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FIRE 626: Risk Management Instructor: Dr.

Puneet Prakash
Assignment # 4: Due at the beginning of class on Tuesday Feb 21, 2012 . A hard copy of typed answers should be turned in at the beginning of the class. The first page would contain the executive summary and should be titled Executive Summary. The remaining sheets should contain detailed solutions of individual problems. Grade will depend upon not only the solutions but also the presentation. Please do not forget to put your name on top of each page. Before you print your answers, ensure that answers fit a page properly (either portrait or landscape) and they are not split over pages arbitrarily. Think of your answer report as work that you are turning in to your boss at work, or even better your customers. Finally, staple or pin the pages together. FAILURE TO FOLLOW INSTRUCTIONS WILL RESULT IN A GRADE OF 0. The assignment is designed to help students understand the concept of probability an essential component in risk analysis. Students will use the EXCEL skills taught in class to complete the assignment.


A person, aged 40 as of 1/1/10, will receive $5000 if alive on 1/1/2018, and another $4000 if alive on 1/1/2027. Assume a. From 1/1/10 to 12/31/17, the nominal annual interest rate will be 6%, compounded monthly. b. From 1/1/18 to 12/31/27, the nominal annual interest rate will be 8%, compounded daily. Using the mortality table given in Sheet titled Mortality Table in the EXCEL workbook Data for HW 2, determine the actuarial present value of the two payments on 1/1/10. You have been asked to find the premium for the following life insurance policy issued to a male aged 30. The characteristics of the policy are as follows: In the case of death during the first 15 years, a lump sum payment of $200,000 will be made. Beginning at age 46, the death the benefit will equal 200,000*[0.05*(66-X)] where X is the age of the person at the beginning of the year. The death benefit from his 66th birthday and on will be $0. In case of survival to age 66, the policyholder would like to receive a life annuity of $20,000*[1+.02*(X-66)] for each year the person is alive. Assume the policyholder dies at age 100. Annuity payments will be made at the beginning of the year. Death proceeds will be paid at the end of the year of death. All premium payments will be made, if the person is alive, at the beginning of the year. Assume premium payments increase 10 percent each year and will be paid for 10 years. Assume a 7 percent discount rate. Determine the premium that will be paid at policy inception. Use the Data Table function to recalculate the premium paid at inception at each of the following discount rates: 2%, 4%, 6%, 8%, and 10%. Download the spreadsheet from the WebCT entitled cummpd.xls. The file contains a cumulative paid loss triangle for a large national company writing general liability insurance. The spreadsheet also contains the actual (not estimated) losses paid by the at the end of the thirteenth development year - a statistic not usually known a priori. Use the data set and answer the following questions: a. Use the link ratio/chain ladder method to develop the losses to ultimate. b. Use the Taylor Separation method to develop the losses to ultimate. You should forecast the calendar year effects and use the forecasted lambdas to estimate the ultimate incurred losses. Be sure to document any assumptions you make to forecast the lambdas. Feel free to experiment with models other than a linear model to forecast the lambdas if appropriate. Report your best model and document any assumptions you make. c. Calculate the average percentage error for each estimation methodology by computing, for each accident year, the error of your estimate of ultimate losses relative to the ultimate losses that were actually paid by the insurer. How accurate was your forecast? Report and comment on your results in the executive summary of this report.