In calculating an insurance premium, the actuarially fair insurance premium is the premium that results in a
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In calculating an insurance premium, 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 $380 million. The probability of loss is 1.25 percent in one year and the relevant discount rate is 4 percent.
a. What is the actuarially fair insurance premium?
b. Suppose that you can make modifications to the building that will reduce the probability of a loss to 0.90 percent. How much would you be willing to pay for these modifications?
Discount RateDepending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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a Expected Loss 00125 x 380M 100125 x 0 475M PV of the expected loss 475M104 456...View the full answer
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Related Book For 
Fundamentals of Corporate Finance
ISBN: 978-0071051606
8th Canadian Edition
Authors: Stephen A. Ross, Randolph W. Westerfield
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