Avicenna, a major insurance company, offers five-year life insurance policies to 65-year-olds. If the holder of one of these po company must pay out $27,400 to the beneficiary of the policy. Executives at Avicenna are considering offering these policie each holder of a policy there is a 3% chance that they will die before the age of 70 and a 97% chance they will live to the ac If the executives at Avicenna know that they will sell many of these policies, should they expect to make or lose money from offering them? How much? To answer, take into account the price of the policy and the expected value of the amount paid out to the beneficiary. Avicenna can expect to make money from offering these policies. In the long run, they should expect to make dollars on each policy sold. O Avicenna can expect to lose money from offering these policies. In the long run, they should expect to lose dollars on each policy sold. Avicenna should expect to
Avicenna, a major insurance company, offers five-year life insurance policies to 65-year-olds. If the holder of one of these po company must pay out $27,400 to the beneficiary of the policy. Executives at Avicenna are considering offering these policie each holder of a policy there is a 3% chance that they will die before the age of 70 and a 97% chance they will live to the ac If the executives at Avicenna know that they will sell many of these policies, should they expect to make or lose money from offering them? How much? To answer, take into account the price of the policy and the expected value of the amount paid out to the beneficiary. Avicenna can expect to make money from offering these policies. In the long run, they should expect to make dollars on each policy sold. O Avicenna can expect to lose money from offering these policies. In the long run, they should expect to lose dollars on each policy sold. Avicenna should expect to
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
Related questions
Question
![**Avicenna Major Insurance Policy Analysis**
Avicenna, a prominent insurance company, offers five-year life insurance policies to individuals aged 65. If the policyholder passes away before reaching the age of 70, the company will pay $27,400 to the policy's beneficiary. The executives at Avicenna are contemplating selling these policies for $765 each. The probability of a policyholder dying before age 70 is 3%, while the probability of surviving until age 70 is 97%.
The core question here is:
*If the executives at Avicenna know that they will sell many of these policies, should they expect to make or lose money from offering them? How much?*
To address this question, we need to consider the price of the policy and the expected value of the payouts.
**Options to Analyze:**
1. **Avicenna can expect to make money from offering these policies.**
- In the long run, they should expect to make \_\_\_ dollars on each policy sold.
2. **Avicenna can expect to lose money from offering these policies.**
- In the long run, they should expect to lose \_\_\_ dollars on each policy sold.
3. **Avicenna should expect to neither make nor lose money from offering these policies.**
### Calculation of Expected Value:
This section involves calculating the expected monetary outcome for Avicenna on average per policy sold. This is determined by considering the probabilities and the associated costs/revenues:
- **Probability of paying out $27,400 (death before 70):** 3%.
- **Probability of not paying out (alive at 70):** 97%.
- **Revenue from selling each policy:** $765.
The expected cost to Avicenna for each policy sold is:
\[ \text{Expected Payout} = (0.03 \times 27,400) + (0.97 \times 0) = 822 \]
Then, to determine the net gain or loss:
\[ \text{Net Gain/Loss} = \text{Revenue} - \text{Expected Payout} \]
\[ \text{Net Gain/Loss} = 765 - 822 = -57 \]
Therefore, in the long run, Avicenna can expect to lose $57 on each policy sold, matching the second option:
- **Avicenna can expect to lose money from offering these policies.**](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F424746dd-29d3-476a-868c-5a06ada19580%2F97ee05e2-d189-48b9-8973-87981212973f%2Fkcu4inm_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Avicenna Major Insurance Policy Analysis**
Avicenna, a prominent insurance company, offers five-year life insurance policies to individuals aged 65. If the policyholder passes away before reaching the age of 70, the company will pay $27,400 to the policy's beneficiary. The executives at Avicenna are contemplating selling these policies for $765 each. The probability of a policyholder dying before age 70 is 3%, while the probability of surviving until age 70 is 97%.
The core question here is:
*If the executives at Avicenna know that they will sell many of these policies, should they expect to make or lose money from offering them? How much?*
To address this question, we need to consider the price of the policy and the expected value of the payouts.
**Options to Analyze:**
1. **Avicenna can expect to make money from offering these policies.**
- In the long run, they should expect to make \_\_\_ dollars on each policy sold.
2. **Avicenna can expect to lose money from offering these policies.**
- In the long run, they should expect to lose \_\_\_ dollars on each policy sold.
3. **Avicenna should expect to neither make nor lose money from offering these policies.**
### Calculation of Expected Value:
This section involves calculating the expected monetary outcome for Avicenna on average per policy sold. This is determined by considering the probabilities and the associated costs/revenues:
- **Probability of paying out $27,400 (death before 70):** 3%.
- **Probability of not paying out (alive at 70):** 97%.
- **Revenue from selling each policy:** $765.
The expected cost to Avicenna for each policy sold is:
\[ \text{Expected Payout} = (0.03 \times 27,400) + (0.97 \times 0) = 822 \]
Then, to determine the net gain or loss:
\[ \text{Net Gain/Loss} = \text{Revenue} - \text{Expected Payout} \]
\[ \text{Net Gain/Loss} = 765 - 822 = -57 \]
Therefore, in the long run, Avicenna can expect to lose $57 on each policy sold, matching the second option:
- **Avicenna can expect to lose money from offering these policies.**
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
Recommended textbooks for you
A First Course in Probability (10th Edition)
Probability
ISBN:
9780134753119
Author:
Sheldon Ross
Publisher:
PEARSON
A First Course in Probability (10th Edition)
Probability
ISBN:
9780134753119
Author:
Sheldon Ross
Publisher:
PEARSON