Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A no claims discount system operates with three levels of discount, 0%, 15% and 40%. If a policyholder makes no claim during the year

image text in transcribed

A no claims discount system operates with three levels of discount, 0%, 15% and 40%. If a policyholder makes no claim during the year he moves up a level of discount (or remains at the maximum level). If he makes one claim during the year he moves down one level of discount (or remains at the minimum level) and if he makes two or more claims he moves down to, or remains at, the minimum level. The probability for each policyholder of making two or more claims in a year is 25% of the probability of making only one claim. The long-term probability of being at the 15% level is the same as the long-term probability of being at the 40% level. (i) Derive the probability of a policyholder making only one claim in a given year. [4] (ii) Determine the probability that a policyholder at the 0% level this year will be at the 40% level after three years. [2] (iii) Estimate the probability that a policyholder at the 0% level this year will be at the 40% level after 20 years, without calculating the associated transition matrix. [3] [Total 9]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cost Accounting A Managerial Emphasis

Authors: Charles T. Horngren, Srikant M. Datar, George Foster

12th edition

131495380, 978-0131495388

More Books

Students also viewed these Accounting questions