What Should the Insurance Premium Be to Break Even?

[don_anon25]

Here goes:

A potential customer for an 85000 dollar fire insurance policy possesses a home in an area that according to experience, may sustain a total loss in a given year with probability of .001 and a 50% loss with probability .01. Ignoring all other partial losses, what premium shoud the insurance company charge for a yearly policy in order to break even on all 85000 dollar policies in this area?

Here's what I wrote down from the problem:
p(Y=-85000) = .001 probability of total loss...that is, loss in amount of 85,000

p(Y=-42500) = .01 probability of 50% loss...loss in the amoung of 42500

85000(.001)+42500(.01)

Any help is greatly appreciated!

 

[Hurkyl]

Well, we can't know where you need help unless you show us what you've done on the problem so that we know where you're stuck!

 

[robert Ihnot]

don anon 25: 85000(.001)+42500(.01)=?

That seems like a reasonable start.