Assume that the insurance company has only claim costs and that administrative c

ID: 1121875 • Letter: A

Question

Assume that the insurance company has only claim costs and that administrative costs are $0. Which of the following statements is correct?

With an actuarially fair insurance premium, an individual expected wealth is lower with than without insurance.

With an actuarially fair insurance premium, an individual expected wealth is the same, with or without insurance.

With an actuarially fair insurance premium, an individual expected wealth is higher with than without insurance.

All of the above.

With an actuarially fair insurance premium, an individual expected wealth is lower with than without insurance.

With an actuarially fair insurance premium, an individual expected wealth is the same, with or without insurance.

With an actuarially fair insurance premium, an individual expected wealth is higher with than without insurance.

All of the above.

Explanation / Answer

When the insurance premium is actuarially fair the expected income of the individual does not change when it purchases insurance or not because insurance company will provide the full unfair insurance in case of a damage.

Hence correct option is option B.

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Assume that the insurance company has only claim costs and that administrative c

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Assume that the insurance company has only claim costs and that administrative c

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