You might sell insurance to a21-year-old friend. The probability that a man aged

ID: 2916322 • Letter: Y

Question

You might sell insurance to a21-year-old friend. The probability that a man aged 21 will die inthe next year is about 0.0015. You decide to charge $250 for apolicy that will pay $100,000 if your frienddies.

(a)   What is your expectedprofit on this policy?

(b)  Although you expect to make a good profit, you would be foolish tosell your friend the policy. Why?

(c)   Alife insurance company that sells thousands of policies, on theother hand, would do very well selling policies on exactly thesesame terms. Explain why.

Explanation / Answer

b) if he dies, you're out $100,000, which you probably don'thave
c) most people live, and only a few die, so on average theywill make a profit even if several people die

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You might sell insurance to a21-year-old friend. The probability that a man aged

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You might sell insurance to a21-year-old friend. The probability that a man aged

Question

You might sell insurance to a21-year-old friend. The probability that a man aged 21 will die inthe next year is about 0.0015. You decide to charge $250 for apolicy that will pay $100,000 if your frienddies.

(a) What is your expectedprofit on this policy?

(b) Although you expect to make a good profit, you would be foolish tosell your friend the policy. Why?

(c) Alife insurance company that sells thousands of policies, on theother hand, would do very well selling policies on exactly thesesame terms. Explain why.

Explanation / Answer

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