2014 Fall #8 type of question
determine the amount paid by the insurance company and the fed government. I agree with the equations for the initial payments, but since the question doesn't say initially shouldn't we also consider the insurance company paying 140% surcharge on the initial government payment:
Comm Direct EP = 150M
Terr loss = 200M
initial Ins co pmt = .2150M + .2(200M-(.2*150M)) = 64M
initial Gov pmt = 200M - 64M = 136M
total ins co pmts after surcharge has been paid back to the fed gov = 64M + 136M1.4 = 254.4M
total pmt by fed gov after surcharge has been received = 136M - 136M1.4 = -54.4M (fed government makes money in total)
Comments
It is not a 140% surcharge. The government levies mandatory surcharges on future premiums to recoup 140% of a particular year's loss. This is not related to that year's loss of 200M, which is what they ask about.