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.

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 2 years ago

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