In calculating insurance premiums, the actuarially fair insurance premium is the premium that results in a zero
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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 $245 million. The probability of loss is 1.25 percent in one year, and the relevant discount rate is 4 percent.
a. What is the actuarially fair insurance premium?
b. Suppose that you can make modifications to the building that will reduce the probability of a loss to .90 percent. How much would you be willing to pay for these modifications?
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Answer 1Expected Loss Probability of loss x Value o...View the full answer
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Related Book For 
Fundamentals Of Corporate Finance
ISBN: 9781265553609
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
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