Question 1177075: Acasa Insurance Company offers several plans for home insurance.
Plan A has a $700 yearly premium with a $3,000 deductible.
Plan B has a $1,200 yearly premium with a $1,000 deductible.
Water damage (from broken pipes, overflows, etc.) results in approximately 12% of claims overall, with an average claim being $5,200. What is the expected value (loss or gain) to Acasa for every customer who chooses plan A?
A. -$1,060
B. $436
C. -$360
D. -$100
Answer by CPhill(1959)   (Show Source):
You can put this solution on YOUR website! Here's how to calculate the expected value for Acasa Insurance Company for Plan A:
**1. Calculate the Expected Claim Payout**
* **Probability of Water Damage:** 12% or 0.12
* **Average Claim Amount:** $5,200
* **Deductible:** $3,000
* **Payout per Claim:** $5,200 - $3,000 = $2,200 (since the average claim exceeds the deductible)
* **Expected Claim Payout:** 0.12 * $2,200 = $264
**2. Calculate the Expected Value**
* **Yearly Premium:** $700
* **Expected Claim Payout:** $264
* **Expected Value (Acasa's Gain):** $700 - $264 = $436
**Therefore, the expected value to Acasa for every customer who chooses Plan A is $436.**
The correct answer is **B. $436**.
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