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.

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 $280 million. The probability of loss is 1.44 percent in one year, and the relevant discount rate is 3.6 percent.

a.

What is the actuarially fair insurance premium? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole dollar amount, e.g., 32.)

Insurance premium $

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? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

Maximum payment $

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

Cornerstones Of Financial Accounting

Authors: Jay Rich, Jeff Jones, Maryanne Mowen, Don Hansen

2nd Edition

0538473452, 9780538473453

More Books

Students also viewed these Finance questions

Question

Discuss the legal framework of HRM in Canada.

Answered: 1 week ago