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Expected premium cost of an insurance policy

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A bonding company want to insure a construction projects completion. If the project is cancelled due to the contractor's lack of performance, the bonding company will cover the entire expenses of $30,000, and it will pay only half of this amount if it is cancelled for any other reason.

The bonding company assigns a probability of 0.15 to the contractor's performance and 0.05 to any other reason.

If the bonding company will charge $1,000 more than its expected payment, what should be the cost [premium] of this policy?

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This solution shows how to find the expected premium cost for an insurance policy.

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The expected value of the payment is found by multiplying each outcome by its probability and ...

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