Question
In calculating an insurance premium, the actuarially fair insurance premium is the premium that results in a zero NPV for both the insured and the
In calculating an insurance premium, the actuarially fair insurance premium is the premium that results in a zero NPV for both the insured and the insurer. As such, the present value of the expected loss is the actuarially fair insurance premium. Suppose your company wants to insure a building worth $388 million. The probability of loss is 1.650 % in one year and the relevant discount rate is 4.8%.
a. What is the actuarially fair insurance premium? (Enter the answer in dollars, not millions of dollars. Round the final answer to 2 decimal places. Omit $ sign in your response.)
b. Suppose that you can make modifications to the building that will reduce the probability of a loss to 1.30 %. How much would you be willing to pay for these modifications? (Enter the answer in dollars, not millions of dollars. Round the final answer to 2 decimal places. Omit $ sign in your response.)
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