Question: Suppose that an insurance company classifies people into one of
Suppose that an insurance company classifies people into one of three classes: good risks, average risks, and bad risks. The company’s records indicate that the probabilities that good-, average-, and bad-risk persons will be involved in an accident over a 1-year span are, respectively, .05, .15, and .30. If 20 percent of the population is a good risk, 50 percent an average risk, and 30 percent a bad risk, what proportion of people have accidents in a fixed year? If policyholder A had no accidents in 1997, what is the probability that he or she is a good or average risk?
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