An insurance company offers two accident policies. Policy A has a premium of $2,000 with a deductible of $800. Policy B has a premium of $2,400 with a deductible of $200. The probability of an accident costing more than $800 in a given year is 15%. Assume a person has at most one accident a year and no accidents costing less than $800. Complete each statement. a. The annual expected cost to the owner for Policy A is $
b. The annual expected cost to the owner for Policy B is $
c. Policy has the lesser annual expected total cost to owner.

a. The annual expected cost to the owner for Policy A is $ 2,120

b. The annual expected cost to the owner for Policy B is $ 2,430

c. Policy A has the lesser annual expected total cost to owner.

Explanation:

a) Data and Calculations:

                                            Policy A      Policy B

Annual Premium                 $2,000      $2,400

Deductible                              $800         $200

Probability of an accident

costing >$800 =                   15%            15%

Probability of no accident    85%           85% (100% - 85%)

Annual expected cost =     $2,120      $2,430

Policy A = $2,120 ($2,000 + ($800 * 15%))

Policy B = $2,430 ($2,400 + ($200 * 15%))

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