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Statistics: How To Calculate An Insurance Risk Premium? |
A chap for a $90,000 fire insurance policy possesses a home in an area which, according to experience, may sustain a complete loss in a given year with probability or 0.001, and a 50% loss with probability 0.01. Ignoring all other predisposed to losses, what premium should the insurance company charge for a yearly policy to make 10% above the break even sense?
Thanks for the help!
| Answer: Well it sounds like you demand the value of the home to solve this, but assuming the home is worth 90,000 then you can use Expected Value. Expected Value = 0.001*90000 + 0.01*45000 = 90 + 450 = 540 The principles is worth 540$ then, so they should charge 594 to be 10% above breakeven. |
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