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 probability 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

let the price P

then :

0.12 x 5,000 + (1 - 0.12 - 0.6 - 0.25) X 25,000 = p

SO, p = 1350

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