Question
Manulife Insurance Companys losses of a particular type per year are to a reasonable approximation normally distributed with a mean of $200 million and a
Manulife Insurance Companys losses of a particular type per year are to a reasonable approximation normally distributed with a mean of $200 million and a standard deviation of $100 million. (Assume that the risks taken on by the insurance company are entirely non-systematic.) The one-year risk-free rate is 4% per annum with annual compounding. Estimate the cost of the following:
1. A contract that will pay in one years time 65% of the insurance companys costs on a pro rata basis
2. A contract that pays $150 million in one years time if losses exceed $300 million
I need an explanation for part 2.
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