MASENO UNIVERSITY UNIVERSITY EXAMINATIONS 2014/2015 FOURTH YEAR SECOND SEMESTER EXAMINATIONS FOR THE DEGREE OF BACHELOR OF SCIENCE IN ACTUARIAL SCIENCE WITH INFORMATION TECHNOLOGY (MAIN CAMPUS) MAC 406: RISK AND CREDIBILITY THEORY Date: 3 August 2015 ‘Time: 11.00 -1.00 pm INSTRUCTIONS: + Attempt question ONE and any other TWO questions. waseno unvensiry ssosozooscennnen ©Question One (30 marks) {a] Assume the loss modelis $= X, + Xz -+--Xy where X has exponential distribution with mean 0 and N has Poisson distribution with mean A. Find the mean and variance ofS. (6 marks) (b} An employer self insures a life insurance program with the following characteristics (i) Given that a claim has occurred, the claim amount is 2,000 with the probability 0.4 and 3,000 with probability of 0.6 (il) The number of claims has the following distribution n flo) 1/36 va 3/8 ya wis Determine the employers expected cost of premium and the variance. (6 marks) (c) Assume X,,X2 and.Xs are mutually independent random variables with probability functions as given below if $= X, +, + Xy and (5) = 0.06. Determine p Necessary [x AG) kG) AG) 0 P 06 025 1 1p 02 025 }2 ° 04 025 | 3 ° o1 02s | (4) For a particular policyholder, the manual premium is 600 per year. The past claims experience is given in the table below. Assess whether full or partial credibility is appropriate and determine the net premium for thenext year’s claims assuming the normal approximation. Use = 0.05 and p = 09 (6 marks) (e} What are the factors affecting the application of full credibility explain how. they affect it. {6 marks) Question Two (20 marks) (a) An insurance portfolio produces N claims, where fa PeN-=n} 0 OS 1 on 3 04 Individual claim amounts have the following distribution: - - fx) 1 og 10 on Individual claim amounts and N are mutually independent. Calculate the variance of the aggregates claims (20 marks) (b) The observed mean (and the standard deviation) of the number of claims and the individual losses over the past 10 months are 6.7(2.3) and 179,247(52,141) respectively. Determine the mean and the variance of aggregate claims per month. Using normal and lognormal distributions as approximating distributions of aggregate claims, calculate the probability that claims will exceed 160% of the expected costs.(20 marks) Question Three (20 marks} (a) Let X, be the outcome of a single trial and let E(X,/%;) be the expected value of the outcome of a second trial. You are given the following information [Outcome,T Pr(X,=1) Buhiman Estimate of Bayesian Estimate of | E67) 60%) 1 3 272 26 | 3 WIL 78 L2 13 30.57 Determine the Bayesian Estimate for E04) (20 marks) (b)Each ofthe two classes, A and & has the same numberof risks. n lass A the numberof elaime ner rick per venr has E75 and variance 6/36 while the amount of a single claim has mean 4 and variance 20. n class B the number of claims per risk per year has mean 5/6 and variance 5/36 while the amount ofa single claim has mean 2 and variance 5. A risk is selected at random from one of the two classes and is observed for four years (i) Determine the value of Z for Buhimann credibility for the observed puire premium (i) Supposethe pure premium calculated from the four ‘observations is 0.25. Determine the Buhlmann credibility estimate for the risk’s pure premium. (20 marks) Question Four (20 marks) (2) Three urns contain balls marked either O or 1. in urn A, 10% are marked 0; in urn B, 60% are marked O; and in urn C, 80% are marked 0. An urn is selected at random and three balls selected without replacement. The total of the values is 1. Three more balls are selected with replacement from the same urn. (i) Determine the expected total of the three balls using Bayes’ theorem, (il) Determine the expected total ofthe three balls using. BuhImann credibility (20 marks) (b)The number of claims follows the Poisson distribution with parameter A. A particular insured had three claims in the past three years. ifthe Ahas pdf f{A) = 4X%, A> 1. Determine the value of k used in Buhimann's credibility formula, (20 Marks) Question Five (20 marks) ‘The observed mean (and the standard deviation) of the number of claims and the individual losses over the past 10 months are 6.7(2.3) ‘and 179,247(52,141) respectively. Determine the mean and the variance of aggregate claims per month. Using normal and lognormal distributions as approximating distributions of aggregate claims, calculate the probability that claims will exceed 160% of the expected costs.