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#1 2006-10-01 03:05:41

abc4616
Member
Registered: 2006-10-01
Posts: 9

Question

An insurance company writes a policy such that an amount of money A must be paid if some event E occurs within a year. If the company has estimated that event E will occur within a year with probability p, how much should the company charge its customer so that its expected profit will be 10% fo A?

Does anyone know how to approach this question?

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#2 2006-10-03 15:48:36

fgarb
Member
Registered: 2006-03-03
Posts: 89

Re: Question

Here's the strategy I would use for this problem. Try answering it in steps:

1) Pick some large number of years. You know the chances that the event will occur in a year and how much the insurance company has to pay out for that event, so how much total money should the insurance company expect to have to pay out in this number of years?

2) Say that the insurance company charges some rate, R each year. In terms of R, how much money will it take in over that same number of years?

3) Once you have answers for 1 and 2, compare them and figure out what R must be so that the insurance company takes in 10% more than it pays out over those years.

Sorry for the late response. Please post if you have any other troubles with this question.

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