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Expected cost of losses to the insurance company

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Reference no: EM133080368

An insurance company offered drivers auto insurance. Assume that claims by safe drivers cost the insurer $1,000 over the term of the policy and claims by reckless drivers costs $5,000. Drivers know whether they are safe or reckless, but the insurer only know that 10% of drivers are reckless.

a. What is the expected cost of losses to the insurance company?

b. How much does the insurance company have to charge for auto insurance to break-even? Why?

Reference no: EM133080368

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