Question: An insurance company writes a policy such that an

[abc4616]

An insurance company writes a policy such that an amount of money A must be paid if some event E occurs within a year. If the company has estimated that event E will occur within a year with probability p, how much should the company charge its customer so that its expected profit will be 10% fo A?

Does anyone know how to approach this question?

 

[tkhunny]

Re: Question

An insurance company writes a policy such that an amount of money A must be paid if some event E occurs within a year. If the company has estimated that event E will occur within a year with probability p, how much should the company charge its customer so that its expected profit will be 10% fo A?

Does anyone know how to approach this question?

Just think it through.

Collect Premium: A

Expect to Pay Claims: E*p

Expected Profit: A - E*p

Pricing Profit: A - E*p = A*0.10

Solve for A.