The probability distribution for collision insurance claims paid by the T.J. Aut

Question

The probability distribution for collision insurance claims paid by the T.J. Automobile Insurance Company is as follows:

claim($) Probability
0 0.90
500 0.04
1000 0.03
2000 0.01
3000 0.01
4000 0.01

a) Use the expected collision claim amount to determine the collision insurance premium that would allow the company to break even on the collision portion of the policy.
b) The insurance company charges an annual rate of $250 for the collision coverage. What is the expected value of the collision policy for the policy holder?
c) Why does the policy holder purchase a collision policy with the expected value in b)?

Explanation / Answer

$430

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