THE UNIVERSITY OF NEW SOUTH WALES

SEMESTER 2
ACTL 3003: Insurance Risk Models
Class Test
Monday, 16 August 2010
Write the required information on the space provided:

Name:

Student ID:

Circle the tutorial session which you are enrolled for:

Luke -A (Tue 3pm-4pm)
Kieran -A (Thu 12pm-1pm)
Kieran -B (Fri 3pm-4pm)

Jinxia (Thu 11am-12pm)

Luke -B (Fri 2pm-3pm)

INSTRUCTIONS:
Read through the following information carefully. DO NOT COMMENCE WRITING UNTIL YOU ARE TOLD TO DO SO.
Time Allowed: 60 minutes
Total Assessment credit: 10%
Total Marks available: 100 points
This examination paper has 11 pages
Total number of questions: 6
All questions are not of equal value. Marks allocated for each part of the questions are
indicated.
This is a closed-book test and no formula sheets are allowed except for the Formulae and
Tables for Actuarial Exams (any edition). IT MUST BE WHOLLY UNANNOTATED.
Use your own calculator for this exam. If your calculators are not UNSW approved, the
calculators must be hand-held, internally powered and silent, and any programmable
memory must be cleared prior to entering an examination room.
Show all necessary steps in your solutions in the space provided (if necessary, you can
also use the back pages). If there is no written solution, then no marks will be
awarded.
STUDENTS WRITING AFTER THE EXAM TIME HAS EXPIRED WILL
SCORE A MARK OF ZERO. ACADEMIC MISCONDUCT ACTION MAY
ALSO RESULT.
1

Question 1. (25 marks)

Consider an automobile insurance policy where the policyholder has probability q of getting
into an accident. The distribution of the damage, given that the accident has occurred,
follows an exponential distribution with parameter .
(a) [10 marks] Find the cumulative distribution function F (x) of the loss of this policy.
Clearly define your notation.

(b) [5 marks] Find the moment generating function of the loss.

Additionally, suppose the policy to have deductible amount d.

(c) [5 marks] Find the probability that the insurer is required to make a payment.

(d) [3 marks] Find the amount the insurer expects to pay.

(e) [2 marks] Suppose the insurer purchases reinsurance and as a result retains a proportion, , of the loss. Find the fair price of the reinsurance contract.

Question 2. (15 marks)

Consider the collective risk model
S = X1 + X2 + . . . + XN ,
where N Binomial(m, p) and X P (x).
(a) [5 marks] Find the moment generating function of S in terms of the moment generating
function of X.

(b) [5 marks] Using the cumulant generating function, find the first cumulant of S in terms
of p1 = E[X]. Show your work.

(c) [5 marks] Suppose X to be a strictly positive random variable. Rewrite S as an

Find the distribution of X
in terms of
individual risk model with modified losses X.
the distribution of X.

Question 3. (10 marks)

Suppose S1 Compound Poisson( = 5, P (x)), where the distribution of X is given by
p(1) = 0.4 and p(2) = 0.6. Let Ni Poisson( = i), i = 1, 2, and N1 , N2 and S1 be
mutually independent. Find the cumulative distribution function of
S = 2N1 + 3N2 + S1 .
.

Question 4. (14 marks)

Suppose that the random variable Y has the following probability mass function:

y1 r
fY (y) =
p (1 p)yr , y = r, r + 1, ,
r1
where r is a positive integer. P
Let N = Y r and S = N
i=1 Xi , where X1 , X2 , are independent and identically
distributed, and independent of N . The probability mass function of the random variable
X1 is p(x) = 0.1x, x = 1, 2, 3, 4.
(a) [8 marks] Show that the random variable N belongs to the (a, b) family and identify
a and b in terms of r and p.

(b) [6 marks] Let p = 0.1 and r = 2. Suppose that you know fS (1) = 0.0018 and
fS (2) = 0.003843. Find fS (0) and use Panjers recursion to determine fS (3).

Question 5. (19 marks)

P
Consider a random variable S = N
i=1 Xi where X1 , X2 are independent and identically
distributed, and independent of N . Suppose that X1 is a continuous random variable. Let
mS (t) denote the moment generating function of S. Suppose that you have found
m (0)mS (0) (mS (0))2
mS (0)
= 6, S
= 4,
mS (0)
(mS (0))2
(3)

[mS (0)mS (0) mS (0)mS (0)](mS (0))2 2[mS (0)mS (0) (mS (0))2 ]mS (0)mS (0)
= 3.
(mS (0))4
(a) [12 marks] Determine E[S], V ar(S) and E[(S E[S])3 ]. Show all working.

(b) [7 marks] Let G(x; , ) denote the Gamma distribution function with parameters
and . Find the translated gamma approximation for Pr(S 10) in terms of G(x; , )
with the appropriate values of x, and being specified.

Question 6. (17 marks)

Consider the Cramer-Lundberg surplus process for an insurance company with positive
initial surplus, where the premium rate is c (c > 0), the number of claims follows a Poisson
process with parameter and the claim amount distribution is exponential with parameter .
(a) [2 marks] Determine the security loading . In other words, express in terms of c,
and only.

(b) [5 marks] Find an expression for the adjustment coefficient R in terms of c, and
only.

10

(c) [10 marks] Now, instead of assuming that the claim amount random variable is exponentially distributed, we assume that the claim amount random variable is uniformly
distributed over the interval [a, b] (0 a < b). Define T to be the time of ruin, i.e., the first
time that the surplus process becomes negative. Given that T < , find the range of U (T ).

END

11