Auto insurance Insurance companies collect annual pay-ments from drivers in exchange for paying for the cost of accidents. a) Why should you be reluctant to accept a $1500 pay-ment from your neighbor to cover his automobile accidents in the next year? b) Why can the insurance company make that offer

Question

Sidney Marquez

Mathematics

20 May, 22:10

Auto insurance Insurance companies collect annual pay-ments from drivers in exchange for paying for the cost of accidents. a) Why should you be reluctant to accept a $1500 pay-ment from your neighbor to cover his automobile accidents in the next year? b) Why can the insurance company make that offer

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Liliana Ibarra · Answer 1

Step-by-step explanation:

a) Because you are only receiving $1500 and in exchange you would have to cover for this accident damage in the next year, which could be up to hundred of thousands of dollar. Sure there's a chance the your neighbor might drive safely, but the odds are far more in his favor than yours.

b) The insurance company collect payments from hundred of thousands buyers, making their cash flow up to tens of million dollar. Sure the expected value of accidents might be high but as a company they surely have capital to cover a handful of cases, if their calculation done right.