Calculate the premium p

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Assume that for an e-commerce firm, the stock market loss of breach is estimated at $125,000. A company selects a policy with a deductible of $50,000. Let the direct loss from a breach be such that there is either a Low loss of L (with probability p) or a Medium loss M (with probability q) or a High loss H (with probability 1 - p - q). Assume that the firm is not obliged by law to disclose a breach.

The insurer provides the following (traditional) formula to the firm to calculate the premium P(x) based on the deductible, x:

P(x) = 1.05 [p*(L-x) + q*(M-x) + (1-p-q)*(H-x)]

The firm estimates L = $100,000 (with a probability of 0.4), M = $200,000 (with a probability of 0.4) and H = $600,000 (with a probability of 0.2).

Should the firm claim when the loss is low? Medium? High?

Reference no: EM133090182

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