2 - Suppose an insurer has losses that follow this distribution: $600,000 with probability 0.01 Loss = $100,000 with probability 0.02 $ 30,000 with probability 0.03 $ 0 with probability 0.94 Claims are paid one year after the premium is received.

a-If the interest rate is 5 percent, what is the discounted expected claim cost?

Expected claim cost = 600000*0.01+100000*0.02+30000*0.03+0*0.94 = 8900 Discount expected claim cost = 8900/(1+5%) = 8476.190476

b-If the interest rate is 8 percent, what is the discounted expected claim cost?

Discount expected claim cost = 8900/(1+8%) = 8240.740741

c- Assume claim payments are not made until two years after the premium is received and the interest rate is 5 percent. What is the discounted expected claim cost?

d-What does problem 2(a-d) tell you about the effect of interest rates and the claims tail on insurance premiums?