2. There is a 3% chance that Betsy becomes ill and this illness will cost her $15,000. AAA Insurance offers Betsy a policy that will cover these costs in the event that she gets sick. This policy costs $1000 (or 6.67% of the policy coverage).

   1. (4 points) Assuming there is a 0.5% administrative fee per policy, what are the expected profits of AAA Insurance?

   2. (4 points) Would you expect AAA insurance to be able to offer this policy in a competitive market? Explain.

   3. (4 points) Again, assuming the health insurance market is perfectly competitive, what is the equilibrium price of insurance (as a percent of coverage)?

Write a program to determine the cost of an automobile insurance premium, based on the driver's age and the number of accidents that the driver has had.

• The basic insurance charge is $500.There is a surcharge of $100. if the driver is under 25 and an additional surcharge for accidents:

Medicare is a social insurance program for elderly individuals that covers the cost of healthcare if they fall sick. Suppose a country decides to enact a similar program called BN-care because it is discovered that many elderly citizen are going bankrupt after they get sick, as the result of high medical costs.

a. What does this bankruptcy situation tell us about private insurance markets? Why might this be the case?

b. Why are consumers willing to pay for insurance, given that the payment reduces their expected lifetime income?

c. Suppose the enactment of BN-care only reduces the percent of elderly who go bankrupt after they get sick by 50%.

What might be going on? (multiple answers possible)

What are the problems associated with reducing insurance cost by using a high deductible

An insurance company would like to compare the cost of claims at their company in two different states. They take a random sample of 50 of their claims from each state. A second insurance company claims that the samples are dependent and that any conclusions drawn are invalid. Do you agree? Explain. Select the correct answer below: No, the claims made in one state should not have any effect on the claims in another state. The company is only comparing their own claims, so the samples can be considered independent. Yes, since the samples are only taken from one insurance company, they are not a random sample of all of the claims. No, two samples are only independent if there is at least some overlap between the two samples. Yes, the two states could be close to each other, making some of the claims potentially the same.

A firm owns a building worth 1,500,000. The premium for insurance on the building will cost $50,000.00. Expected annual losses on the building is $30,000. The firm would earn 14% on funds applied to operations. Invested reserves earn 4%. What is the true cost of retaining the risk of loss on its building, including opportunity costs. Explain your answer and show your work.

Safeco Insurance is considering a software equipement at a cost of $4,133,250. They expect this equipment to produce cash flows of $822,432 , $463,965, $937,250, $1,017,112, $1,212,960, and $1,300,000 over the next six years. If the appropriate discount rate is 12 percent, what is the NPV of this investment? Would they go ahead with the project? If each cashflow is reduced by 20%, what is the new NPV at 12%? If each cashflow is increased by 20% , what is the new NPV at 12%? Share the results in a table, with the best case scenario, normal scenario and worst case scenario. Comment on these scenarios.

Suppose that the spot price of gold is $600. The total cost of insurance and storage for gold is $30 per year, payable in advance. The rate of interest for borrowing or lending is 20%. If the forward price is $700, and you are interested in arbitrage, you would: (Hint: Check answer with an arbitrage table)

Suppose that the spot price of gold is $500.  The total cost of insurance and storage for gold is $30 per year, payable in advance.  The rate of interest for borrowing or lending is 20%. If the forward price is $650, how much money could you make from arbitrage at expiration of the forward?  Hint: Use an arbitrage table after you figure out the appropriate arbitrage portfolio.