Suppose a $50,000 annual loss occurs randomly with a probability of one in one hundred. a....

Suppose a $50,000 annual loss occurs randomly with a probability of one in one hundred.

a. What is the actuarially fair premium? If the insurance company charges $750 per person per year, what is the loading factor?

b. Assume the insurance company has 100 people in the pool and the insurance company is charging $750 per person per year. If one person in the pool suffers from the loss, will the insurance company be able to pay for the loss?

c. Assume the insurance company has 100 people in the pool and the insurance company is charging $750 per person per year. If two people in the pool suffer from the loss, will the insurance company be able to pay the losses?

d. What happens to the variability of the expected value of a loss as the number of people in the group increases?

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Expert Solution

Rahul Sunny answered 2 years ago

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