Actuarially Fair Premium is defined as the price that covers which concept?

Actuarially Fair Premium is defined as the price that covers which concept?

• A. Worry value
• B. P*
• C. Total Cost
• D. Monetary Cost

Answer: (B)

Actuarially fair premium is the amount that exactly equals the expected payout from the policy—the expected value of the insurer’s loss. In other words, it’s the pure premium that would leave the insurer with zero profit or loss on average, before any loading for expenses, taxes, or profit. If the policy can result in different losses Li with probabilities pi, the actuarially fair premium is P* = sum(pi * Li). For a simple case with a single possible loss L and probability p, P* = pL. This concept focuses on covering the expected loss, not additional costs or unspecified charges, so the correct concept is the premium that matches the expected payout, i.e., P*.

Actuarially fair premium is the amount that exactly equals the expected payout from the policy—the expected value of the insurer’s loss. In other words, it’s the pure premium that would leave the insurer with zero profit or loss on average, before any loading for expenses, taxes, or profit. If the policy can result in different losses Li with probabilities pi, the actuarially fair premium is P* = sum(pi * Li). For a simple case with a single possible loss L and probability p, P* = pL. This concept focuses on covering the expected loss, not additional costs or unspecified charges, so the correct concept is the premium that matches the expected payout, i.e., P*.