2. What would be the fair premium for a one-year insurance policy with a $2,000 annual aggregate deductible and a $200,000 annual aggregate limit if the policyholder has the following probability distribution for annual losses:
Loss Amount Probability
$0 0.850
$2000 0.100
$20,000 0.030
$200,000 0.015
$250,000 0.005
Assume that the cost of processing claims equals 10% of the claim amount, underwriting costs equal $1,000, a fair profit loading for the policy equals $600 at the beginning of the contract period, and that the appropriate discount rate equals 5%.
Assume that one-half of claim and claim processing costs are paid at the end of the year and that one-half of claim and claim processing costs are paid at the end of two years.