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    Time Value of Money

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    Provide answers and calculations.

    An insurer sells a very large number of policies to people who each have the following identical loss (claims) distribution

    Loss/claim Probability
    100,000 .005
    60,000 .010
    20,000 .020
    10,000 .050
    0 .915

    1 A. Calculate the Expected claim cost per person.

    1 B. Assume claims are paid out 1 year after premiums are received and the discount rate is 6%. Calculate the Present value of expected claim cost

    1 C. Assume that the only administrative cost is the cost of processing an application which is $100 per policy and that the fair profit loading is $50. Calculate the Fair premium .

    Redo problem 1, but include the expected costs of lost adjustment expenses (the cost of processing claims) assuming that loss adjustment expenses equal 12% of losses and are paid at the time that claims are paid.

    2 A. Expected loss adjustment expenses =

    2 B. Present value of expected loss adjustment expenses =

    2 C. Fair premium =

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    https://brainmass.com/statistics/central-tendency/time-value-of-money-297987

    Solution Preview

    1A.
    Expected Claim cost per person = 100,000*.005 + 60,000*.01 + 20,000*.02 + 10,000*.05 + 0*.915 = 2,000

    1B.
    Present Value of the Expected Claims = 2,000/1.06 = ...

    Solution Summary

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