Question

An insurance policy sells for $1200.Based on past​ data, an average of 1 in 100 policyholders will file a ​$20,000 ​claim, an average of 1 in 200 policyholders will file a ​$40,000 ​claim, and an average of 1 in 400 policyholders will file a ​$70,000 claim. Find the expected value​ (to the​ company) per policy sold. If the company sells 20,000 policies, what is the expected profit or​ loss?

Answer 1

Cost = 1200

EV = 0.01 * 20000 + 0.005 * 40000 + 0.0025 * 70000 - 1200

So,

We can say

expected value = -625