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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:

    $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 Preview

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

    Solution Summary

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