Question
10. Betty Bad and Gary Good have the following expected claims distributions: (5 points) Loss Probability of Loss Betty Bad $50,000 .10 $10,000 .20 $5,000
10. Betty Bad and Gary Good have the following expected claims distributions: (5 points)
|
| Loss | Probability of Loss |
| Betty Bad | $50,000 | .10 |
| $10,000 | .20 | |
| $5,000 | .30 | |
| $0 | .40 | |
|
| ||
| Gary Good | $50,000 | .05 |
| $10,000 | .10 | |
| $5,000 | .15 | |
| $0 | .70 | |
- What are the expected claims costs for Betty Bad and Gary Good respectively?
- What is the expected average claim cost per policy for a pool in which 50% of the participants have claims distributions identical the Betty Bad and 50% have claims distributions identical to Gary Good.
- If insurers cannot distinguish the Goods from the Bads, what is the potential problem with charging everyone a premium equal to the expected average claims costs?
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International Financial Management
Authors: Geert Bekaert, Robert J. Hodrick
1st Edition
0131163604, 9780131163607
