Help with business homework about Insurance and empirical probability.?

Question

I hate to do this, but I gotta do what I gotta do.

The annual premium for $5000 insurance policy against the theft of a painting is $150. If the (empirical) probability that the painting will be stolen during the year is .01, what is your expected return from the insurance company if you take out this insurance?

Answer 1

Dear jonatne,

What is this business about "empirical probability?" If you want to assert that there is a 1% chance that the painting will be stolen during the next year then that's fine; it's all you need to work with, and terming it "empirical" is a needless and dubious distinction.

The problem itself is quite simple. To get the expected return, multiply each possible outcome by its respective probability, then sum these. This gives you a weighted average, where the weights are the probabilities. (If the probabilities were equal, then you would have the familiar arithmetic average.) Thus your expected return from the insurance company is given as

[(0.01) x $5000] + [(0.99) x (-$150)]
= $50.00 - $148.50
= -$98.50 .

Edit: KevinZoo caught my slip, good for him.

You can approach it the way Kevin wrote, which looks like (expected) losses versus gains, or you could look at it as (expected) revenues minus costs in the form below. Either way gives you the same net result.

[(0.01) x $5000] -$150
= $50.00 - $150.00
= -$100.00 .

Answer 2

I suggest one to try this web page where onel can get quotes from different companies: http://PROTECTIONQUOTES.NET/index.html?src=5YAojmqfNU741

RE :Help with business homework about Insurance and empirical probability.?
I hate to do this, but I gotta do what I gotta do.

The annual premium for $5000 insurance policy against the theft of a painting is $150. If the (empirical) probability that the painting will be stolen during the year is .01, what is your expected return from the insurance company if you take out this insurance?
Follow 4 answers

Answer 3

1

Answer 4

Wow. I took college algebra but this one is way over my head.

I'll bet someone over on the Math forum could find the answer. Why don't you post in in Mathematics? I can't even remember the formula for Empirical probability anymore.

Answer 5

The one answer is close but slightly off, as you still incur the premium even if it is stolen. The correct answer is:

.99x(-150) + .01x(5000-150)

which equals -100.