Insurance Expected Value Problem
Remember that this is from the point of view of the policyholder.
Insurance expected value problem. The expected value is also known as the expectation mathematical expectation mean average or first moment. This means that the expected value for the insurance company is positive. Answer key to problem set 2. Sal uses expected value to compare a couple of different insurance policies.
In probability theory the expected value of a random variable is a generalization of the weighted average and intuitively is the arithmetic mean of a large number of independent realizations of that variable. 14 insurance example 2 outcomes probability cost to premium company major accident minor accident no accident 0 005 0 08 5000 150 1000 e 0 005 5000 0 08 1000 0 915 0 150 45 1 0 005 0 08 0 915 0. Past experience shows that 1 in 10 000 policy holders will die forcing the insurance company to payout 1 000 000. Part of the washington open course l.
I thought i would start with x value of 1 12 but i m lost on what my p x x value will be. Expected value can help both insurance companies and policyholders select investments. Expected value with empirical probabilities. What is the expected value of the policy to the insurance company.
Another expected value problem. A we have u w 1 2w 1 2 so u w 1 4w 3 2 as we will see below u w 0 indicates that the individual is risk averse. Compute the expected value of this policy to the insurance company. Suppose a life insurance company sells a 240 000 one year term life insurance policy to a 25 year old female for 210.
It makes sense that the expected value is negative. So it s a good investment though a bit risky. This is the currently selected item. The probability that the female survives the year is 999592.
Another way to think of this is that the insurance company can expect to earn about 50 for each 23 year old male that buys a 1 year 150 000 policy. Expected value 5000 0 8 10000 0 2 4000 2000 2000 the club can expect a return of 2000. Expected value and insurance 1. Ok roughly if you wanted to construct this so it s easier to do the math which the problem writers have done say look ok.
Comparing insurance with expected value. An insurance company charges 500 for a life insurance policy. On average how much does the insurance company profit per policy. However if the risk is low enough and the expected value high enough then the particular investment may be viewed more.
If the expected value of an investment is too low compared to the risk of making this investment it may be viewed as a bad decision.
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