carry). Assume that total dollar amount of claims each month varies randomly. Which of the statements do not accurately reflect the meaning of the law of large numbers. 1.In one particular...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT