The probability distribution for damage claims paid by the Newton Automobile Insurance Company on collision insurance is as follows. Payment ($) Probability 0 0.85 500 0.04 1,000 0.04 3,000 0.03 5,000 0.02 8,000 0.01 10,000 0.01 Use the expected collision payment to determine the collision insurance premium that would enable the company to break even. The insurance company charges an annual rate of $520 for the collision coverage. What is the expected value of the collision policy for a policyholder? (Hint: It is the expected payments from the company minus the cost of coverage.) Why does the policyholder purchase a collision policy with this expected value?
Contingency Table
A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.
Binomial Distribution
Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.
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The
|
Payment ($) |
Probability |
|---|---|
|
0 |
0.85 |
|
500 |
0.04 |
|
1,000 |
0.04 |
|
3,000 |
0.03 |
|
5,000 |
0.02 |
|
8,000 |
0.01 |
|
10,000 |
0.01 |
-
Use the expected collision payment to determine the collision insurance premium that would enable the company to break even.
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The insurance company charges an annual rate of $520 for the collision coverage. What is the expected value of the collision policy for a policyholder? (Hint: It is the expected payments from the company minus the cost of coverage.) Why does the policyholder purchase a collision policy with this expected value?
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