SGWhas experienced the following workers‘ compensation losses at two of their cleaning plants over a 10-year period shown below. 

year 1 2 3 4 5 6 7 8 9 10

plant #1 losses 800 400 200 0 400 600 200 600 0 800

plant #2 losses 400 400 600 200 0 200 0 800 800 600

SGW is considering whether to purchase insurance or to self-insurance these losses.

1) Based on the experience of plant #1 losses only, estimate the expected loss and the standard deviation of the loss.

2) SGW is considering buying insurance from XYZ company, an insurer that is able to pool the loss experience of plant #1 with other firms that are independent of each other. Estimate the expected loss and the standard deviation of the mean loss distribution when XYZ insures 100, 900, and 2500 independent and homogeneous plants. For now, disregard the loss experience of SGW's plant #2.

3)If XYZ could pool an unlimited number of independent and homogeneous exposure units, what premium would XYZ charge to cover their underlying losses.

Answer rating: 100% (QA)

QUESTION 1 The expected loss is 400 and the standard deviation is 200 QUESTION 2 The expected loss i... View the full answer