Office Use Only

Semester TWO Examination Period 2012

Faculty of Business and Economics
EXAM CODES:

ETC1010 / ETC9010

ACTUARIAL TOPIC SOLUTIONS

TITLE OF PAPER:

Data Modelling and Computing

EXAM DURATION:

2 hours

Question 1 (20 MARKS)

Question 2 (40 MARKS)

Page 1 of 11

Question 3 (40 marks)

(a)

In the context of demography:

(i)

The fertility rate measures the number of births occurring in the population of a
particular country. As those children age and become adults what two main factors
then affect the number of people in the population at each age?
(2 marks)
ANSWER TO (a) (i)
The two main factors affecting the number of people in the population at each age are:

The level of mortality rates, and

The extent of net migration into the country (excess of immigration over
emigration)

One mark for each point wording not important as long as they convey the essence
of the point.
Half a mark if they refer to wars affecting the numbers.
(ii)

There are at least three very significant factors which have affected the changing
structure of the population of France in the last 110 years. Say what you think two of
them would have been?
(2 marks)
ANSWER TO (a) (ii)
The factors affecting the population of France are (1m for each point for 2 points):

The large number of deaths during both the first world war 1914-18 and later
(Spanish flu etc) and the second world war 1940-15, and
The significant net immigration into the country in the last 15 to 20 years
The ageing of the population due to both mortality improvements causing there
to be a lot more older people, and a reduced fertility rate, in common with
most advanced European countries.

One mark for each point wording not important as long as they convey the essence
of the point.

Page 2 of 11

(iii)

A population pyramid is shown overleaf for males and females in Country X for the
year 2012. In analysing the features of this pyramid:
a) Does Country X appear to be a richer European country or a poorer developing
country, and why?
b) The population pyramid becomes narrow in shape especially for males
around the age group 45 to 49. What could have possibly caused this to occur?
c) The population pyramid becomes wide in shape for both sexes in the age
groups 50 through to 64. What could have possibly caused this to occur?
d) Why does the male/female ratio reduce significantly after the age group 55 to
59?
(4 marks)
ANSWER TO (a) (iii)
a) Country X appears to be a poorer developing country because the relative
number of older people over 40 in the population is relatively low and there
are a large number of people under 20 showing that fertility rates have been
high in the last 20 years or so. These factors are typical of a developing
country. (1m)
b) The population pyramid being narrow in shape especially for males around
the age group 45 to 49 could have been due to a war causing deaths of adults,
especially males, or a lot of net migration out of the country eg by people
looking for work overseas, or a period of extremely low fertility for some
reason (eg war) happening 40 to 50 years previously. (1m)
c) The population pyramid being wide in shape for both sexes in the age
groups 50 through to 64 could possibly be due to fertility being exceptionally
high 50 to 65 years ago, or due to there being a lot of net immigration into the
county of older people (less likely). (1m)
d) The male/female ratio reduces significantly after the age group 55 to 59 due to
mortality levels for males over 55 being much higher than for females, which is
normal for any population especially one without advanced medical facilities
to deal with heart attacks, cancer etc which tend to affect males more than
females. (1m)

Page 3 of 11

Age M '000s F '000s

Group (Left) (Right)

M/F
Ratio

0-4

250

238

105%

5-9

240

229

105%

10-14

230

220

105%

15-19

220

210

105%

20-24

190

182

104%

25-29

170

163

104%

30-34

150

152

99%

35-39

130

150

87%

40-44

115

140

82%

45-49

110

145

76%

50-54

135

140

96%

55-59

145

140

104%

60-64

120

138

87%

65-69

90

108

83%

70-74

70

90

78%

75-79

50

70

71%

80-84

40

60

67%

85-89

30

55

55%

90-94

25

50

50%

95+

15

35

43%

Country X Population 2012

95+
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
-300

-200

-100

M '000s (Left)
F '000s (Right)

100

200

300

Page 4 of 11

(b)

A car club has 100 drivers of whom 30 are classified as young and 70 are classified as old.
The probability of a young driver having a car accident is 0.20 and the probability of an old
driver having a car accident is 0.10. The probability frequency table expected to apply for
accidents in the car club in the year is as follows (per cent):

Accident (A)
Claim free (nA)
Total

Young (Y)
6.00
24.00
30.00

Old (O)
7.00
63.00
70.00

All
13.00
87.00
100.00

(i) The probability of 13 in 100 that an accident will have occurred is referred to as what
type of probability?
(1 mark)
(ii) Given that an accident has occurred, what is the conditional probability (to 1 dec place
per cent) that the driver in that accident is a young driver?
(2 marks)
(iii)

The following expression expresses what principle?

(1 mark)

Pr (Y / A) = Pr(A/ Y) Pr (Y) / Pr (A)

(iv) Show that this produces the same conditional probability result (show your working).
(1 mark)
ANSWER TO (b)
(i) The probability of 13 in 100 = a marginal probability.

(1 mark)

(ii) Conditional probability, given an accident, that the driver in that accident is a young
driver = 6/13 = 0.46154 = 46.2% (to 1 dec place per cent)
(2 marks)
(iii)

Bayes Theorem

(1 mark)

(iv) Show that this produces the same conditional probability result (show your working).
Pr (Y / A) = Pr(A/ Y) Pr (Y) / Pr (A)
Pr (Y / A) = 6/30 x 30/100 / 13/100
Pr (Y / A) = 6/30 x 30/100 / 13/100
Pr (Y / A) = 6/100 / 13/100
Pr (Y / A) = 6/13 = 46.2%
A reasonable amount of working must be shown, as asked in the question.
(1 mark)

Page 5 of 11

(c)

Using compound interest:

(i)

If nominal interest of 18% per annum is paid monthly, what is the effective interest
rate per annum (to 2 decimal places per cent)?
(1 mark)

(ii)

Henry received an inheritance of $30,000 when he was age 25. For 5 years he invested
this sum in a bond paying 5% per annum interest payable half-yearly. What maturity
amount did he have then at the end of 5 years, to the nearest dollar?
(2 marks)

(iii)

Joseph incurred a liability to pay $20,000 at the end of 3 years. He decided to set aside
the present value of that liability in a fund. What present value is required if the
applicable interest is 8% per annum interest convertible, again to the nearest dollar?
(2 marks)

ANSWER TO (c)
(i)

Nominal interest of 18% pa is paid monthly, effective interest rate pa is

100 [(1+ 0.18/12)^12 -1] = 19.562 = 19.56% (to 2 dec places per cent)
(1 mark)

(ii)

Maturity amount after 5 years = $30,000 x (1+.05/2)^10 =$30,000 x 1.280085 =

$38,402.54 = $38,403 to the nearest dollar.
(2 marks)

(iii)

(Mistake in the question I intended to say convertible quarterly) Joseph incurred a

liability to pay $20,000 at the end of 3 years. He decided to set aside the present value
of that liability in a fund. What present value is required if the applicable interest is
8% per annum interest convertible, again to the nearest dollar?

Alternative answers
If assumes convertible yearly = 20000 / (1+.08)^3 = $15,877
If assumes convertible half-yearly = 20000 / (1+.08/2)^6 = $15,806
If assumes convertible quarterly = 20000 / (1+.08/4)^12 = $15,770
If assumes convertible monthly = 20000 / (1+.08/12)^36 = $15,745
Any of these worth 2m
If the student gave up and said he could not answer it give 1m
(2 marks)

Page 6 of 11

(d)

Attached is the Australian Life Tables 2007-2009 published by the Australian Bureau of
Statistics in November 2010. Using that table answer the following:
(i)

In relation to lx , the number of people alive at age x:

a. What symbol is used to denote the probability that a male aged x will live for t years
into the future?
b. Express this as a ratio using two lx terms.
c. What is the probability (to 2 decimal places per cent) that a male aged 60 will live
for at least 25 years more?
(3 marks for (i)
ANSWER TO (d) (i)
a) Probability that a male aged x will live for t years = t px
b) As a ratio using two lx terms = lx+t / lx

(1 mark)
(1 mark)

c) Prob male 60 will live for 25 years = l85 / l60 T= 40852 / 91101
= 0.448425 = 44.84% to 2 dec places %.
(ii)

(1 mark)

A male aged 35 marries a female aged 25. If probabilities of death are independent and
in accordance with the life table what is the probability (to 2 decimal places per cent)
that they will both be alive to celebrate their 25th wedding anniversary?
(2 marks)
ANSWER TO (d) (ii)
Probability that a male aged 35 and female ages 25 will both live for 25 years to
celebrate their wedding anniversary
= 25p35 (m) 25p25 (f)
= l60 / l35 (m) l50 / l25 (f)
= 91101 / 97824 97333 / 99204 = 0.91371
= 91.37% to 2 dec places %

(iii)

(2 marks)

Lx as listed in the 3th column for each sex represents the number of years of life lived
between age x and age x+1 for the lx lives starting at age x.
a. If you sum Lx+i for each value of i through to the end of the life table and call this
sum Tx what does Tx represent?
b. If we then divide Tx by lx and call that ex what does that represent?
(2 marks)
ANSWER TO (d) (ii)
a) Lx+i for each value of i represents the number of years of life the group of people
alive at age x+ i will live between x+ i and x+i+1 so Tx represents the total
number of years of life the lx lives starting at age x will live during the whole of
the rest of their lives from age x onwards.
(1 mark)
b) If we divide Tx by lx this is the average number of years lived in the future per life
and this is written as ex and represents the expectation of life at age x (1 mark)

Page 7 of 11

(e) Considering actuarial work in General Insurance:

A General Insurance Actuary working for a company which provides car accident insurance
wants to set up a mathematical model of the possible claim experience which may occur in
the next 3 years. He has established that the chance of an accident claim being made by a
policyholder is approximately 10% and that most claims are between $1,000 and $9,000 in
amount with an average near $5,000
(i)

What is he likely to model by using a binomial probability distribution?

(1 mark)

(ii)

What is he likely to model by using a normal probability distribution?

(1 mark)

(iii)

Why is the variance or standard deviation of the normal distribution used relevant to
this study?
(1 mark)

(iv)

What is the main purpose of setting up such a mathematical model?

(2 marks)

ANSWER TO (e)
(i)

The binomial probability distribution would be ideal for modelling the number of
accident claims being made amongst the group of policyholders.
(1 mark)

(ii)

The normal probability distribution would be ideal for modelling the variation in the
size of the claim amounts. (Optional - A normal distribution with mean expected claim
amount of $5,000 and a standard deviation of around $2,000 would produce a
distribution of claims mostly between $1,000 and $9,000 as under the normal about
two-thirds of claims are within 2 standard deviations of the mean).
(1 mark)

(iii)

Setting an assumed variance or standard deviation for the normal distribution

representing the claim sizes allows one to get either a more peaked or less peaked
bell-shaped curve of the normal distribution to fit not just the right mean value, but
also approximately the right shape of the actually incurred claim distribution.
(1 mark)

(iv)

The main purpose of setting up such a mathematical model is so that we can model
alternative scenarios of what claims may happen in the future. This tests the actual
claims outcome for the year against the normal level which helps to indicate
expected future claim levels and profitability levels. This helps to get our premium
levels right. Also we can find out probability of adverse scenarios where claims are
high and this enables the actuary to assess the need for reinsurance.
(2 marks)
(Mark (iv) fairly generously as students may not possibly express their answer well
and may not cover all of this expect a couple of sentences though)

Page 8 of 11

(f)

In the context of actuarial practice:

(i) The Managing Director says a consultant said he should be careful of adverse
selection in running his portfolio of temporary insurance policies which covers a range
of both non-smoking policyholders and smokers. Which of these descriptions of
adverse selection below is correct?
a. Adverse selection means that a person who has been selected for life insurance by
passing a medical examination on applying (proposing) for life insurance will exhibit
lower mortality for several years as compared to someone who has had a policy for a
long period.
b. A smoker choosing to apply for a policy with a company which charges the same
premium rates for all policyholders, irrespective of their smoking status, hoping to
gain from this, is an example of adverse selection.
c. The increase in mortality rates for males as they age being greater than the increase
for females is due to adverse selection for males.
(2 marks)
ANSWER TO (f) (i)
i. The situation of adverse selection is described in (b) above where a
prospective policyholder tries to gain by getting a better premium rate from a
company charging general rates to smokers and non-smokers, rather than a
company charging smokers more.
(2 marks)
Description (a) above is initial selection, not adverse selection, and (c)
just refers to a normal property of comparative mortality levels for the sexes,
not a selection effect at all.
(ii) Each year the actuary of a life office will put a value on the assets and liabilities of the
life office. The excess of assets over liabilities is the surplus and that provides the
solvency reserves of the life office. Why does a life office need these solvency
reserves?
(2 marks)
ANSWER TO (f) (ii)
ii. A life office needs solvency reserves to allow for the possibility of claim
levels and other aspects of experience such as investment returns fluctuating
from year to year, so they always have a financial margin which keeps them
safely operating, and always have assets to cover their liabilities. It is also a
government requirement according to the regulatory environment governing
the operation of insurance in Australia and other countries.
(2 marks)
(Mark (f)(ii) fairly generously as students may find this difficult and may not possibly
express their answer well and may not cover all of this expect a couple of sentences
though)

Page 9 of 11

(g)

In the context of contingent payments:

(i)

A life office offers to a male now aged 60 a 3 year insurance policy with a life sum
insured of $10,000 payable at the end of the year of death if death occurs during the 3
years. The premium for the contract is payable in two equal amounts now and after
one year, provided the male is then still alive. The payments are valued at compound
interest effective rate i per annum, and v is 1/(1+i).
a)

Explain briefly in words why the premium P can be found from solving the
following formula:
P (1+ l61 / l60 . v) = 10000 (q60 . v + l61 / l60 . q61 . v2 + l62 / l60 . q62 . v3 )
(3 marks)

b)

If the rate of interest i is 6%, and the life table values come from the Australian
Life Tables 2007-2009 for males as attached, calculate the up-front premium to
the nearest dollar.
(3 marks)

ANSWER TO (g) (i) (a)

a)

Why the premium P can be found from:

P (1+ l61 / l60 . v) = 10000 (q60 . v + l61 / l60 . q61 . v2 + l62 / l60 . q62 . v3 )
On the left hand side the present value of the premium is 1 for the first premium
paid now and for the second premium paid after one year this is multiplied by
the prob. of survival for one year and one year compound interest discount.
On the right hand side the benefit of $10,000 is paid only to those who die each
year hence the probabilities of death q60, q61 and q62 . Payments to those
who die in the second and third years require them to have survived for the first
year or the first 2 years hence the l61 / l60 and the l62 / l60 . Also payments are
made at the end of 1, 2 or 3 years hence the compound interest discount v , v2 ,
and v3 terms.
(3 marks)

If the rate of interest i is 6%, and the life table values come from the
Australian Life Tables 2007-2009 for males as attached, calculate the upfront premium to the nearest dollar.
(3 marks)
ANSWER TO (g) (i) (b)
P (1+ 90471 / 91101 . 1/1.06) =
10000 (.00692 . 1/1.06 + 90471/91101 . 00762 . v2 + 89781/91101. 0.00840.v3 )
b)

P (1.93687 =
10000 (.0065283 + . 0067349 + 0.0069506)
P = 10000 (.0202138) / 1.93687 = 104.36 = $104 to nearest dollar
(dont worry if rounding wrong a little)
Give 1.5 marks for looking up l & q values correctly, .5 mark for using 1/1.06 and
1m for final calculation right.
Page 10 of 11

**** End of Examination ****

Page 11 of 11