60.1K

Verified Solution

Link Copied!

2. (11 Points) Suppose that Tom's insurer views him as having the following distribution for the present value of losses: Loss = $30,000 with probability of 0.02 Loss = $6,000 with probability of 0.04 Loss = $2,000 with probability of 0.08 Loss = $0 with probability of 0.86 Suppose the insurance market is competitive. Suppose the competitive loading for administrative costs and capital costs equals 14% of expected claim costs. a) What is the fair premium that the insurer will charge Tom? Show your calculations. b) Suppose Tom believes that the distribution for the present value of losses is as follows: Loss = $30,000 with probability of 0.01 Loss = $6,000 with probability of 0.02 Loss = $2,000 with probability of 0.04 Loss = $0 with probability of 0.93 1) Would Tom find his insurance policy too expensive? What is the expected loss from Tom's point of view? Show your calculations. i) What is the loading fee for administrative costs and capital costs from Tom's point of view? Show your calculations. iv) What is the loading fee for administrative and capital costs from the insurer's point of view? 2. (11 Points) Suppose that Tom's insurer views him as having the following distribution for the present value of losses: Loss = $30,000 with probability of 0.02 Loss = $6,000 with probability of 0.04 Loss = $2,000 with probability of 0.08 Loss = $0 with probability of 0.86 Suppose the insurance market is competitive. Suppose the competitive loading for administrative costs and capital costs equals 14% of expected claim costs. a) What is the fair premium that the insurer will charge Tom? Show your calculations. b) Suppose Tom believes that the distribution for the present value of losses is as follows: Loss = $30,000 with probability of 0.01 Loss = $6,000 with probability of 0.02 Loss = $2,000 with probability of 0.04 Loss = $0 with probability of 0.93 1) Would Tom find his insurance policy too expensive? What is the expected loss from Tom's point of view? Show your calculations. i) What is the loading fee for administrative costs and capital costs from Tom's point of view? Show your calculations. iv) What is the loading fee for administrative and capital costs from the insurer's point of view

Answer & Explanation Solved by verified expert

See Answer