Use the finite risk contract. Suppose that a 3-year contract is signed that:
(1) requires the insured firm to pay premiums of $4 million a year
(2) credit interest at 6.0% percent annually on the year’s beginning balance
(3) provides the insurer with a fee equal to 10 percent of each premium
(4) has an aggregate limit of $20 million for the three years.
How much would the policyholder get back at the end of three years if loss payments at year-end were a) $3 million in year 1; $3 million in year 2; and $3 million in year 3?
b) $8 million in year 1; $1 million in year 2; and $1 million in year 3?
I know the answers are: a = $,2598 and b = $1,100 but I am not sure how to get to those answer. Please show work when answering the questions.
We have provided with the information,
Suppose that a 3-year contract is signed that:
(1) requires the insured firm to pay premiums of $4 million a year
(2) credit interest at 6.0% percent annually on the year’s beginning balance
(3) provides the insurer with a fee equal to 10 percent of each premium
(4) has an aggregate limit of $20 million for the three years.
So the calculation for the 3 year is as follow = $ 2598
How much would the policyholder get back at the end of three years if loss payments at year-end were a) $3 million in year 1; $3 million in year 2; and $3 million in year 3?
| Year 1 | Year 2 | Year 3 | |
| At the beginig of the year | 0 | 816 | 1681 |
| Premium (A) | 4000 | 4000 | 4000 |
| Insurance fee ( 10% on 4000) (B) | -400 | -400 | -400 |
| Beginning balance at the year end C = Beginig+(A-B) |
3600 | 4416 | 5281 |
| Claim Paymnets (D) | -3000 | -3000 | -3000 |
| Add: | |||
| Interest Bearing (E) | 216 | 265 | 317 |
| Ending Balance (C+D+E) | 816 | 1681 | 2598 |
b) $8 million in year 1; $1 million in year 2; and $1 million in year 3? = $ 1100
| Year 1 | Year 2 | Year 3 | |
| At the beginig of the year | 0 | -4184 | -1619.04 |
| Premium (A) | 4000 | 4000 | 4000 |
| Insurance fee ( 10% on 4000) (B) | -400 | -400 | -400 |
| Beginning balance at the year end C = Beginig+(A-B) |
3600 | -584 | 1980.96 |
| Claim Paymnets (D) | -8000 | -1000 | -1000 |
| Add: | |||
| Interest Bearing (E) @ 6% on C |
216 | -35.04 | 118.8576 |
| Ending Balance (C+D+E) | -4184 | -1619.04 | 1100 |
