Question

If a private pilot wishes to insure his airplane for $200000 the insurance company estimate that total loss may occur with probability 0.002 , a 50% loss with probability 0.01 and a 25% loss with probability 0.1 ignoring all the other partial losses what premium should the insurance company charge each year to realize an average profit of $500

Answer 1

The expected claim would be

$$200000(0.002)(1)+200000(0.01)(0.5)$$

$$+200000(0.1)(0.25)=6400$$

Hence the insurance company should charge a premium of

$$\$6400 + \$500 = \$6900.$$