Suppose a ite insurance company sells a $260,000 one-year term ife insurance pol

Question

Suppose a ite insurance company sells a $260,000 one-year term ife insurance polcy to a 22 year-old female for $220 The probablity that the female sunives the year is 0 999493 Compute and interpret the expected vatue of this pol The expected value is $ Round to two decimal places as needed) Which of the following interpretation of the expected value is correct? cy to the insurance company A. The insurance company expects to make an average profit of S88 18 on every 22-year-old female t insures for 1 year O B. The insurance company expects to make an average proft of $19,99 on every 22-year-oid female it insures for 1 month nsurance company expects to make an average profit of $219 89 on every 22-year-old female t insures for 1 year D. me insurance company expects to make an average profof S802 on every 22-year-old temale d insures for 1 month O C. Tho i Cick to sevect your answeris)

Explanation / Answer

The expected value of the policy to the insurance company here is computed as:

= Premium Amount * Probability that she survives + ( Premium Amount - claim amount ) * (1 - Probability that she survives )

= 220*0.999493 + (220 - 260000)*(1 - 0.999493)

= 219.88846 -131.70846

= 88.18

Therefore the expected value here is $88.18

The interpretation of the above statement here means that the insurance company would expect to make an average of $88.18 on every 22 year old female it insures for 1 year.

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