Question: Suppose that Skipper's insurer views him as having the following distribution for the present value of losses:
Loss=
$20,000 with probability 0.02
$5,000 with probability 0.04
$1,000 with probability 0.10
$0 with probability 0.84
What is the fair premiums for full coverage if the competitive loading (administrative costs and capital costs) equals 15% of expected claim costs?
Suppose that Skipper believes his probabilities of losses are ½ of what the insurer believes. What is the loading on the policy from Skipper's perspective?