This month, an insurance company receives $10m in revenue from selling its insurance policy to its...
This month, an insurance company receives $10m in revenue from selling its insurance policy to its customers. If there is a weak hurricane, the insurance company will have to pay $50m in damage claims this month. If there is a strong hurricane, the insurance company will have to pay $100m in damage claims. If there is no hurricane, the insurance company pays nothing. This month there is a 10% chance of a weak hurricane, and a 5% chance of a strong hurricane.
What does the insurance company expect to earn this month?
|
$-20m |
||
|
$0m |
||
|
$10m |
||
|
$40m |
Homework Answers
Expected amount of claim the company would face = sum of product of probabilities of occurrence of hurricane and the claim provided
= 50 x 10% + 100 x 5% + 0 x 85%
= 10 million
Revenue earned = 10 million
Hence insurance company expects $0 million to earn this month because revenue is $10 million and expected cost of claims is also $10 million
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