# Suppose you are interested in insuring a car stereo for \$600 against theft. An insurance company ...

Suppose you are interested in insuring a car stereo for \$600 against theft. An insurance company charges a premium of \$80 for coverage for 1 year, claiming an empirically determined probability of 0.8 that the stereo system will be stolen some time during the year.

(a) What is the insurance company's expected profit?

(b) What is your expected return from the insurance company if you take out this insurance?

a) For Insurance company, the probability table will be:

 Profit Probability \$600 P(Not stolen) = 1 - 0.8 = 0.2 \$(80 - 600) = - \$520 0.8

Hence,

Expected profit

= \$600*0.2 - \$520*0.8

= - \$296

This indicates that the insurance company will be having a loss of \$296 per insurance policy.

b) My expected return = Loss of Insurance company = \$296

##### Add Answer of: Suppose you are interested in insuring a car stereo for \$600 against theft. An insurance company ...
Similar Homework Help Questions
• ### An insurance company will insure a \$50,000 diamond for its full value against theft at a...

An insurance company will insure a \$50,000 diamond for its full value against theft at a premium of \$400 per year. Suppose that the probability that the diamond will be stolen is .005, and let x denote the insurance company's profit. a) Set up the probability distribution of the random variable x. b) Calculate the insurance company's expected profit. c) Find the premium that the insurance company should charge if it wants its expected profit to be \$1,000.

• ### Insurance. The annual premium for a \$15,000 insurance policy against the theft of a painting is...

Insurance. The annual premium for a \$15,000 insurance policy against the theft of a painting is \$250. If the empirical) probability that the painting will be stolen during the year is .01, what is your expected return from the insurance company if you take out this insurance? a. Let X be the random variable for the amount of money received from the insurance company in the given year. Complete the payoff table for the random variable X. (Enter the values...

• ### The annual premium for a \$5,000 insurance policy against the theft of a painting is \$200....

The annual premium for a \$5,000 insurance policy against the theft of a painting is \$200. If the (empirical) probability that the painting will be stolen during the year is 0.02, what is your expected return from the insurance company if you take out this insurance? Let X be the random variable for the amount of money received from the insurance company in the given year. Edollars

• ### An insurance company will insure a \$50,000 diamond for its fullvalue against theft at a premium...

An insurance company will insure a \$50,000 diamond for its fullvalue against theft at a premium of \$400 per year. Suppose that theprobability that the diamond will be stolen is .005, and let xdenote the insurance company’s profit. a) What is the name of this distribution? Circle the correctanswer. A) Discrete Distribution. B) Sampling Distribution about theMean C) Normal Distribution D) Binomial Distribution b) Set up the probability distribution of the random variable x intabular form. c) Calculate the insurance...

• ### Insurance, Inc., a nonlife insurance company, insures customer properties, including jewelries. The company will insure a...

Insurance, Inc., a nonlife insurance company, insures customer properties, including jewelries. The company will insure a \$50,000 diamond for its full value against theft at an annual premium of \$400. Suppose that the probability that the diamond would be stolen is 0.005, and let xdenote the insurance company’s profit. Set up the probability distribution of the random variable x. Calculate the insurance company’s expected profit. Find the premium that the insurance company should charge if it wants its expected profit...

• ### An insurance company would like to offer theft insurance for renters. The policy would pay the...

An insurance company would like to offer theft insurance for renters. The policy would pay the full replacement value of any items that were stolen from the apartment. Some apartments have security alarms installed. Such systems detect a break-in and ring an alarm within the apartment. The insurance company estimates that the probability of a theft in a year is 0.05 if there is no security system and 0.01 if there is a security system (there cannot be more than...

• ### 11. An insurance company is considering insuring two large oil tankers against spills. The limit of...

11. An insurance company is considering insuring two large oil tankers against spills. The limit of the liability on the coverage is S10,000,000. The company believes that the probability of an oil spill requiring the maximum liability coverage during the policy period is 0.001 per tanker. a. What is the probability that neither tanker would have a spill requiring the maximum liability coverage during the policy period? b. What is the probability that only one tanker would have a spill...

• ### Suppose you are selling car insurance. You have a customer with the utility function U(w)=600-200 Where...

Suppose you are selling car insurance. You have a customer with the utility function U(w)=600-200 Where w is the customer's wealth. With probability 0.1, this customer is going to get into an accident while driving. If there is an accident, the customer would have to pay for all the damages and would end up with wealth of \$1. The customer has a 0.9 probability of not getting into an accident, and if this were to happen, the individual would get...

• ### Sue just bought a car for \$1500. She is required to carry collision insurance for 80%...

Sue just bought a car for \$1500. She is required to carry collision insurance for 80% value, less a \$500 deductible. She was listening to music and didn't hear the horn of a truck just before she was hit. Her car was "totaled." She will get a check from the insurance company for how much? The cost of buying a basic car insurance policy is \$750. Optional coverage are radio theft-\$50, personal property loss, except cell phone-\$75, additional cell phone-\$25,...

• ### An insurance company will insure a \$220,000 home for its total value for an annual premium...

An insurance company will insure a \$220,000 home for its total value for an annual premium of \$590. If the company spends \$30 per year to service such a policy, the probability of total loss for such a home in a given year is 0.001 and you assume either total loss or no loss will occur, what is the company's expected annual gain (or profit) on each such policy? OA \$290 O B. \$340 O C. -\$220 O D. \$370...

Need Online Homework Help?