In calculating insurance premiums, the actuarially fair insurance premium is the

Question

In calculating insurance premiums, the actuarially fair insurance premium is the premium that results in a zero NPV for both the insured and the insurer. As such, the present value of the expected loss is the actuarially fair insurance premium. Suppose your company wants to insure a building worth $390 million. The probability of loss is 1.29 percent in one year, and the relevant discount rate is 3.10 percent. What is the actuarially fair insurance premium? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Round your answer to the nearest whole dollar amount, (e.g., 32)) Insurance premium $l 4879728 Suppose that you can make modifications to the building that will reduce the probability of a loss to 0.80 percent. How much would you be willing to pay for these modifications? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole dollar amount, (e.g., 32)) Maximum payment $ 1521000

Explanation / Answer

Answer:

a. Your answer for this part is correct :

b. If the loss become 0.80 percent then the fair insurance premium for this would be :

$390,000,000 * 0.80% /(1+0.031) = $3026188

Hence we can pay for this modification = Fair value if loss% prob is 1.29%

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.