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FandI CT6 200804 Exam FINAL

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0% found this document useful (0 votes)
125 views6 pages

FandI CT6 200804 Exam FINAL

Uploaded by

Urvi purohit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Faculty of Actuaries Institute of Actuaries

EXAMINATION

8 April 2008 (am)

Subject CT6 — Statistical Methods


Core Technical

Time allowed: Three hours

INSTRUCTIONS TO THE CANDIDATE

1. Enter all the candidate and examination details as requested on the front of your answer
booklet.

2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.

3. Mark allocations are shown in brackets.

4. Attempt all 10 questions, beginning your answer to each question on a separate sheet.

5. Candidates should show calculations where this is appropriate.

Graph paper is not required for this paper.

AT THE END OF THE EXAMINATION

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.

In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

© Faculty of Actuaries
CT6 A2008 © Institute of Actuaries
1 Give two examples of the main types of liability insurance, stating for each example a
typical insured peril. [4]

2 A claim amount distribution is normal with unknown mean μ and known standard
deviation £50. Based on past experience a suitable prior distribution for μ is normal
with mean £300 and standard deviation £20.

(i) Calculate the prior probability that μ, the mean of the claim amount
distribution, is less than £270. [1]

(ii) A random sample of 10 current claims has a mean of £270.

(a) Determine the posterior distribution of μ.

(b) Calculate the posterior probability that μ is less than £270 and
comment on your answer.
[5]
[Total 6]

3 (i) X and Y are independent Poisson random variables with mean λ. Derive the
moment generating function of X, and hence show that X + Y also has a
Poisson distribution. [4]

(ii) An insurer has a portfolio of 100 policies. Annual premiums of 0.2 units per
policy are payable annually in advance. Claims, which are paid at the end of
the year, are for a fixed sum of 1 unit per claim. Annual claims numbers on
each policy are Poisson distributed with mean 0.18.

Calculate how much initial capital is needed in order to ensure that the
probability of ruin at the end of the year is less than 1%. [4]
[Total 8]

4 Y1, Y2, …, Yn are independent observations from a normal distribution with E[Yi] = μi
and Var[Yi] = σ2.

(i) Write the density of Yi in the form of an exponential family of distributions.[2]

(ii) Identify the natural parameter and derive the variance function. [3]

(iii) Show that the Pearson residual is the same as the deviance residual. [4]
[Total 9]

CT6 A2008—2
5 The following table shows the claim payments for an insurance company in units of
£5,000:

Development year
Accident
year 0 1 2 3

2004 410 814 216 79


2005 575 940 281
2006 814 1066
2007 1142

The inflation for a 12 month period to the middle of each year is given as follows:

2005 2006 2007


5% 5.5% 5.4%

The future inflation from 2007 is estimated to be 8% per annum.

Claims are fully run-off at the end of the development year 3.

Calculate the amount of outstanding claims arising from accidents in year 2007, using
the inflation adjusted chain ladder method.
[9]

6 A portfolio of general insurance policies is made up of two types of policies. The


policies are assumed to be independent, and claims are assumed to occur according to
a Poisson process. The claim severities are assumed to have exponential distributions.

For the first type of policy, a total of 65 claims are expected each year and the
expected size of each claim is £1,200.

For the second type of policy, a total of 20 claims are expected each year and the
expected size of each claim is £4,500.

(i) Calculate the mean and variance of the total cost of annual claims, S, arising
from this portfolio. [3]

The risk premium loading is denoted by θ, so that the annual premium on each policy
is (1+θ)×expected annual claims on each policy. The initial reserve is denoted by u.

A normal approximation is used for the distribution of S, and the initial reserve is set
by ensuring that

P(S < u + annual premium income) = 0.975.

(ii) (a) Derive an equation for u in terms of θ.

(b) Determine the annual premium required in order that no initial reserve
is necessary. [7]
[Total 10]

CT6 A2008—3 PLEASE TURN OVER


7 Consider the following model applied to some quarterly data:

Yt = et + β1et-1 + β4et-4 + β1β4et-5

where et is a white noise process with mean zero and variance σ2.

(i) Express in terms of β1 and β4 the roots of the characteristic polynomial of the
MA part, and give conditions for invertibility of the model. [2]

(ii) Derive the autocorrelation function (ACF) for Yt. [5]

For our particular data the sample ACF is:

Lag ACF

1 0.73
2 0.14
3 0.37
4 0.59
5 0.24
6 0.12
7 0.07

(iii) Explain whether these results confirm the initial belief that the model could be
appropriate for these data. [3]
[Total 10]

8 The NCD scale policy for an insurance company is:

Level 0 0%
Level 1 25%
Level 2 50%

The premium at the Level 0 is £800. The probability that a policyholder has an
accident in a year is 0.2, and it is assumed that a policyholder does not have more than
one accident each year.

In the event of a claim free year the policyholder moves to the next higher level of
discount in the coming year or remains at Level 2.

In the event of a claim the policyholder moves to the next lower level of discount in
the coming year or remains at Level 0.

Following an accident the policyholder decides whether or not to make a claim based
on the claim size and the amount of premiums over the period of the next 2 policy
years, assuming no more claims are made.

CT6 A2008—4
(i) For each discount level, find the minimum claim amount for which the
policyholder will make a claim. [2]

(ii) Assuming that the cost of repair for each accident has an exponential
distribution with mean £600, calculate the probability that a policyholder
makes a claim at each level of discount. [5]

(iii) Write down the transition matrix and calculate the average premium payment
for a year when the system has reached the equilibrium. [6]
[Total 13]

9 (i) Describe the difference between strictly stationary processes and weakly
stationary processes. [2]

(ii) Explain why weakly stationary multivariate normal processes are also strictly
stationary. [1]

(iii) Show that the following bivariate time series process, (Xn, Yn)t , is weakly
stationary:

Xn = 0.5Xn-1 + 0.3Yn-1 + enx


Yn = 0.1Xn-1 + 0.8Yn-1 + eny

where enx and enx are two independent white noise processes. [5]

(iv) Determine the positive values of c for which the process

Xn = (0.5 + c) Xn-1 + 0.3Yn-1 + enx


Yn = 0.1Xn-1 + (0.8 + c) Yn-1 + eny

is stationary. [6]
[Total 14]

CT6 A2008—5 PLEASE TURN OVER


10 A bicycle wheel manufacturer claims that its products are virtually indestructible in
accidents and therefore offers a guarantee to purchasers of pairs of its wheels. There
are 250 bicycles covered, each of which has a probability p of being involved in an
accident (independently). Despite the manufacturer’s publicity, if a bicycle is
involved in an accident, there is in fact a probability of 0.1 for each wheel
(independently) that the wheel will need to be replaced at a cost of £100. Let S denote
the total cost of replacement wheels in a year.

(i) Show that the moment generating function of S is given by

250
⎡ pe 200t + 18 pe100t + 81 p ⎤
M S (t ) = ⎢ +1− p⎥ . [4]
⎣⎢ 100 ⎦⎥

(ii) Show that E ( S ) = 5, 000 p and Var ( S ) = 550, 000 p − 100, 000 p 2 [6]

Suppose instead that the manufacturer models the cost of replacement wheels
as a random variable T based on a portfolio of 500 wheels, each of which
(independently) has a probability of 0.1p of requiring replacement.

(iii) Derive expressions for E(T) and Var(T) in terms of p. [2]

(iv) Suppose p = 0.05.

(a) Calculate the mean and variance of S and T.


(b) Calculate the probabilities that S and T exceed £500.
(b) Comment on the differences. [5]
[Total 17]

END OF PAPER

CT6 A2008—6

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