ScholarMatic: Explanation & Answer
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Loss Probability
Suppose that Skipper’s insurer views him as having the
following distribution for the present value of losses:
Loss=
$20,000 with probability 0.02
$5,000 with probability 0.04
$1,000 with probability 0.10
$0 with probability 0.84
What is the fair premiums for full coverage if the
competitive loading (administrative costs and capital costs) equals 15% of
expected claim costs?
Suppose that Skipper believes his probabilities of losses
are ½ of what the insurer believes. What is the loading on the policy from
Skipper’s perspective?
ScholarMatic: Explanation & Answer
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