An insurance company charges $800 annually for car insurance. The policy specifies that the company will pay $1000 for a minor accident and $5000 for a major accident. If the probability of a motorist having a minor accident during the year is 0.2 and of having a major accident is 0.05 (and these events are mutually exclusive), what is the insurance company's expected profit on the policy

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Mathematics

Kristin Sandoval

16 August, 09:02

An insurance company charges $800 annually for car insurance. The policy specifies that the company will pay $1000 for a minor accident and $5000 for a major accident. If the probability of a motorist having a minor accident during the year is 0.2 and of having a major accident is 0.05 (and these events are mutually exclusive), what is the insurance company's expected profit on the policy

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Guadalupe Mendoza · Answer 1

Answer: the expected profit will be $755 annually.

Explanation: Expected Profit (EP) = Charges (income for the insurance company) - probability of minor accidents X amount payable for a minor accident - probability of mayor accidents X amount payable for a major accident.

800 - 1000 (0.2) - 5000 (0.05) = 800-20-25 = 755