# Time Value of Money

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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#### 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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