An insurer sells a one-year policy to many people with the following loss distri
ID: 2797685 • Letter: A
Question
An insurer sells a one-year policy to many people with the following loss distributions:
Size of loss
Probability of loss
50,000
0.005
30,000
0.01
10,000
0.02
5,000
0.05
0
0.915
Assume:
1) The fair premiums, the administrative expenses and the profit loading are all paid at the beginning of the year;
2) The claims are paid one year later;
3) The interest rate is 8%;
4) The administrative expenses are assumed to be 10% of the fair premiums;
5) The profit loading is assumed to be 5% of the expected claim costs.
Find the fair premium for the policy.
Size of loss
Probability of loss
50,000
0.005
30,000
0.01
10,000
0.02
5,000
0.05
0
0.915
Explanation / Answer
Answer is 1069.4
Copy paste the following data in excel start from A1 cell. and put the formulas as given in blue below
Size of loss Probability of loss 50,000 0.005 30,000 0.01 10,000 0.02 5,000 0.05 0 0.915 Value Formulas Expected loss 1000 SUMPRODUCT(C4:C8, D4:D8) PV of expense loss 925.9 C10/(1+8%) Expenses 92.6 C11*10% Profit Loading 5 % 1069.4 (C11+C12)*(1+5%)Related Questions
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