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Assume that the only administrative cost is the cost of

1. An insurer sells a very large number of policies to people with the following loss distribution:

$100,000 with probability 0.005

$60,000 with probability 0.010

Loss = $20,000 with probability 0.020

$10,000 with probability 0.05

$ 0 with probability 0.915

a. Assume claims are paid one year after premiums are received and that the interest rate is 6 percent. Calculate the discounted expected claim cost per policy.

b. Assume that the only administrative cost is the cost of processing an application, which equals $100 per policy, and that the fair profit loading is $150. What is the fair premium?

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