An insurer has a pool of identical policyholders each with a potential claim that fits the ideal characteristics of insurability. There are 10,000 policyholders in the pool. Any single policyholder has an expected claim of 10 and the claim’s standard deviation is 2. The insurer collects premiums at the beginning of the year, and pays claims at the end of the year. Premium is 9.5 per insurer. The insurer invests premiums at an annual rate of 5.68 percent. What is the probability (a very close approximation will suffice) that the insurer will not have sufficient money to pay claims?

An insurer has a pool of identical policyholders each with a potential claim that fits the ideal characteristics of insurability. There are 10,000 policyholders in the pool. Any single policyholder has an expected claim of 10 and the claim’s standard deviation is 2. The insurer collects premiums at the beginning of the year, and pays claims at the end of the year. Premium is 9.5 per insurer. The insurer invests premiums at an annual rate of 5.68 percent. What is the probability (a very close approximation will suffice) that the insurer will not have sufficient money to pay claims?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 17.2IP

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