1. Suppose that Thomas Lee's insurer views him as having the following loss distribution:

$6000000 h 0.01 $100000 h 0.02 $30000 h 0.03

=

{$0 h 0.94

Claim payments are not expected to be paid until one year after the premium is received, the interest rate is 5% and the competitive loading equals 15% of expected claim costs.

(a)(8%). What is the loading on the insurance policy from the insurer's perspective?

(b)(7%). Suppose that Thomas Lee believes that her true probabilities for each possible loss outcome are half as high as the insurer has estimated. What is the loading on the insurance policy from Thomas Lee's perspective? (Note: This means Thomas Lee believes his probability for $0 loss is .97)