Question

20) An insurance company will insure a $260,000 home for its total value for an annual premium of 20) $590. If the company spends $30 per year to service such a policy, the probability of total loss for such a home in a given year is 0.001 and you assume either total loss or no loss will occur, what is the company's expected annual gain (or profit) on each such policy? A) $250 B) $330 C) -$260 D) $300

Answer 1

Sol:

Insurance value = $260,000

Annual premium = $590

Loss probability = 0.001

Spending to serve the policy = $30 per year

To compute company's expected annual gain (or profit) on each such policy is as follows:

Annual gain = Annual premium - (Insurance value x Loss probability) - Spending to serve the policy

Annual gain = $590 - ($260,000 x 0.001) - $30

Annual gain = $590 - $260 - $30

Annual gain = $300

Therefore company's expected annual gain (or profit) on each such policy will be $300.

Answer is D. $300