. James estimates his total wealth at 500(1000+ C). He is concerned about two risks. ...

  

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. James estimates his total wealth at €500(1000+ C). He is concerned about two risks. • He is reliant on his wife's income, without which his wealth would fall by €400,000, to €500(200 + C) • He may need to replace his car, which could cost €20 000. If both these events occur, the effect is additive, so the loss of his wife and his car is equivalent to a loss of €420 000. He calculates that, over a five-year period, • There is a probability of 2% that his wife dies • There is a probability of 40% that he has to replace his car. . These two events are independent. His utility function has constant relative risk aversion of 0.5 + 2Ç/995. (a) Calculate the expected loss for: (i) His wife's death (ii) Replacing his car (b) Calculate the maximum premium James would pay to insure the full impact of: (i) His wife's death (ii) Replacing his car In each of these calculations, you may ignore the impact of the other risk. (c) Calculate the maximum premium James would pay for a comprehensive in- surance policy covering both perils. [4] [2] [2] [2] [2] (d) Compare the two separate premiums to the combined premium and explain, in words, why the combined maximum premium is more than the sum of the single-risk maximum premiums. [3] . James estimates his total wealth at €500(1000+ C). He is concerned about two risks. • He is reliant on his wife's income, without which his wealth would fall by €400,000, to €500(200 + C) • He may need to replace his car, which could cost €20 000. If both these events occur, the effect is additive, so the loss of his wife and his car is equivalent to a loss of €420 000. He calculates that, over a five-year period, • There is a probability of 2% that his wife dies • There is a probability of 40% that he has to replace his car. . These two events are independent. His utility function has constant relative risk aversion of 0.5 + 2Ç/995. (a) Calculate the expected loss for: (i) His wife's death (ii) Replacing his car (b) Calculate the maximum premium James would pay to insure the full impact of: (i) His wife's death (ii) Replacing his car In each of these calculations, you may ignore the impact of the other risk. (c) Calculate the maximum premium James would pay for a comprehensive in- surance policy covering both perils. [4] [2] [2] [2] [2] (d) Compare the two separate premiums to the combined premium and explain, in words, why the combined maximum premium is more than the sum of the single-risk maximum premiums. [3]

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a Expected loss for i His wifes death Expected loss Probability of wifes death Loss without wifes in... View the full answer