Q1) Probability distribution for collision insurance claims paid by T. J. Automobile Insurance Company is as follows:
|
Claim
|
Probability
|
|
$0
|
0.90
|
|
$500
|
0.04
|
|
$1000
|
0.03
|
|
$2000
|
0.01
|
|
$3000
|
0.01
|
|
$4000
|
0.01
|
a) Use expected collision claim amount to find out the collision insurance premium that would permit the company to break even on collision portion of policy.
b) Insurance company charges annual rate of $250 for collision coverage. Determine the expected value of collision policy for policy holder? Why does policyholder buy a collision policy with this expected value?