A medical insurance policy covers a particular illness assuring a sum of $1,500,000. If the probability of the illness occurring is 0.0001 and the expected profit is $270 what is the premium that the company should charge?
To determine the premium that the insurance company should charge, we need to take into account the expected profit and the probability of the illness occurring. Here's how you can calculate it step-by-step:
1. Start by calculating the expected loss. This is the product of the sum assured and the probability of the illness occurring:
Expected Loss = Sum Assured * Probability of Illness
Expected Loss = $1,500,000 * 0.0001
Expected Loss = $150
2. Calculate the premium by adding the expected loss to the expected profit:
Premium = Expected Loss + Expected Profit
Premium = $150 + $270
Premium = $420
Therefore, the premium that the company should charge to cover the particular illness is $420.