Problem 11

Introduction

In an actuarially fair insurance policy, the premiums that a person pays to the insurance company are the same as the average amount of benefits for a person in that risk group. The expected net pay off in an actuarially fair insurance policy is zero.

For a consumer, an insurance policy is actuarially fair if the premiums paid are equal to the expected value of compensation received. The expected value is the probability of the insured against event occurring multiplied by the compensation received in the event of a loss.