FIN 4130hw2 - Bradley Thebeau - Bjt6h5 Finance 4130...

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Bradley Thebeau - Bjt6h5 Finance 4130 09/13/2009 FIN 4130: Management of Financial Institutions Fall 2009 Homework 2 Due: Tuesday, September 15, 2009 Pick 5 of the 9 problems to answer and turn in at the start of class. Chapter 3: (Pages 89-91) 21.) Insurance companies will charge a higher premium for which of the insurance lines listed below? Why? a.) Low-severity, high-frequency lines versus high-severity, low-frequency lines. -A higher premium will be charged for High Severity/Low frequency lines because estimating the expected loss rates is extremely difficult in these coverage areas. The severity of these losses could also be enormous. High frequency events are usually small in value. b.) Long-tail versus short-tail lines. - A higher premium will be paid on long-term lines because a loss will occur when the insured event occurs during a coverage period, but a claim is not filed or reported until years later. The delay in filing of a claim is in accordance with the terms of the insurance contract and often occurs because the consequences of the event are not known for a period of time after the event actually occurs. Losses incurred but not reported have caused insurers significant problems in lines such as medical malpractice and other liability insurance where product damage suits have mushroomed many years after the event occurred and the coverage period expired. A short tail premium will be more definite and the value will be known. 27.) An insurance company’s projected loss ratio is 77.5 percent, and its loss adjustment expense ratio is 12.9 percent. The company estimates that commission payments and dividends to policyholders will be 16 percent. What must be the minimum yield on
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FIN 4130hw2 - Bradley Thebeau - Bjt6h5 Finance 4130...

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