If there is a 1% chance that you will be in an auto accident that will cost you $100,000 in lost income, medical expenses, and liability, and your insurance company charges a 10% risk premium, an insurance policy giving you full coverage would likely cost

Options:

a) $10,000

b) $1,000

c) $1,100

d) $11,000

Answer:

d) $11,000

Explanation:

There is 1% chance of involving in the auto accident

1% of $100, 000 = 1/100 * 100000 = $1000

The insurance company charges a 10% risk premium

10% of $100,000 = 10/100 * 100000 = $10,000

Full coverage = $10,000 + $ 1000

Cost of Full coverage = $11,000