FIN:4410 Enterprise Risk Management Problem Set 4: Insurance Problem 1: Steven Steel Corporation faces the following loss distribution for annual liability losses: $1,200,000 with prob. 0.01 Loss $ 800,000 with prob. 0.03 $ 120,000 with prob. 0.05 $ 0 with prob. 0.91 a) Claims are paid at the end of the year, the annual interest rate is 3%, and administrative expenses equal 15% of the expected claim costs and are paid immediately. A profit loading of 4% applies. Find the fair premium for full insurance coverage. b) How is the insurer's investment income affected if the interest rate changes or if the time horizon changes? How would this be reflected in the premium?