Jim has a 5-year-old car in reasonably good condition. He wants to take out a $2

Question

Jim has a 5-year-old car in reasonably good condition. He wants to take out a $20,000 term (that is, accident benefit) car insurance policy until the car is 10 years old. Assume that the probability of a car having an accident in the year in which it is x years old is as follows:

x = age 5 6 7 8 9

P(accident) 0.01182 0.01282 0.01386 0.01513 0.01602

Jim is applying to a car insurance company for his car insurance policy. If the car insurance company charges $7000 for the policy, how much profit does the company expect to make? Round your answer to the nearest dollar.

Explanation / Answer

Ans:

Expected payout=20000*(0.01182+0.01282+0.01386+0.01513+0.01602)=20000*0.06965=1393

Company charges=7000

Expected profit =7000-1393=5607

Option e is correct.

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