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Two individuals have different unemployment risk. Individual A has a probability of 10% of being unemployed...

Two individuals have different unemployment risk. Individual A has a probability of 10% of being unemployed for 4 months, while individual B has a probability of 5% of being unemployed for 4 months. Both individuals will lose 10000 dollars during this four months. If individuals become unemployed, 55% of their lost earnings will be replaced.

If an actuarially fair premium was to be charged, what annual premium would each worker be charged? Show your calculations.

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Answer #1

Total final loss = .55*10,000

= 5500

Now actuarially fair insurance premium , M = B*R

B = loss

R = loss probability

So from A, M = 5500*.1

= 550

From B , M = 5500*.05

= 275

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