Department of Mathematics and Statistics Examination: This Paper Is For Bentley Campus Students

Semester 2 & Trimester 3B, 2015
STAT3002 Risk Analysis and Credibility Theory

Venue ____________________
Student Number |__|__|__|__|__|__|__|__|
Family Name _____________________
First Name _____________________
Department of Mathematics and Statistics

EXAMINATION

This paper is for Bentley Campus students.
This examination has a total of 100 marks.
Examination Duration: 180 minutes
Reading Time: 10 minutes
Exam Conditions:
For Examiner Use Only
This is a CLOSED BOOK exam - no text books or written materials permitted
Q Mark
Students are permitted to write notes during reading time in the margins or the
reverse of the exam paper 1
This paper MUST NOT be released to students after the exam 2
The students exam paper must be returned inside the answer book 3
A Scientific calculator is permitted in this exam 4
Materials Permitted In The Exam Venue: 5
Actuarial Science -Selected Formulae 6
7
Materials To Be Supplied To Students:
8
Statistical tables and formulae book
9
Instructions To Students:
10
11
12
13
14
15
16
17
18
Total ________
Page 1 of 21
IMPORTANT INFORMATION
The possession or use of mobile phones, or any other device capable of communicating information, is prohibited during
examinations.
Electronic Organisers/PDAs (with the exception of calculators) or other similar devices capable of storing text or restricted
information are prohibited during examinations.
Only calculators approved specifically by the school/department may be used during this examination. Prior to the
commencement of the examination, calculators will be checked for compliance by the examiner.
Any breach of examination regulations will be considered cheating and appropriate action will be taken in accordance
with University policy.
Page 2 of 21
Question 1
The number of claims from a certain portfolio of motor policies has a Poisson distribution
with parameter . The parameter varies over the portfolio in such a way that has an
exponential distribution with parameter .
Determine the unconditional claim number distribution for this portfolio.

(7 marks)
(A total of 7 marks for this question)

Question 2 is on the following page…
Page 3 of 21
Question 2
The loss severity distribution for a portfolio of household insurance policies is assumed to
be with parameters and .
Next year, losses are expected to increase by 7%, and the insurer has decided to introduce
a policyholder excess of $200.
Calculate the probability that a loss next year is borne entirely by the policyholder.
(4 marks)

Page 4 of 21
Question 3
An insurance company has an excess of loss reinsurance contract with retention of

$30,000. Over the last year, the insurer paid the following claims:
$13,270 $2,620 $490 $44,300
In addition, the insurer paid the retained amount of $30,000 on 6 claims with the excess
being paid by the reinsurer.
The insurer believes that the distribution of gross claim amounts is exponential with mean
.
Calculate the maximum likelihood estimate of based on the information given.

(7 marks)

Page 5 of 21
Question 4
If X = I * B where is an indicator variable taking the value 1 with probability

and the value 0 otherwise, and has a lognormal distribution with parameters and
, find and .
(8 marks)
Continues on the next page…
Page 6 of 21
Use the following space to answer Question 4.

Page 7 of 21
Question 5
The aggregate claim amount from a portfolio has a compound negative binomial
distribution.
a. If is Type 2 negative binomial distribution with and , and has a

gamma distribution with and , find
(4 marks)
b. Hence, by using , find the mean and variance of . Using a normal
approximation, estimate the aggregate amount which will be exceeded with
probability 0.2%.
(9 marks)
(Total: 13 marks)
Page 8 of 21
Use the following space to answer Question 5

Page 9 of 21
Question 6
An insurance company has a portfolio of policies, for which claims occur as a Poisson
process at a rate of 25 claims per year. The claim amounts follow a generalised (three
parameter) Pareto distribution with parameters and . The insurer
includes a premium loading of 10% in its premiums for this portfolio. You may assume
that the aggregate claim amount for a year is approximately normally distributed.
a. Find , the initial capital required if the insurer insists that the probability of ruin at
the end of the first year can only be 1%.
(8 marks)
b. If the insurer takes out proportional reinsurance, reinsuring 30% of the loss with a
reinsurer which loads its premiums by 45%, find the new level of initial capital
required, and explain how the reinsurance has changed your answer in part (a).
(8 marks)
(Total: 16 marks)
Page 10 of 21
Page 11 of 21

Page 12 of 21
Question 7
One year ago, a company insured a portfolio of 50 independent policies. Under each
policy at most one claim can be made in any year and the probability of a claim being
made in a year, denoted , is the same for all policies. Let denote the total number of
claims occurring in the past year.
a. Show that the maximum likelihood estimate of is .

(4 marks)
b. Now, suppose that , regarded as a random variable, has prior distribution with
parameters and .
i. Show that the posterior distribution of is also a distribution and find the
parameters of this distribution in terms of and .
(3 marks)
ii. The posterior mean of can be written in the form of a credibility estimate.
Determine the weight .
(4 marks)
iii. If the number of claims is 8, the posterior mean is and is . Determine
the values for .
(4 marks)
(Total: 15 marks)
Page 13 of 21
Page 14 of 21

Page 15 of 21
Question 8
An insurance company has a portfolio with expected claim payments per unit of time
equal to 80. Initial surplus is 200. If the company were to experience claims, , at times
shown below:
0.5 1.2 1.8 3.0 3.6

100 75 200 200 50
then what is the minimum relative security loading such that ruin would not occur during
the time interval ? (Answer to the nearest 0.1).
(8 marks)

Page 16 of 21
Question 9
Aggregate claims on a general insurance company’s portfolio form a compound Poisson

process with parameter .
Individual claims have an exponential distribution with mean 100. The company applies
a premium loading. The insurer effects proportional reinsurance with a retained
proportion of . The reinsurer applies a 30% premium loading.
a. Calculate the minimum value of such that the insurer’s net income is greater than
the expected net claims.
(5 marks)
b. Hence, calculate the adjustment coefficient.
(6 marks)
(Total: 11 marks)
Page 17 of 21

Page 18 of 21
Question 10
The tables below show the cumulative cost of incurred claims and the number of claims
reported each year for a certain cohort of insurance policies.
Cumulative cost of incurred claims:
Development Year
Accident Year 0 1 2
0 288 634 893
1 465 980
2 773
The numbers of claims reported in each year are:
Development Year
Accident Year 0 1 2
0 110 85 55
1 167 113
2 285
Given that the total amount paid in claims to date, relating to accident years 0, 1 and 2, is
$3,750, calculate the outstanding claims reserve using the average cost per claim method.
Indicate any assumptions made.
(11 marks)
Page 19 of 21
Page 20 of 21

END OF EXAMINATION
Page 21 of 21

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Semester 2 & Trimester 3B, 2015

STAT3002 Risk Analysis and Credibility Theory

Student Number |__|__|__|__|__|__|__|__|

Family Name _____________________

First Name _____________________

Department of Mathematics and Statistics

STAT3002 Risk Analysis and Credibility Theory

This examination has a total of 100 marks.

Examination Duration: 180 minutes

Reading Time: 10 minutes

This paper MUST NOT be released to students after the exam 2

A Scientific calculator is permitted in this exam 4

Materials Permitted In The Exam Venue: 5

Actuarial Science -Selected Formulae 6

Determine the unconditional claim number distribution for this portfolio.

(A total of 7 marks for this question)

(A total of 4 marks for this question)

An insurance company has an excess of loss reinsurance contract with retention of

$13,270 $2,620 $490 $44,300

Calculate the maximum likelihood estimate of based on the information given.

(A total of 7 marks for this question)

If X = I * B where is an indicator variable taking the value 1 with probability

Continues on the next page…

Use the following space to answer Question 4.

(A total of 8 marks for this question)

a. If is Type 2 negative binomial distribution with and , and has a

Continues on the next page…

Use the following space to answer Question 5

(A total of 13 marks for this question)

Continues on the next page…

Use the following space to answer Question 6

Continues on the next page…

Use the following space to answer Question 6

(A total of 16 marks for this question)

a. Show that the maximum likelihood estimate of is .

Continues on the next page…

Use the following space to answer Question 7

Continues on the next page…

Use the following space to answer Question 7

(A total of 15 marks for this question)

0.5 1.2 1.8 3.0 3.6

(A total of 8 marks for this question)

Aggregate claims on a general insurance company’s portfolio form a compound Poisson

Continues on the next page…

Use the following space to answer Question 9.

(A total of 11 marks for this question)

Cumulative cost of incurred claims:

The numbers of claims reported in each year are:

Continues on the next page…

Use the following space to answer Question 10.

Continues on the next page…

Use the following space to answer Question 10.

(A total of 11 marks for this question)

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