SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT

BACHELOR OF ACTUARIAL SCIENCE

ACTUARIAL STATISTICS III/STOCHASTIC MODELLING – BAS410
TERM ASSIGNMENT
MARCH 2023
DUE 31 MARCH 2023

ATTEMPT ALL

Question One [Total 30 Marks]

(a)

(i) Let A, B, and C be any events, with P(B ∩ C) ≠ 0. Prove the following:
P(B |C) = P(B|A ∩ C) [2 marks]
(ii) Let A and B be events, with P(A) = ¾ and P(B) = ⅓. Show that:
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/12 ≤ P(A ∩ B) ≤ 1/3 [3 marks]

(b) The following multiple state model, with constant transition intensities µ and
ν, is used to represent the mortality and withdrawal experience of life
assurance policyholders between ages x and x + 1:

(i) Write down the generator matrix for the above model [3]
(ii) state the specific equations for the given process and provide the solutions for each of them.
[10]
(iii) Comment on possible assumptions underlying the above model [2]

(c) The conventional premise in multiple life contingencies is that the remaining
lifetimes of joint lives are independent. Data based evidence has led to the conclusion

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that joint life annuities are underpriced while last survivor annuities are overpriced.
There is also evidence of the short-term broken heart effect that weans as the widow/er
adjusts to the new status.

Present a multi-state model for this scenario and explain any possible notation and
relationships. [10]

Question Three [Total 35 Marks]

(a) The joint cdf of (X,Y) is

FX,Y(x,y) = 1 – e-2x –e-3y + e-(2x+3y) ; x,y > 0
= 0 elsewhere

By finding the marginal pdfs of X and Y, demonstrate how the intersection/product of X and
Y may be obtained for the following.

(i) Plot the PMF on a 3-D plane x, y and z = fX,Y(x,y) or alternatively use Cartesian (x-y) plane
with fX,Y(x,y) plots [4 marks]

Use the above diagram to find

(ii) P[(X = 1) ∩ (Y = 1) ] [3 marks]
(iii) P[(1 < X < 3) ∩ ( 1 < Y < 2)] [3 marks]

(b) A population of lives between the integer ages x and x + 1 is modelled using
the following sickness and death model

where s, r, m and n represent the forces of transition between the three states.

(i) Derive the expressions for the MLE estimates for each of the given parameters. [6]

During a period of investigation of three calendar years, the following data have been recorded
for lives aged between x and x + 1.

W1 = total waiting time in state 1 = 1237191 days

W2 = total waiting time in state 2 = 4237 days
q = number of healthy lives dying = 4
S = number of healthy lives falling sick = 9
R = number of sick lives recovering = 10
D = number of sick lives dying = 1

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(ii) Write down the likelihood function for the observed data. What assumptions are necessary
to construct this likelihood function? [4]
(iii) Derive the expressions for the MLE estimates for each pf the given parameters.
[6]
(iv) Using these data, determine estimates of σ, ρ, µ and ν. [3]
(v) Is there statistical evidence that r is greater than 1.250? Show all your calculations and
explain your reasoning clearly. [6]

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