Assignment:
The probability distribution for damage claims paid by the Newton Automobile Insurance Company on collision insurance follows.
|
Payment (S)
|
Probability
|
|
0
|
.85
|
|
500
|
.04
|
|
1000
|
.04
|
|
3000
|
.03
|
|
5000
|
.02
|
|
8000
|
.01
|
|
10000
|
.01
|
a. Use the expected collision payment to determine the collision insurance premium that would enable the company to break even.
b. The insurance company charges an annual rate of $520 for the collision coverage. What is the expected value of the collision policy for a policyholder? (Hint: It is the expected payments from the company minus the cost of coverage.) Why does the policy hokler purchase a collision policy with this expected value?
Provide complete and step by step solution for the question and show calculations and use formulas.