Statistics: How to calculate an insurance risk premium?

A customer for a $90,000 fire insurance policy possesses a home in an area which, according to experience, may sustain a total loss in a given year with probability or 0.001, and a 50% loss with probability 0.01. Ignoring all other partial losses, what premium should the insurance company charge for a yearly policy to make 10% above the break even point?





Thanks for the help!

Statistics: How to calculate an insurance risk premium?
Well it sounds like you need the value of the home to solve this, but assuming the home is worth 90,000 then you can use Expected Value.





Expected Value = 0.001*90000 + 0.01*45000


= 90 + 450 = 540





The policy is worth 540$ then, so they should charge 594 to be 10% above breakeven.
Reply:The expected value of a fire loss is:


E(x) = $90000(0.001) + $45000(0.01) = $540 (break even)


Plus a 10% profit is $540 + $54 = $594 premium