Saudi Electronic University Probability Worksheet
Description
1. Jessica owns a $450,000 house and has an 5% chance of experiencing a fire in any given year. Assume that only one fire per year can occur and that if a fire occurs, the house is completely destroyed.
Suppose that Jessica purchases a full insurance contract from Lemonade Insurance Company for an actuarially fair premium. This contract would pay all losses due to the fire. Assume that Jessica’s contract is the only insurance contract Lemonade Insurance Company sold.
a. What is the probability distribution of total losses for Lemonade Insurance Company if they sell a contract to Jessica? (2 points)
b. What is the actuarially fair premium [AFP] Lemonade Insurance Company will charge Jessica in the coming year? (1 point)
c. What is the amount of risk Lemonade Insurance Company faces if they have Jessica as their only customer? (2 points)
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