Question

Problem 5

An insurance company issues a policy on a car under the following conditions:

(i) The replacement cost of $37,000 will be paid for a total loss.

(ii) If it is not a total loss, but the damage is more than $11,000, then only $ 10,500 will be paid.

(iii) Nothing will be paid for damage costing $11,000 or less and, (iv) Nothing will be paid out if

there is no damage.

The company estimates, based on their internal research, the probability of the first three events

as 0.05, 0.15, and 0.25, respectively.

a) Compute the expected amount paid out in a year.

b) If the company wishes to make a profit of $200 a policy, what is the amount the company

should charge per month?

Answer 1