Suppose that an item is insured for $10,000. The insurance company estimates that there is a...

Suppose that an item is insured for $10,000. The insurance company estimates that there is a 1% chance that they will have to pay out on the policy. If they need to make a profit of 50%, explain what they should charge for the policy.

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Expert Solution

there is a 1% chance that they will have to pay out on the policy

expected payout of insurance company= 10000*1%=$1000

since,they want to make 50% profit

so, premium for policy should be 1000+1000*50%=$1500

orchestra answered 2 years ago

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