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CS/JAN 2013/ASC456

UNIVERSITI TEKNOLOGI MARA


FINAL EXAMINATION

COURSE

RISK MODELING

COURSE CODE

ASC456

EXAMINATION

JANUARY 2013

TIME

3 HOURS

INSTRUCTIONS TO CANDIDATES
1.

This question paper consists of ten (10) questions.

2.

Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3.

Do not bring any material into the examination room unless permission is given by the
invigilator.

4.

Please check to make sure that this examination pack consists of:
i)
ii)

the Question Paper


an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO


This examination paper consists of 4 printed pages
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CS/JAN 2013/ASC456

QUESTION 1
The loss random variable X has p.d.f. f{x) = 1 / 1 5 0 , 0 <x <1S0. Two Insurance policies
are defined by

(i)

p^x) =

(ii)

P a (*)=f

fex

, .r > 0
7n

'X%2i

Each policy can be purchased for the expected value of the claims to be paid. The two
policies have the same premium. Calculate k.
(8 marks)

QUESTION 2
A decision maker's utility function is given by u(;x) = x2. She is willing to pay 7 as an
insurance premium against a random loss Y which has a uniform distribution over the
interval (0,15). She is indifferent to having or not having insurance. Calculate her wealth.
(10 marks)

QUESTION 3
X and Xz are independent random variables whose possible values are non-negative
integers.
You are given:
X

Fi(x-)

F (a) U)

0
1
2
3

0.45
0.80
0.95
1.00

0.20
0.47
0.90
0.93

Determine / 2 (2).

(10 marks)

QUESTION 4
If the number of claims is negative binomially distributed with parameters r = 30, -p- 0.3
and the claim distribution p(x) = e~x, x > 0 then what is Msi1)

?
(10 marks)

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CS/JAN 2013/ASC456

QUESTION 5
An insurance company has two classes of insureds:
Class

Probability of a Claim

Benefit

Smoker
Non-smoker

0.7
0.3

3
3

Number of
Policies
125
275

The company charges each smoker a relative security loading that is two times the relative
security loading charged to each non-smoker. The company wants the total premium
collected to exceed the 95t?H percentile of the aggregate claims distribution. Determine the
smallest relative security loading for non-smokers. (Use the fact that Pr{Z < 1.645) = 0.95,
where Z is the standard normal random variable.)
(12 marks)

QUESTION 6
An insurance company has a portfolio with expected claim payments per unit of time equal
to 60. Initial surplus is 150. If the company were to experience claims, x, at times t shown
below:

t:
x\

0.5
80

1.0
50

1.5
90

2.0
70

2.5
40

then what is the minimum relative security loading such that ruin would not occur during the
time interval 0 < t < 2.5 ?
(12 marks)

QUESTION 7
A claim distribution, F(x), satisfies:

EUdl =7-d
E[Id]=0

, d = 0,1,,...... 10.
, d = 11,12,13,...

All possible claim amounts are positive integers. Calculate / ( 2 ) .


(8 marks)

QUESTION 8
Apply the chain ladder method to the given IBNR triangle with cumulated figures. What
could be the reason why run-off triangles to be processed through the chain ladder method
are usually given in a cumulated form?

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Year of
origin
1
2
3
4
5

CS/JAN 2013/ASC456

4
1
232
258
221
359
349

2
338
373
303
430

Development year
3
373
429
307

4
389
456

5
391

(14 marks)

QUESTION 9
a)

What is a bonus-malus system (BMS)?


(4 marks)

b)

Based on the table below, determine the percentage of the basic premium to be paid
by a Dutch driver, who originally entered the bonus-malus scale at level 100%, drove
without claim for 7 years, then filed one claim during the eighth policy year, and has
been driving claim-free for the three years since then.
Step
9
10
11
1
2
7
8
3
4
5
6
37.5
45
40
%
120
100
55
50
90
80
70
60
0
10
11
12
2
3
4
8
9
5
6
7
claims
1 claim
6
7
7
1
1
4
5
1
2
1
3
2
3
2
3
1
1
1
1
1
1
1
1
claims
1
1
1
3+
1
1
1
1
1
1
1
1
claims
Table: Transition rules and premium percentages for the Dutch bonus-malus system
(2 marks)

QUESTION 10
A compound Poisson process has an adjustment coefficient of 10. A second compound
Poisson process is identical to the first except that the claim amounts and premiums are
double those of the first process. Calculate the adjustment coefficient for the second
process.
(10 marks)

END OF QUESTION PAPER

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