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# An insurer sells a very large number of policies to people w

An insurer sells a very large number of policies to people with the following loss distribution:
\$100,000 with probability 0.005
\$ 60,000 with probability 0.010
Loss = \$ 20,000 with probability 0.020
\$ 10,000 with probability 0.05
\$ 0 with probability 0.915

a. Calculate the expected claim cost per policy.
b. Assume claims are paid one year after premiums are received and that the interest rate is 6 percent. Calculate the discounted expected claim cost per policy.
c. Assume that the only administrative cost is the cost of processing an application, which equals \$100 per policy, and that the fair profit loading is \$50. What is the fair premium?

#### Solution Preview

An insurer sells a very large number of policies to people with the following loss distribution:
\$100,000 with probability 0.005
\$ 60,000 with probability 0.010
Loss = \$ 20,000 with probability 0.020
\$ 10,000 with ...

#### Solution Summary

An insurer sells a very large number of policies to people with the following loss distribution:
\$100,000 with probability 0.005
\$ 60,000 with probability 0.010
Loss = \$ 20,000 with probability 0.020
\$ 10,000 with probability 0.05

\$2.19