A fair insurance policy is one whose premium:
A)is zero.
B)allows the insurance company to profit.
C)equals the expected value of the claims.
D)is higher as the probability of a claim decreases.

Question

Quizplus · Accepted Answer

A fair insurance policy is one in which the premium equals the expected value of the claims. This means that on average, the premium paid by the policyholder should be equal to the expected cost of the claims that the insurance company will have to pay out. If the premium is lower than the expected value of the claims, the insurance company will not be able to cover all of the costs and may go bankrupt. If the premium is higher than the expected value of the claims, then the policyholder is overpaying and the insurance company is making a profit unnecessarily. Therefore, the premium should be set at the expected value of the claims for the policy to be fair.

A Fair Insurance Policy Is One Whose Premium