(a) A friend says "Insurance policies are a rip-off; they always have provisions that limit

how much you can be compensated." You will enlighten your friend by saying . . .

(b) Nestle Ghana has the following loss distribution, L, for its annual products liability

costs:

L = {

GH0 with a probability of 0.95

GH100,000 with a probability of 0.035

GH300,000 with probability of 0.01

GH1,000,000 with probability 0.005

Assume that the only administrative cost is the cost of processing an application which

equals GH1250 regardless of the size of the claim. The cost of providing insurance is the

sum of the expected claim costs and the expected claim processing costs. Determine the

fair premium in each of the following scenarios:

(i) Full insurance

(ii) GH100,000 deductible and GH600,000 limit

(iii) No deductible and a GH600,000 limit

In each case ignore moral hazard, adverse selection, time value of money and the risk load.