Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

In calculating insurance premiums, the actuarially fair insurance premium is the premium that results in a zero NPV for both the insured and the insurer.

image text in transcribed

In calculating insurance premiums, 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 $420 million. The probability of loss is 1.41 percent in one year, and the relevant discount rate is 3.5 percent. a. What is the actuarially fair insurance premium? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.) b. Suppose that you can make modifications to the building that will reduce the probability of a loss to.85 percent. How much would you be willing to pay for these modifications? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.) a. Insurance premium b. Maximum cost

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

Financial Markets Of Eastern Europe And The Former Soviet Union

Authors: François Perquel

1st Edition

1855733404,1782420002

More Books

Students also viewed these Finance questions

Question

Describe what is meant by the full circle of management.

Answered: 1 week ago