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In: Statistics and Probability

An insurance company estimates that the probability that a person’s car will be destroyed and need...

An insurance company estimates that the probability that a person’s car will be destroyed and need to be replaced in any given year is 0.03. The insurance company charges $2000 for the insurance policy, and if your car is destroyed, they will give you $25000 to buy a replacement car. Let X be the net earnings for the insurance company from one insurance policy. What is the expected net earnings for this insurance company? On average, will the insurance company tend to earn money or lose money?

Solutions

Expert Solution

The expected value = 0.03 * (25000 - 2000) + (1 - 0.03) * (-2000) = -1250

On average, the insurance company will loose money.

  

orchestra answered 2 years ago
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