John O.

asked • 02/15/19

describing, evaluating and managing risk

There is a 1 percent that you will have healthcare bills of $100,000, a 19 percent chance that you will have a healthcare bill of $10,000, a 60 percent chance that you will have healthcare bills of $500, and a 20 percent chance that you will have a bill of $0. What will your expected insurance benefits be? Would you be willing to buy complete insurance coverage if it cost$3,712? Explain.

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Inactive Tutor answered • 04/09/19

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The expected value of the benefit is 100,000 x .01 + 10,000 *.19 + 500*.6 + 0*2 = 3200 --------The expected value of the gain to the customer is less than the premium, however this is normal for insurance. If the customer has assets well in excess of $100,000 then it is unlikely that the policy is worth the price. However, if the customer has assets less than $100,000 and is risk adverse, he may be willing to pay the premium to avoid the possibility of bankruptcy.
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04/09/19

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