Records from the buzz sawmill show that workers have 0.03 probability of losing a leg and a 0.04 probability of losing an arm in any one year. Armand leg casualty insurance company plans to offer insurance policies for the workers. The company will pay $300 fir the loss of an arm,$400 for the loss of a leg and $6000 for the loss of both an arm and a leg. On the average, how will the company expect to pay out per policy?

Question

Records from the buzz sawmill show that workers have 0.03 probability of losing a leg and a 0.04 probability of losing an arm in any one year. Armand leg casualty insurance company plans to offer insurance policies for the workers. The company will pay $300 fir the loss of an arm,$400 for the loss of a leg and $6000 for the loss of both an arm and a leg. On the average, how will the company expect to pay out per policy?
My answer: $31.40

*** Armand Legg wants to make a profit of $10 per policy. How much should the premium be? That is, how much should the company charge each worker for the policy?
:(   ?

Reiny · Answer

Expected pay-out = .04(300) + .03(400) + (.03)(.04)(6000) = 12 + 12 + 7.20 = $31.20 how did you get 31.40 ? to make a $10 profit, they should charge 41.20 per policy