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.

1) What is the actuarially fair insurance premium?

2) 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? (maximum cost)