UNIVERSITY OF GHANA

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1stSEMESTER EXAMINATIONS: 2017/2018

MPHIL RISK MANAGEMENT AND INSURANCE

FINC 673: ACTUARIAL MATHEMATICS

TIME ALLOWED: 3 Hours

___________________________________________________________________________

INSTRUCTIONS

Answer Four Questions only

The usual actuarial notations apply to all questions

Question 1:
a) Discuss two main challenges that an actuary faces in the discharge of his
or her work. Propose ways by which these challenges can be mitigated.
[10 marks]
b) What is endowment insurance?
You are given that 𝑞40 = 0.1, 𝑞41 = 0.2, the rate of interest is a constant
25% and that UDD holds. Find the present value of a 2-year endowment
insurance on (40), paying 1000 at the moment of death if this occurs
before age 42, and 1000 at age 42 if (40) is alive at that time.
[15 marks]

Question 2:
a) Given a cashflow vector 𝑐 and a discount function 𝑣, let 𝑣′ be another
discount function. Define a new cashflow vector 𝑐′ whose entry is given
by
𝑐𝑘′ = 𝑐𝑘 + [𝑣 ′ (𝑘, 𝑘 + 1) − 𝑣 (𝑘, 𝑘 + 1)]𝐵𝑘+1
Show that 𝐵𝑘 (𝑐; 𝑣 ) = 𝐵𝑘 (𝑐′; 𝑣′).
[Hint: use the recursion formula 𝐵𝑘+1 = (𝐵𝑘 + 𝑐𝑘 )𝑣(𝑘 + 1, 𝑘)]
[12 marks]
b) You are given 𝑎̈ 60 = 12, 10𝑝50 = 0.8, and interest is a constant 6%.
Dr. Charles Andoh
FINC 673 Page 1 of 3
 i) Find the net single premium for an annuity on (50) with level benefit
payments of 1000 per month, beginning at age 50 and continuing for
life, with the provision that the first 120 monthly payments are
guaranteed, regardless of whether (50) is alive or not.
ii) Redo i), assuming now the first payment is made at the end of one
month.
[13 marks]

Question 3:
a) State and prove the endowment identity.
[Hint: 𝐴𝑥 (𝑏) = 𝑎̈ 𝑥 (∆𝑏) − 𝑎̈ 𝑥 (𝑑 ∗ 𝑏)]
[7 marks]
b) For a 4-year endowment insurance on (60), 𝑏2 = 100, 𝑏3 = 200 and
there is a pure endowment of 200 paid at age 64 if the insured is then
alive. You are given 𝜋2 = 10, 𝜋3 = 20, 𝑞62 = 0.1. The interest rate after
2 years is 25%. Find 2𝑉 and 3𝑉 .
[11 marks]
c) You are given that 5𝑝40 = 0.8, 10𝑝45 = 0.6, 10𝑝55 = 0.4. Find the
probability that (40) will die between the ages of 55 and 65.
[7 marks]

Question 4:
a) Explain the following actuarial notations:
o
i) e15
ii) 1∞
iii) 𝑎𝑚 (𝑐, 𝑦)
iv) 𝑃̅
v) ̅
𝑡𝑉 (𝑐, 𝑦)
[5 marks]
b) A certain electrical appliance is sold with a 5-year guarantee. This
provides that the full purchase price is refunded if the product fails within
2 years, and half of the purchase price is refunded if the product fails in
the following 3 years. A study shows that out of a typical batch of 100
items, there will be 2 failures in the first year, 3 failures in the second
year, and 4 failures per year after that. Assuming that the interest rate is a
constant 5% and that the reimbursement is made at the end of the year of
failure, what is the cost of this guarantee to the manufacturer, as a
percentage of the purchase price?

[11 marks]

Dr. Charles Andoh

FINC 673 Page 2 of 3
 c) A person age 30 purchases a life annuity that provides 12000 per year
for life with the first payment at age 60. If (30) lives to age 60, she will
receive at least 15 payments. Nothing is paid if death occurs at age 60.
Find a formula for the premium.

[9 marks]

Question 5:
a) Distinguish between the following types of insurance policies: fully
continuous policy, fully discrete policy and semi-continuous policy.
[6 marks]

b) A life annuity on (𝑥) provides for annual benefit payments for life
beginning at age 𝑥. The initial benefit payment is 1000 and each
subsequent payment increases by 6% (i.e. the benefit payment at age
𝑥 + 1 is 1060, the payment at age 𝑥 + 2 is 1000(1.06)2 , and so on). The
first 10 benefits payments are guaranteed and will be made regardless of
whether (𝑥) is alive or not. The interest rate is a constant 6%. You are
given that 10𝑝𝑥 = 0.9 and 𝑒𝑥+10 = 10. Find the present value of this
contract.
[13 marks]

c) You are given the investment discount function 𝑣 where 𝑣 (4,9) =

0.3, 𝑣 (6,4) = 1.2, 𝑣 (2,6) = 0.4.
i) How much must you invest at time 2 to accumulate 50 at time 9?
ii) If you invest 150 at time 4, how much will you accumulate at time
9?
[6 marks]

Dr. Charles Andoh

FINC 673 Page 3 of 3