You Just bought a new car and want to get an insurance policy for it for the next 5 year. You will either have only one car accident in year 3 with the probability of 30%, or you will have no accident at all with the probability of 70%. The insurance company has three policies. The annual cost and the cost of having an accident under each policy is given in the following table. These payments are at the beginning of the year and start from year zero to 4. Also, the right column shows how much money you should pay for the accident in addition to the amount which the insurance company pay for the accident. Which policy should you choose? Assume that your MAAR is 10%.

1. Policy 1
2. Policy 2
3. Policy 3
4. All Policies are equal

 

Plan Annual cost (5 payments Accident cost in case of from zero to 4) an accident in year 3 Policy 1 Policy 2 Policy 3 $ 400 $ 600 $ 800 $ 12,400 $7,600 $ 4,200