An insurance company charges an annual premium of $75 for a $200,000 insurance policy against a...

An insurance company charges an annual premium of $75 for a $200,000 insurance policy against a house burning down. If the (empirical) probability that a house burns down in a given year is .0003, what is the expected value of the policy to the insurance company?

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Expert Solution

Expected value of the policy to the insurance company = Annual premium - Expected amount to be paid as insurance

= 75 - Insurance amount x P(paying insurance)

= 75 - 200,000xP(a house burning down)

= 75 - 200,000 x 0.0003

= 75 - 60

= $15

orchestra answered 2 years ago

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