Maritime Insurance Company offers insurance policies for recreational boats. A t

Question

Maritime Insurance Company offers insurance policies for recreational boats. A typical policy will pay the replacement cost of $25, 000 if the boat is a total loss. If the boat is not a total loss but the damage is more than $10,000, the policy pays $5,000. For damage under $10,000 no coverage is offered. The company estimates the probability of no damage to be 0.60 the proability of damage between $0 and $10,000 to be 0.25 and the probability of damage between $10,000 and $25,000 to be 0.12. If the company wants to make a profit of $200 above the expected cost what should be the price of the policy?

Explanation / Answer

Expected cost to Company = 25000*.12+5000*.25+0*.60 = 4250

profit = 200

Price of policy = 4250+200 = $4450

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