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December 31st, 2013, 08:18 AM  #1 
Newbie Joined: Dec 2013 Posts: 1 Thanks: 0  Insurance Policy Problem
Hi, I just encountered this question today and I cannot solve it. The question is: Suppose the premium of a home insurance policy is $200 and in case of a fire the insurance company will pay out $200,000. Let X denotes the profit(or loss) of such a policy. X is a random variable. The expected value of X depends on a probability of a fire, p=0.0002. If an insurance agent wants to sell such policy to you, will you buy the policy? why? I really do not know how to proceed this question. This is the last part of the question and i already solved the previous parts. Thank you very much 
December 31st, 2013, 10:34 AM  #2 
Senior Member Joined: Oct 2013 From: New York, USA Posts: 632 Thanks: 85  Re: Insurance Policy Problem
Converting it to fraction, the probability of a fire = 1/5000. Therefore if 5,000 policies are sold, the insurance company will collect $1,000,000 (1 million) and pay out $200,000 for an insurance company profit of $800,000, which is $160 per policy. Based on the probability of a fire, a policy should cost $40 and you should not buy the policy in question.

December 31st, 2013, 11:10 AM  #3  
Math Team Joined: Oct 2011 From: Ottawa Ontario, Canada Posts: 13,943 Thanks: 985  Re: Insurance Policy Problem Quote:
 

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