Suppose a life insurance company sells a $190,000 one-year term life insurance policy to a 24-year-old...

Suppose a life insurance company sells a $190,000 one-year term life insurance policy to a 24-year-old female for $200. The probability that the female survives the year is .999461. Compute and interpret the expected value of this policy to the insurance company.

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Expert Solution

Expected value of this policy to the insurance company = Expected profit - Expected loss

where Expected profit = premium recieved*probability of survival = $200*0.999461 = $199.8922

and Expected loss = premium to be paid by customer*(1 - probability of survival)

so, Expected loss = $190000*(1-0.999461) = $102.41

so, the Expected value = $199.8922 - $102.41 = $97.4822

orchestra answered 1 year ago

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