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SCHOOL OF RISK AND ACTUARIAL STUDIES

SESSION 2 2014

ACTL2102: FOUNDATIONS OF ACTUARIAL MODELS

QUIZ EXAM

INSTRUCTIONS:
1. TIME ALLOWED1 HOUR
2. READING TIME5 MINUTES
3. THIS EXAMINATION PAPER HAS 16 PAGES.
4. TOTAL NUMBER OF QUESTIONS4
5. TOTAL MARKS AVAILABLE50
6. MARKS AVAILABLE FOR EACH QUESTION ARE SHOWN IN THE EXAMINATION PAPER (AND OVERLEAF). ALL QUESTIONS ARE NOT OF EQUAL VALUE.
7. ANSWER ALL QUESTIONS IN THE SPACE ALLOCATED TO THEM. IF MORE
SPACE IS REQUIRED, USE THE ADDITIONAL PAGES AT THE END.
8. CANDIDATES MAY BRING
a. THE TEXT FORMUL AND TABLES FOR ACTUARIAL EXAMINATIONS (ANY
EDITION) INTO THE EXAMINATION. IT MUST BE WHOLLY UNANNOTATED.
b. THEIR OWN UNSW APPROVED CALCULATOR
9. ALL ANSWERS MUST BE WRITTEN IN INK. EXCEPT WHERE THEY ARE EXPRESSLY
REQUIRED, PENCILS MAY BE USED ONLY FOR DRAWING, SKETCHING OR GRAPHICAL WORKS.
10. THIS PAPER MAY NOT BE RETAINED BY THE CANDIDATE.

a.

[5

marks ]

b.

[5

marks ]

c.

[5

marks ]

a.

[3

marks ]

b.

[5

marks ]

c.

[3

marks ]

a.

[6

marks ]

b.

[5

marks ]

c.

[4

marks ]

a.

[3

marks ]

b.

[6

marks ]

[Total:

50 marks ]

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Question 1. (15 marks)

(a) List the key steps in constructing a new actuarial model.

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[5]

(b) Consider a Markov chain with state space

S = {1, 1, 2, , 6}

and transition matrix

0
1
0
0
0
0
0.4 0.6 0
0
0
0

0.3 0 0.4 0.2 0.1 0

P =

0
0
0
0.3
0.7
0

0
0
0
0 0.5 0.5
0
0
0 0.3 0 0.7

Classify the states and identify the recurrent and transient states.

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[5]

(c) Assume a Markov chain

probability

1 2i1

Xn

has states

0, 1, 2,

and to 0 with probability

and transitions from each

i > 0

to

i+1

with

1
2i . Moreover, from 0 it transitions to 1 with probability

1.
(i) Is this chain irreducible?
(ii) Assume that

[2]

X0 = 0 and let R be the rst return time to 0 (that is the rst time after the initial
is

time the chain is back at the origin). Determine for which

1 f0 = P (no
(iii) Depending on

return)

= lim P (R > n) = 0.
n

determine which classes are recurrent.

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[2]
[1]

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Question 2. (11 marks)

A no-claims discount system operates with three levels of discount, 0%, 10% and 30%. If a policyholder
makes no claim during the year he moves up a level of discount (or remains at the maximum level). If
he makes one claim during the year he moves down one level of discount (or remains at the minimum
level) and if he makes two or more claims he moves down two levels, or remains at the minimum level.
The probability for each policyholder of making two or more claims in a year is 20% of the probability
of making only one claim.
The long-term probability of being at the 10% level is the same as the long-term probability of being
at the 30% level.
(a) Derive the probability of a policyholder making only one claim in a given year.

[3]

(b) Determine the probability that a policyholder at the 0% level this year will be at the 30% level
after three years.

[5]

(c) Estimate the probability that a policyholder at the 0% level this year will be at the 30% level
after 15 years, without calculating the associated transition matrix.

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[3]

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Question 3. (15 marks)

Customers arrive at an automated teller machine (ATM) at the times of a Poisson process with a rate
of

= 10

per hour. Suppose that the amount of money withdrawn on each transaction has a mean of

$30 and a standard deviation of $20.

(a) Find the mean and variance of the total amount of dollars withdrawn in 8 hours.

[6]

(b) What is the approximate probability that the total amount of money withdrawn in the rst 8
hours exceeds $3,400?

[5]

(c) How do the answers change if the Poisson arrival process is a non-homogeneous Poisson process
with arrival rate function

(t) = 2.5t, t 0?

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[4]

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Question 4. (9 marks)

(a) Describe what is meant by a Compound Poisson process.

(b) Show that if

A(z)

is the probability generating function for the number of events occurring at

each point of the process, then the random variable

occurring in time

[3]

t,

X(t)

which is the total number of events

has a probability generating function of the form

G(z) = etA(z)t .

[6]

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(This page can only be used to answer Question 4.)

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ADDITIONAL PAGE
Answer any unnished questions here, or use for rough work.

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