Question: Life insurance. You might sell insurance to a 21-year-old friend. The probability that a man aged 21 will die in the next year is about 0.0015. You decide to charge $250 for a policy that will pay $100,000 if your friend dies.
(a) What is your expected profit on this policy?
(b) Although you expect to make a good profit, you would be foolish to sell your friend the policy. Why?
(c) A life insurance company that sells thousands of policies, on the other hand, would do very well selling policies on exactly these same terms. Explain why.