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 $410 million. The probability of loss is 1.37 percent in one year, and the relevant discount rate is 4.4 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 number, e.g., 1,234,567.) b. Suppose that you can make modifications to the building that will reduce the probability of a loss to .95 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 number, e.g., 1,234,567.) a. Insurance premium b. Maximum cost
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 $410 million. The probability of loss is 1.37 percent in one year, and the relevant discount rate is 4.4 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 number, e.g., 1,234,567.) b. Suppose that you can make modifications to the building that will reduce the probability of a loss to .95 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 number, e.g., 1,234,567.) a. Insurance premium b. Maximum cost
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 $410 million. The probability of loss is 1.37 percent in
one year, and the relevant discount rate is 4.4 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 number, e.g., 1,234,567.)
b. Suppose that you can make modifications to the building that will reduce the
probability of a loss to .95 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 number, e.g.,
1,234,567.)
a. Insurance premium
b. Maximum cost
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