Answer to Question #286402 in Statistics and Probability for Trissmith

Question

6. A risk neutral investor is considering insuring his assets worth 15000. These assets are subject to a random loss of 3 in 1000.

(a) What insurance premium can you offer him to buy?

(b) Are you able to ask for more? Explain fully why and how you may be able to ask for more.

Answer 1

(a).

Value of assets =$15000

Probability =3 in 1000

Maximum premium= Probability × Value of assets

Maximum premium =15000 × 3/1000=$45

Maximum premium =$45

(b).

Can ask for more definitely due to following reasons

1. For owner of assets it is very cheap and he can give more for taking risks.

2. There are expenses involved in that like administration and settlement charges.

3. Some minimum profit required for organization for investment and effort putting.

4. There must be some premium for taking and managing the risk of owners.