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Loss Probability

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Suppose that Skipper's insurer views him as having the following distribution for the present value of losses:

Loss=
$20,000 with probability 0.02
$5,000 with probability 0.04
$1,000 with probability 0.10
$0 with probability 0.84

What is the fair premiums for full coverage if the competitive loading (administrative costs and capital costs) equals 15% of expected claim costs?

Suppose that Skipper believes his probabilities of losses are ½ of what the insurer believes. What is the loading on the policy from Skipper's perspective?

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Solution Summary

This solution shows all the steps for calculating the loss probability in the given problem.

Solution Preview

First we calculate the expected loss, expected loss = 20000 X 0.02 + 5000 X 0.04 + 1000 X ...

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