CASE STUDY 6

1. According to the National Association of Insurance

Commissioners (NAIC), the average premium for homeowner's
insurance in the United States in a recent year was $1,034.
Suppose these premium rates are uniformly distributed across the
country from $535 to $1533. What percentage rates are between
$800 and $1200? What percentage are more than $1350?

Answer:

Given:
Mean = $1,034
a = $535
b = $1,533
Find:
P(800<x<1200) = ?
P(y>1350) = ?
Solution:
For P(800<x<1200):
b - a = 1533 - 535 = 998
c - d = 1220 - 800 = 400
P(800<x<1200) = 400 / 998 = 0.4008
P(800<x<1200 = 40.08%
For P(y>1350):
b - a = 1533 - 535 = 998
b - e = 1533 - 1350 = 183
P(y>1350) = 183 / 998 = 0.1834
P(y>1350) = 18.34%

2. A study by Quadrant Information Services commissioned by

Insure.com calculated auto insurance rates for each of the 50
states; and as a result, the average annual rate for the United
States was $1317. Suppose annual rates of auto insurance in the
United States are normally distributed with a standard deviation of
$324. Based on these data, what is the probability that a randomly
selected auto insurance rate in the United States would be greater
than $1750? What percentage of auto insurance rates would be less

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 than $1200? What percentage of auto insurance rates would be
between $1100 and $1500?
Answer:

2.1 2.2
Standard
Standard deviation 324 deviation 324
Mean 1317 Mean 1317
Cutoff point X 1750 Cutoff point X 1200

0.9092939
Cumulative probability = 4 35.9%
9.1%

Standard deviation 324 Standard deviation 324

n= 50 n= 50
Mean 1317 Mean 1317
Cutoff point X 1100 Cutoff point X 1500

0.251507602 0.713900135 46.2%

3. Homeowners do not make insurance claims very often. In fact,

the Oregon Insurance Division says that, on average, a homeowner
makes one claim every nine years. Suppose such homeowner claims
are Poisson distributed. What is the probability that it would be 15
years or more between claims for a homeowner? What percentage
of the time would it be less than 5 years between claims? According
to data released by the Insurance Information Institute, the claim
frequency for automobile collisions is 5.59 per 100 car years (a car
year is equal to 365 days of insured coverage for one vehicle). What
is the average “inter arrival time” for auto collisions in car years?
What do you think this average means? Assume that auto collisions
are Poisson distributed.

Answer:

Homeowners Claims are Poisson distributed.

There's I daim in every 9 years.

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 Number of years in each claim. Then inter-arrival times of claims
are exponentially distributed with mean 9 years

Let x be the time if has passed between claims

Pr ( x >, 15 ) = 1 - P ( 45 )
= 1 - F(is )
= 1 - (1 - exp- 1/19
= exp - 15 719
= 0. 4541 to 42p

Also in less than Syears between claims.

Pr ( X < 5 ) = F(s )
= 1 - exp - 5 / 19
= 0. 2314.

Claim Frequency for automobile, collision is 5. 59 per 100 car Years

5. 59 collision - 100 Car years
1 collision 100/5.59 = 17.89

The interval time is 17.89 Car years. This means the average time
between one collision to the next is 17. 89 car Years

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