An insurance company charges $1000 for a one-year policy for an automobile
that is valued at $60,000. The company's actuaries have determined that all
accidents fall into one of three categories: 1 in 500 policyholders will be
involved in an accident that causes a loss of one-third of the value of the car at
some time during the year, 1 in 800 policyholders will be in an accident that
causes a loss of two-thirds of the value of the car, and 1 in 1250 will incur a
total loss of their vehicle's value.
In case of an accident, the policyholder will owe the insurance company a
$1000 deductible, and the insurance company will owe the policyholder for
the dollar value of his or her loss in each case.