Suppose that Skipper's insurer views him as having the following distribution for the present value of losses:
$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?© BrainMass Inc. brainmass.com June 4, 2020, 12:39 am ad1c9bdddf
First we calculate the expected loss, expected loss = 20000 X 0.02 + 5000 X 0.04 + 1000 X ...
This solution shows all the steps for calculating the loss probability in the given problem.