Assume that for an e-commerce firm, the stock market loss of breach is estimated at $125,000. A company selects a policy with a deductible of $50,000. Let the direct loss from 3 breach be such that there is either a Low loss of L(with probability p) or a Medium loss M (with probability a) or a High loss (with probability 1-P-a). Assume that the firm is not obliged by law to disclose a breach. The insurer provides the following (traditional) formula to the firm to calculate the premium P(x) based on the deductible, P(x) -1.05 p*(L-x)+ q*(M-x)+(1-2)*(1-x)] The firm estimates L= $100,000 (with a probability of 0.4), M - $200,000 (with a probability of 0.4) and H - $600,000 (with a probability of 0.2). 1. Should the firm claim when the loss is low? Medium? High? (5 points) 2. What premium will be charged based on the above formula? (5 points) 3. Is this premium fair, or is it overpriced based on the firm's correct claiming strategy? (5 points) 4. Given the firm's correct claiming strategy, what should the fair premium be? (5 points) 5. Under the traditional contract, can you suggest a better choice for the deductible (the current deductible is $50,000)? (5 points) Assume that for an e-commerce firm, the stock market loss of breach is estimated at $125,000. A company selects a policy with a deductible of $50,000. Let the direct loss from 3 breach be such that there is either a Low loss of L(with probability p) or a Medium loss M (with probability a) or a High loss (with probability 1-P-a). Assume that the firm is not obliged by law to disclose a breach. The insurer provides the following (traditional) formula to the firm to calculate the premium P(x) based on the deductible, P(x) -1.05 p*(L-x)+ q*(M-x)+(1-2)*(1-x)] The firm estimates L= $100,000 (with a probability of 0.4), M - $200,000 (with a probability of 0.4) and H - $600,000 (with a probability of 0.2). 1. Should the firm claim when the loss is low? Medium? High? (5 points) 2. What premium will be charged based on the above formula? (5 points) 3. Is this premium fair, or is it overpriced based on the firm's correct claiming strategy? (5 points) 4. Given the firm's correct claiming strategy, what should the fair premium be? (5 points) 5. Under the traditional contract, can you suggest a better choice for the deductible (the current deductible is $50,000)? (5 points)