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You are on page 1of 24

Dear Students,

Thank you for purchasing the DVD recording of the ACTEX Review Seminar for SOA Exam M,

Life Contingencies segment (MLC). This version is intended for the exam offered in May 2007

and thereafter. Please be aware that the DVD seminar does not deal with the Financial

Economics segment (MFE) of Exam M.

The purpose of this memo is to provide you with an orientation to this seminar, which is

devoted to a review of life contingencies plus the related topics of multi-state models and the

Poisson process. A 6-page summary of the topics covered in the seminar is attached to this cover

memo. Although the seminar is organized independently of any particular textbook, the

summary of topics shows where each topic is covered in the textbook Models for Quantifying Risk

(Second Edition), by Cunningham, Herzog, and London.

In order to be ready to write the MLC exam, you need to accomplish three stages of preparation:

This first stage is to obtain an understanding of all the underlying mathematical theory, including

a mastery of standardized international actuarial notation. This DVD review seminar is designed

to enable you to obtain that understanding.

The second stage is to prepare, and then master, a complete list of all formulas and relationships

(of which there are many) needed for the exam. For those who do not wish to prepare their own

lists, a very complete set of formulas (364 in total) is available from ACTEX in the form of study

flash cards.

The third stage is to do a large number of exam-type practice questions, beginning with the endof-chapter exercises is the textbook. In addition, you should purchase one (or more) of the

several exam-prep study guides that have been prepared for that purpose. A relatively small

number of sample problems (34) are worked out for the group in this DVD. A copy of these

questions, with detailed solutions, is attached to this cover memo for your reference.

Summary of Topics

A.

1. Age-at-Failure Random Variable X (3.1)

a.

CDF

b.

SDF

c.

d.

HRF

e.

CHF

f.

Moments

g.

Actuarial notation and terminology

2. Examples (3.2)

a.

Uniform

b.

Exponential

c.

Gompertz

d.

Makeham

e.

Weibull

f.

Others via transformation

3. Time-to-Failure Random Variable Tx (3.3)

a.

SDF

b.

CDF

c.

d.

HRF

e.

Moments

f.

Discrete counterpart K x

g.

Curtate duration K(x)

4. Central Rate (3.4)

5. Select Models (3.5)

B.

1. Definition (4.1)

2. Traditional Form (4.2)

a.

x

b.

d x and n d x

c.

px and n px

d.

qx and n qx

3. Other Functions (4.3)

a.

x and x t

b.

PDF and moments of X

-1-

c.

n|m q x

d.

e.

f.

g.

h.

Temporary expectation

Curtate expectation

Temporary curtate expectation

Central rate

a.

Linear assumption

b.

Exponential assumption

c.

Hyperbolic assumption

5. Select Tables (4.6)

C.

1. Discrete Models (5.1)

a.

Z x , and its moments

b.

c.

n| Z x , and

d.

e.

3. Continuous Models (5.3)

a.

Z x , and its moments

b.

Z 1x:n and

c.

Z x:n

d.

e.

f.

Evaluation under exponential distribution

Evaluation under uniform distribution

n| Z x , and

their moments

a. Bx in general

b. (IA)x

c.

d.

e.

a.

Continuous models

b.

mthly models

-2-

D.

1. Whole Life (6.1)

a.

Immediate

b.

Due

c.

Continuous

2. Temporary (6.2)

a.

Immediate

b.

Due

c.

Continuous

3. Deferred (6.3)

a.

Immediate

b.

Due

c.

Continuous

4. mthly Payments (6.4)

a.

Immediate

b.

Due

c.

Random variables

d.

Approximation from life table

5. Non-Level Payments (6.5)

a.

Immediate

b.

Due

c.

Continuous

E.

Funding Plans

1. Annual Payment Funding (7.1)

a.

Discrete payment models

b.

Continuous payment models

c.

Non-level funding

2. Random Variable Analysis (7.2)

d.

Present value of loss random variable

e.

Expected value

f.

Variance

3. Continuous Payment Funding (7.3)

a. Discrete payment models

b. Continuous payment models

4. mthly Payment Funding (7.4)

a. Discrete payment models

b. Continuous payment models

5. Incorporation of Expenses (7.5)

-3-

F.

Reserves

1. Annual Payment Funding (8.1)

a.

Prospective method

b.

Retrospective method

c.

Additional expressions

d.

Random variable analysis

e.

Continuous payment models

f.

Contingent annuity model

2.

a.

Group deterministic analysis

b.

Random variable analysis cash basis

c.

Random variable analysis accrued basis

a.

Discrete payment models

b.

Continuous payment models

c.

Random variable analysis

4. mthly Payment Funding (8.4)

5. Incorporation of Expenses (8.5)

6. Fractional Duration Reserves (8.6)

7. Non-Level Benefits and Premiums (8.7)

a. Discrete models

b. Continuous models

G.

Multi-Life Models

1. Joint-Life Model (9.1)

a.

Random variable Txy

b.

SDF

c.

CDF

d.

PDF

e.

HRF

f.

Conditional probabilities

g.

Moments

2. Last-Survivor Model (9.2)

a.

Random variable Txy

b.

c.

d.

e.

f.

g.

CDF

SDF

PDF

HRF

Moments

Relationships of Txy and Txy

-4-

4. Contingent Multi-Life Contracts (9.4)

a.

Contingent payment models

b.

Contingent annuity models

c.

Premiums and reserves

d.

Reversionary annuities

e.

Contingent insurance functions

5. Random Variable Analysis (9.5)

a.

Marginal distributions

b.

Covariance

c.

Joint functions

d.

Joint-life

e.

Last-survivor

6. Common Shock (9.6)

H.

Multiple-Decrement Models

1. Discrete Models (10.1)

a.

Multiple-decrement tables

b.

Random variable analysis

2. Competing Risks (10.2)

3. Continuous Models (10.3)

4. Uniform Distribution (10.4)

a.

Multiple-decrement context

b.

Single-decrement context

5. Actuarial Present Value (10.5)

6. Asset Shares (10.6)

I.

Poisson Process

1. Properties (11.3.1-11.3.3)

2. Mixture Process (11.3.4)

3. Nonstationary Process (11.3.5)

4. Compound Poisson Process (14.1)

-5-

J.

Multi-State Models

1. Review of Markov Chains (Appendix A)

2. Homogeneous Multi-State Process (10.7.1)

3. Nonhomogeneous Multi-State Process (10.7.2)

4. Daniels Notation (SN: M-24-05)

-6-

Practice Questions

1.

is 60, find the median of X.

2.

3.

x

4.

Given that e0 25 and x x, for 0 x , find the value of Var (T10 ), where T10

10

20

p40 .

denotes the future lifetime random variable for an entity known to exist at age 10.

5.

Given the UDD assumption and the values 80.5 .0202, 81.5 .0408, and 82.5 .0619, find

the value of 2 q80.5 .

6.

Let x k denote a constant force of mortality for the age interval ( x k , x k 1). Find the value

of ex:3 , the expected number of years to be lived over the next three years by a life age x, given

the following data:

7.

e xk

1 e xk

xk

0

1

2

.9512

.9493

.9465

.9754

.9744

.9730

Given the following excerpt from a select and ultimate table with a two-year select period, and

assuming UDD between integral ages, find the value of .90 q[60].60 .

x

[ x]

[ x ]1

x 2

61 79,137 78,402 77,252

62 77,575 76,770 75,578

8.

x2

62

63

64

A51 A50 .004

2

i .02

2

-7-

p50 .98

9.

Let the age-at-failure random variable X have a uniform distribution with 110. Let f Z ( z ) denote

the PDF of the random variable Z 40 . Calculate the value of f Z (.80), given also that .05.

10.

(b) Calculate the value of ( IA)36 , given the following values:

11.

A35:1 .9434

A35 .1300

p35 .9964

Assuming failures are uniformly distributed over each interval ( x, x1), calculate the value of

2

12.

( IA)35 3.711

Find the value of Ax , given the values a x 10, 2 ax 7.375, and Var (aT ) 50.

x

13.

Let S denote the number of annuity payments actually made under a unit 5-year deferred whole

life annuity-due. Find the value of Pr ( S 5|ax ), given the following values:

ax:5 4.542

i .04

i (i d )ax

14.

15.

Calculate the probability that the present value of payments actually made under a unit 3-year

temporary increasing annuity-due will exceed the APV of the annuity contract, given the

following values:

px .80

16.

px 1 .75

px 2 .50

Calculate the value of 1000 P( Ax:n ), assuming UDD over each interval ( x, x1) and the

following values:

Ax:n .804

17.

v .90

n Ex

.600

i .04

For a unit whole life insurance, let Lx denote the present value of loss random variable when the

premium is chosen such that E[ Lx ] 0, and let L*x denote the present value of loss random

variable when the premium is chosen such that E[ L*x ] .20. Given that Var ( Lx ) .30, find

the value of Var ( L*x ).

-8-

18.

If the force of interest is and the force of failure is ( x ) for all x, show that

Var[ L ( Ax )] 2 , with continuous premium rate determined by the equivalence principle.

19.

Consider a 20-pay unit discrete whole life insurance, with expense factors of a flat amount .02 each

year, plus an additional .05 in the first year only, plus 3% of each premium paid. Find the gross

annual premium for this contract, given the values ax 20, ax:20 10, and d .04.

20.

Calculate the value of 1000(2 Vx:3 1Vx:3 ), given the following values:

Px:3 .33251

x 100

i .06

x 1 90

21.

A 2-year term insurance of amount 400 is issued to (x), with benefit premium determined by the

equivalence principle. Find the probability that the loss at issue is less than 190, given the values

Px1:2 .185825, 1Vx1:2 .04145, and i .10.

22.

A 10-pay whole life contract of amount 1000 is issued to (x). The net annual premium is 32.88

and the benefit reserve at the end of year 9 is 322.87. Given that i .06. and q x 9 .01262, find

the value of Px 10 .

23.

Let 11 denote the accrued cost random variable in the 11th year for a discrete whole life

insurance of amount 1000 issued to (40). Calculate the value of Var ( 11| K 40 10), given the

following values:

i .06,

24.

Let

0 L ( Ax )

a40 14.8166

a50 13.2669

a51 13.0803

denote the present value of loss at issue for a fully continuous whole life contract

20 V ( Ax ).

Var[0 L ( Ax )] .20

2

Ax .30

Ax 20 .70

25.

A 2-year endowment contract issued to (x) has a failure benefit of 1000 plus the reserve at the end

of the year of failure and a pure endowment benefit of 1000. Given that i .10, q x .10, and

q x 1 .11, calculate the net level benefit premium.

26.

Let Tx and Ty be independent future lifetime random variables. Given q x .080, q y .004,

t

-9-

27.

Let T80 and T85 be independent random variables with uniform distributions with 100. Find

the probability that the second failure occurs within five years from now.

28.

A discrete unit benefit contingent contract is issued to the last-survivor status ( xx ), where the

two future lifetime random variables Tx are independent. The contract is funded by discrete net

annual premiums, which are reduced by 25% after the first failure. Find the value of the initial net

annual premium, under the equivalence principle, given the following values:

Ax .40

Axx .55

ax 10.00

29.

The APV for a last-survivor whole life insurance on ( xy ), with unit benefit paid at the instant of

failure of the status, was calculated assuming independent future lifetimes for ( x) and ( y ) with

constant hazard rate .06 for each. It is now discovered that although the total hazard rate of .06 is

correct, the two lifetimes are not independent since each includes a common shock hazard factor

with constant force .02. The force of interest used in the calculation is .05. Calculate the

increase in the APV that results from recognition of the common shock element.

30.

Decrement 1 is mortality, which is governed by a uniform survival distribution with 100, and

Decrement 2 is leaving academic employment, which is governed by the HRF (2)

y .05, for all

y 50. Find the probability that this professor remains in academic employment for at least five

years but less than ten years.

31.

Find the value of px(1) , given q x(1) .48, q x(2) .32, q x(3) .16, and each decrement is uniformly

distributed over ( x, x1) in the multiple-decrement context.

32.

Decrement 1 is uniformly distributed over the year of age in its associated single-decrement table

with qx(1) .100. Decrement 2 always occurs at age x .70 in its associated single-decrement

table with qx(2) .125. Find the value of q x(2) .

33.

(a) What is the expected waiting time until the tenth event occurs?

(b) What is the probability that the 11th event will occur more than two days after the 10th event?

34.

During a certain type of epidemic, infections occur in a population at a Poisson rate of 20 per day,

but are not immediately identified. The time elapsed from onset of the infection to its

identification is an exponential random variable with mean of 7 days. Find the expected number

of identified infections over a 10-day period.

-10-

1.

2

We have S (0) b 1 and S (k ) ak 2 1 0. Thus a 12 , so S ( x) 1 x 2 . Then

0 S ( y ) dy

k k 2 k 1 k 2 k 60,

3

3

3k

2

so k 90, and thus a 1 . Finally, S (m) 1 m 1 , which leads to m 2 4050, and

8100

8100 2

m 45 2.

E[ X ]

2.

Recall that

x t

t px

e 0 x r dr e 0

y dy

Here

45

10 p35

.81 e 35 ky dy

e

12 k (45) 2 12 k (35)2

e400 k ,

and

60

20 p40

e 40 ky dy

e

12 k (60) 2 12 k (40) 2

e1000 k

e400 k

3.

2.5

t px

S ( x t )

1 t ,

S ( x)

x

1

mx

0 t px x t dt

1

0 t px dt

1

0 1 x dt

1

0

x t

x dt

0 dt

1

0 ( x t )

dt

1

.

x .50

Then

mx

1

1 1

1 x ,

1 .50mx

.50

.50

x

mx .50

as required.

-11-

4.

The survival model is uniform. The fact that e0 25 tells us that 50. Then T10 is uniform over

(0, 40), so its variance is

5.

(40)2

133.33.

12

q80

.0202 to solve for q80 .02. Similarly we find q81 .04 and

1 .50q80

q82 .06. Arbitrarily let 80 1000, so

81 (.98)(1000) 980,

82 (.96)(980) 940.80,

and

83 (.94)(940.80) 884.352.

Then

2 q80.5 1

1 (940.80 884.352)

82.5

1 2 1

80.5

2 (1000 980)

1 912.576 .07821.

990

6.

We start with

3

e x:3

px dt

px dt px

1

0

p x 1 dt px px 1

1

0

px 2 dt.

1

t p x dt

( px )t dt

( px )t

ln p x

1 px

.

ln px

But

px e x and

x

1 px

1 e ,

ln px

x

so

x

x 1

x 2

o

e x:3 1 e

e x 1 e

e x e x 1 1 e

x

x 1

x 2

.9754 (.9512)(.9744) (.9512)(.9493)(.9730) 2.78084.

-12-

7.

.90 q[60].60

.40 q[60].60

.40q[60]

.40q[60]

1

.50q[60]1

1 .60q[60] 1 .60q[60]

Here

[60]1

79,954

1

.00832248

[60]

80,625

q[60] 1

and

q[60]1 1

62

78,839

1

.01394552,

[60]1

79,954

so

.90 q[60].60

(.40)(.00832248)

1 (.60)(.00832248)

(.40)(.00832248)

1

(.50)(.01394552)

1

(.60)(.00832248

8.

A51 A50 A51 v q50 v p50 A51

A51 (1v p50 ) v q50

1.02 1.02

Similarly,

A51 v q50 v p50 2A51

A51 2A50

A51 1 .98 2 .02 2 .005,

(1.02) (1.02)

Then

Var ( Z 51 )

-13-

9.

so we have

FZ40 ( z ) ST40 ln z .

But ST40 (t ) t p40 1 t

1 t under a uniform distribution with 110. Therefore,

40

70

FZ 40 ( z ) 1

ln z

1 ln z ,

70

3.50

f Z 40 ( z ) d FZ 40 ( z ) 1 ,

dz

3.50 z

and finally

f Z 40 (.80)

10.

1

.35714.

(3.50)(.80)

( IA) x

k v k k 1| qx

k 1

k 1

k 2

v k k 1| qx (k 1) vk k 1|qx.

Let r k 1 so k r 1. Then

( IA) x Ax r v r 1 r | qx

r 1

Ax v px r v r r 1| qx 1 Ax 1 Ex ( IA) x 1.

r 1

1 E35

( IA)35 A35 1E35 ( IA)36 .

Then

( IA)36

( IA)35 A35

3.711 .130 3.80957.

.940

1 E35

-14-

11.

The relationship given by Equation (5.64b) holds for the second moment functions using an interest

rate based on 2 . We have

2 1

Ax:2

12.

(1.12)2 1 .10

(.90)(.20)

i 2A1x:2

2

2

ln(1.12) (1.12)

(1.12)4

1.12240(.07972 .11439) .21787.

Recall that

Var (aTx ) Var (Yx )

Ax Ax 2

.

2

We know that

Ax 1 a x 1 10

and

2

Ax 1 2 2 ax 1 14.75 .

Then

Var (Yx )

(114.75 ) (110 ) 2

5.25 100 2 50,

2

2

Ax 1 (.035)(10) .65.

13.

ax 1 v p x v 2 2 px

1 e e e 2 e 2

1 e ( ) (e ( ) ) 2

1

1

20.82075,

( )

[.01 ln(1.04)]

1 e

1 e

so

x

5| a

ax ax:5 16.27875.

Then S 5| ax if 17 payments are made, which occurs if ( x) survives to age x 21. This means

that

Pr ( S 5| ax )

21 p x

e (21)(.01) .81058.

-15-

14.

Ax i (1 d ax )

i id ax

i i d ax .

15.

APV 1 2 v px 3 v 2 2 px

1 (2)(.90)(.80) (3)(.90) 2 (.80)(.75)

3.898.

The present value of payments actually made is 1 2v 2.80 if only two payments are made,

and 2.80 3v 2 5.23 if all three payments are made. Then for the present value of payments

actually made to exceed the APV, survival to time t 2 is required, the probability of which is

(.80)(.75) .60.

16.

We have

1000 P Ax:n

1000 Ax:n

(1000)(.804)

.

ax:n

ax:n

ax:n

1 Ax:n

,

d

Ax:n Ax1:n n E x

i A1x:n n E x .05 A1x:n .600 804,

ln(1.05)

.200. Then

.05

so

.800 5.20

ax:n 1 .04

1.04

and finally

1000 P Ax:n

(1000)(.804)

154.62.

5.20

-16-

17.

A A

1 A A

d a

Px

d

Var ( Lx ) 1

.30,

so

2

Ax Ax 2 (.30)(d ax )2 .

E L*x Ax 1 P P

d

d

(1 d ax ) 1 P P

d

d

P

1 d ax P ax P .20,

d

d

ax

Now observe that

A A

P d (.30)( d a )

d

Var ( L*x ) 1 P

d

(.30)(d a )

1.20

d ax

18.

P P ( Ax ) ,

Ax

Ax

.

2

and

2

-17-

Var L ( Ax ) 1

( )2 2

2 ( 2 ) 2

( 2 2 2 ) 2 ( 2 )

2 ( 2 )

3

2

2

3

2

2 2 2

( 2 )

19.

, as required.

2

G ax:20 Ax .05 .02ax .03G ax:20 .

Then

G

Ax .05 .02ax

(1.03)ax:20

(.97)(10)

.06701.

20.

1 Ex

1 Ex

1000 .33251

.10 280.51.

1

(1.06) (.90) .90

1000 2Vx:3 1000 Ax 2:1 Px:3

610.89 280.51 330.38.

-18-

21.

L 400 (400)(.185825) 289.31

1.10

if failure occurs in the first year, which happens with probability qx . The loss will be

L

1.10

1.10 2

if failure occurs in the second year, which happens with probability px q x 1. Certainly the loss will

be less than 190 if ( x) survives to age x 2, so we can conclude that the loss is less than 190 with

probability px .

To find px we first use

1

1Vx:2

v q x 1 .185825 .04145,

Px1:2

qx

px qx 1

1 px

.25 px

1.10 (1.10)2

1.10 (1.10)2

px

px

1 1.10

1 1.10

(1.10)(1 px ) .25 px

.185825,

(1.10)2 1.10 p x

22.

(9 V P )(1i) 1000qx 9 10V p x 9 ,

we have

(322.87 32.88)(1.06) 12.62 10V (.98738),

which solves for 10 V 369.13. At duration 10 the contract is paid up, so the reserve

prospectively is 1000 Ax 10 369.13. Then

A

Px 10 x 10 1.36913

.03312.

.36913

ax 10

.06 /1.06

-19-

23.

Var (11 | K 40 10) v 2 (1 11V ) 2 q50 p50 .

Here we have

a

1000 11V40 1000 1 51 117.19.

a

40

11V

p50

(a50 1)(1i )

(12.2669)(1.06)

.99408.

a51

13.0803

Then

Var (11 | K 40 10) (1.06)2 (1000 117.19)2 (.99408)(.00592) 4081.93.

24.

2

ax

1 Ax

so

(.30 Ax 2 ) .20(1 2 Ax Ax 2 )

or

1.20 Ax 2 .40 Ax .10 0,

20 V ( Ax )

25.

ax 20

1 Ax 20

1

1 .30 .40.

ax

.50

1 Ax

When the failure benefit is a fixed amount plus the benefit reserve, we use the recursive relationship

approach. For the first year, where 0 V 0, we have

P (1 i ) qx (1000 1V ) p x 1V 1000qx 1 V ,

so

1V

(1V P )(1i ) q x 1 (1000 2V ) px 1 2V ,

so

2V

P (1.10) 100 P (1.10) 110 P

s2 .10 220.

a2 .10

-20-

26.

t

p xy t p x t p y (1.080t 2 )(1.004t 2 )

1 .084t 2 .00032t 4 ,

d t pxy 2(.084)t .00128t 3 ,

dt

27.

5 q80:85

1 5 p80:85

1 5 p80 5 p85 5 p80:85

1 1 5 1 5 1 5 1 5

20

15

20

15

1 15 10 15 10 1 .

20 15 20 15

12

Alternatively,

5 q80:85

28.

5 q80 5 q85 5 5 1 .

20 15

12

The APV of the benefit is Axx Ax Ax Axx . The APV of the premium stream is

P axx .75 P( axx axx )

P (1.50ax .50axx ).

Ax .40 1 d ax 1 10d ,

axx

1 Axx

.45 7.50.

d

.06

Then

2 Ax Axx

1.50ax .50axx

(2)(.40) .55

(1.50)(10.00) (.50)(7.50)

.02222.

-21-

29.

Axy Ax Ay Axy .06 .06 .12 .38503.

.11 .11 .17

Recognition of the common shock hazard means that x y .06 as before, but the joint

hazard rate is now

Now the APV is

Axy .06 .06 .10 .42424,

.11 .11 .15

so the difference is

30.

( )

( )

We seek the value of 5 p50

10 p50

. We have

( )

p50

and

10

(1)

5 p50

5 p50

50

( )

p50

1 10 e (.05)(10) .48522,

50

so

5

31.

( )

( )

p50

10 p50

.70092 .48522 .21570.

Recall that

q x( ) qx(1) qx(2) qx(3) .96,

px(1) ( px( ) ) qx

(1)

32.

/ q x( )

single-decrement

environment

and

is

uniformly

distributed.

Therefore

( )

(1)

(.70)(.100) .070. If we assume an arbitrary radix of x 1000, then we have 70

.70 q x

decrements in the interval so we have 930 survivors at age x .70. Then there are

(930)(.125) 116.25 occurrences of Decrement 2 at age x .70, and therefore in ( x, x 1], so

the probability is

q x(2) 116.25 .11625.

1000

-22-

33.

(a) The waiting time for the tenth event, denoted S10 , has a gamma distribution with parameters

10 and 2. Then

E[ S10 ] 10 5.

(b) The interarrival time for the eleventh event, denoted T11 , has an exponential distribution with

parameter 2. Then

Pr (T11 2) e2 e4 .01832.

34.

Note that the process counting the number of infections occurring is a standard (homogeneous)

Poisson process with 20 (per day), so the expected number of infections would be 200 in a

10-day period. But we wish to count the number of identifications in the 10-day period, not the

number of actual infections. Let t 0 denote the start of the 10-day period.

10 t

10

For an infection occurring at time t, the probability of being identified by time 10 is 1 e (10t ) / 7 ,

since the time-to-identification has an exponential distribution with mean 7. Thus the rate

function for the process counting all occurring infections is the constant (t ) 20, but the rate

function for the process counting only infections that get identified by time 10 is the non-constant

(t ) 20(1e (10 t ) / 7 ),

which identifies this process as a nonstationary (nonhomogeneous) Poisson process. Then the

expected number of identifications in the interval from t 0 to t 10 is given by

10

(t ) dt

10

20(1e (10t ) / 7 ) dt

10

20 dt 20 e 10 / 7 et / 7 dt

m(10)

10

10

10

-23-

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