SOCIETY OF ACTUARIES

EXAM M ACTUARIAL MODELS

EXAM M SAMPLE QUESTIONS

Copyright 2005 by the Society of Actuaries

Some of the questions in this study note are taken from past SOA examinations.

M-09-05

PRINTED IN U.S.A.

1.

For two independent lives now age 30 and 34, you are given: x 30 31 32 33 34 35 36 37

qx
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

Calculate the probability that the last death of these two lives will occur during the 3rd year from now (i.e. 2 q30:34 ).

(A) (B) (C) (D) (E)

0.01 0.03 0.14 0.18 0.24

2.

For a whole life insurance of 1000 on (x) with benefits payable at the moment of death: (i)

t =

0.04, 0.05,

0 < t 10 10 < t

(ii)

x (t ) =

0.06, 0 < t 10 0.07, 10 < t

Calculate the single benefit premium for this insurance. (A) (B) (C) (D) (E) 379 411 444 519 594

3.

A health plan implements an incentive to physicians to control hospitalization under which the physicians will be paid a bonus B equal to c times the amount by which total hospital claims are under 400 ( 0 c 1) . The effect the incentive plan will have on underlying hospital claims is modeled by assuming that the new total hospital claims will follow a two-parameter Pareto distribution with = 2 and = 300 .

E( B ) = 100 Calculate c. (A) (B) (C) (D) (E) 0.44 0.48 0.52 0.56 0.60

4.

Computer maintenance costs for a department are modeled as follows: (i) The distribution of the number of maintenance calls each machine will need in a year is Poisson with mean 3. The cost for a maintenance call has mean 80 and standard deviation 200. The number of maintenance calls and the costs of the maintenance calls are all mutually independent.

(ii) (iii)

The department must buy a maintenance contract to cover repairs if there is at least a 10% probability that aggregate maintenance costs in a given year will exceed 120% of the expected costs.

Using the normal approximation for the distribution of the aggregate maintenance costs, calculate the minimum number of computers needed to avoid purchasing a maintenance contract.

(A) (B) (C) (D) (E)

80 90 100 110 120

5.

A whole life policy provides that upon accidental death as a passenger on an airplane a benefit of 1,000,000 will be paid. If death occurs from other accidental causes, a death benefit of 500,000 will be paid. If death occurs from a cause other than an accident, a death benefit of 250,000 will be paid. You are given: (i) (ii)
(iii) (iv) (v)

Death benefits are payable at the moment of death.

( ) = 1/ 2, 000, 000 where (1) indicates accidental death as a passenger on an airplane.

1 2 ( ) = 1/ 250, 000 where (2) indicates death from other accidental causes. 3 ( ) = 1/10, 000 where (3) indicates non-accidental death.

= 0.06

Calculate the single benefit premium for this insurance.

(A) (B) (C) (D) (E)

450 460 470 480 490

6.

For a special fully discrete whole life insurance of 1000 on (40): (i) (ii) (iii) (iv) The level benefit premium for each of the first 20 years is . The benefit premium payable thereafter at age x is 1000 v qx , Mortality follows the Illustrative Life Table.

x = 60, 61, 62,

i = 0.06

Calculate . (A) (B) (C) (D) (E) 4.79 5.11 5.34 5.75 6.07

7.

For an annuity payable semiannually, you are given: (i) (ii) (iii) (iv) Deaths are uniformly distributed over each year of age.

q69 = 0.03 i = 0.06

1000 A70 = 530
2

Calculate a ( ) . 69 (A) (B) (C) (D) (E) 8.35 8.47 8.59 8.72 8.85

8.

For a sequence, u (k ) is defined by the following recursion formula

u (k ) = ( k ) + ( k ) u ( k 1) for k = 1, 2, 3,

(i)

(k ) =

qk 1 pk 1

(ii)

(k ) =

1+ i pk 1

(iii)

u ( 70 ) = 1.0

Which of the following is equal to u ( 40 ) ?

(A) (B) (C) (D) (E)

A30 A40 A40:30

1 A40:30 1 A40:30

9.

Subway trains arrive at a station at a Poisson rate of 20 per hour. 25% of the trains are express and 75% are local. The type of each train is independent of the types of preceding trains. An express gets you to the stop for work in 16 minutes and a local gets you there in 28 minutes. You always take the first train to arrive. Your co-worker always takes the first express. You both are waiting at the same station. Calculate the probability that the train you take will arrive at the stop for work before the train your co-worker takes. (A) (B) (C) (D) (E) 0.28 0.37 0.50 0.56 0.75

10.

For a fully discrete whole life insurance of 1000 on (40), the contract premium is the level annual benefit premium based on the mortality assumption at issue. At time 10, the actuary decides to increase the mortality rates for ages 50 and higher. You are given: (i) (ii) d = 0.05 Mortality assumptions: At issue Revised prospectively at time 10 (iii)
10 L k

q40 = 0.02, k = 0,1, 2,..., 49 q50 = 0.04, k = 0,1, 2,..., 24

is the prospective loss random variable at time 10 using the contract premium.

Calculate E[ 10 L K (40) 10] using the revised mortality assumption.

(A) (B) (C) (D) (E)

Less than 225 At least 225, but less than 250 At least 250, but less than 275 At least 275, but less than 300 At least 300

11.

For a group of individuals all age x, of which 30% are smokers and 70% are non-smokers, you are given: (i) (ii) (iii) (iv) (v) (vi)

= 0.10
Ax smoker = 0.444
Ax non-smoker = 0.286

T is the future lifetime of (x).

Var aT smoker = 8.818 Var aT non-smoker = 8.503

Calculate Var aT for an individual chosen at random from this group.

(A) (B) (C) (D) (E)

8.5 8.6 8.8 9.0 9.1

12.

T, the future lifetime of (0), has a spliced distribution.

(i) (ii)
f1 ( t ) follows the Illustrative Life Table. f 2 ( t ) follows DeMoivres law with = 100 .

(iii)

k f1 ( t ) , 0 t 50 fT ( t ) = 1.2 f 2 ( t ) , 50 < t

Calculate

10

p40 .

(A) (B) (C) (D) (E)

0.81 0.85 0.88 0.92 0.96

10

13.

A population has 30% who are smokers with a constant force of mortality 0.2 and 70% who are non-smokers with a constant force of mortality 0.1. Calculate the 75th percentile of the distribution of the future lifetime of an individual selected at random from this population. (A) (B) (C) (D) (E) 10.7 11.0 11.2 11.6 11.8

14.

Aggregate losses for a portfolio of policies are modeled as follows: (i) The number of losses before any coverage modifications follows a Poisson distribution with mean . The severity of each loss before any coverage modifications is uniformly distributed between 0 and b.

(ii)

The insurer would like to model the impact of imposing an ordinary deductible, d ( 0 < d < b ) , on each loss and reimbursing only a percentage, c ( 0 < c 1) , of each loss in excess of the deductible. It is assumed that the coverage modifications will not affect the loss distribution. The insurer models its claims with modified frequency and severity distributions. The modified claim amount is uniformly distributed on the interval 0, c ( b d ) . Determine the mean of the modified frequency distribution.

11

(A) (B) (C)

d b bd b bd b

(D)

(E)

15.

The RIP Life Insurance Company specializes in selling a fully discrete whole life insurance of 10,000 to 65 year olds by telephone. For each policy: (i) (ii) (iii) The annual contract premium is 500. Mortality follows the Illustrative Life Table.

i = 0.06

The number of telephone inquiries RIP receives follows a Poisson process with mean 50 per day. 20% of the inquiries result in the sale of a policy. The number of inquiries and the future lifetimes of all the insureds who purchase policies on a particular day are independent.

Using the normal approximation, calculate the probability that S, the total prospective loss at issue for all the policies sold on a particular day, will be less than zero.

(A) (B) (C) (D) (E)

0.33 0.50 0.67 0.84 0.99

12

16.

For a special fully discrete whole life insurance on (40): (i) The death benefit is 1000 for the first 20 years; 5000 for the next 5 years; 1000 thereafter. The annual benefit premium is 1000 P40 for the first 20 years; 5000 P40 for the next 5 years; thereafter. Mortality follows the Illustrative Life Table.

(ii)

(iii) (iv)

i = 0.06

Calculate 21V , the benefit reserve at the end of year 21 for this insurance.

(A) (B) (C) (D) (E)

255 259 263 267 271

13

17.

For a whole life insurance of 1 on (41) with death benefit payable at the end of year of death, you are given: (i) (ii) (iii) (iv) (v)
i = 0.05

p40 = 0.9972 A41 A40 = 0.00822

2

A41 2 A40 = 0.00433

Z is the present-value random variable for this insurance.

Calculate Var(Z).

(A) (B) (C) (D) (E)

0.023 0.024 0.025 0.026 0.027

14

18.

For a perpetuity-immediate with annual payments of 1: (i) The sequence of annual discount factors follows a Markov chain with the following three states: State number Annual discount factor, v (ii) 0 0.95 1 0.94 2 0.93

The transition matrix for the annual discount factors is:

0.0 0.9 0.0 1.0 0.0 1.0 0.0 0.1 0.0

Y is the present value of the perpetuity payments when the initial state is 1.

Calculate E(Y).

(A) (B) (C) (D) (E)

15.67 15.71 15.75 16.82 16.86

15

19.

A member of a high school math team is practicing for a contest. Her advisor has given her three practice problems: #1, #2, and #3. She randomly chooses one of the problems, and works on it until she solves it. Then she randomly chooses one of the remaining unsolved problems, and works on it until solved. Then she works on the last unsolved problem. She solves problems at a Poisson rate of 1 problem per 5 minutes.

Calculate the probability that she has solved problem #3 within 10 minutes of starting the problems.

(A) (B) (C) (D) (E)

0.18 0.34 0.45 0.51 0.59

20.

For a double decrement table, you are given: (i) (ii) (iii)
(1) ( x (t ) = 0.2 x ) (t ), ( x ) (t ) = k t 2 ,

t >0

t >0

' qx(1) = 0.04

(2) Calculate 2 qx .

(A) (B) (C) (D) (E)

0.45 0.53 0.58 0.64 0.73 16

21.

For (x): (i) (ii)

K is the curtate future lifetime random variable. qx + k = 0.1(k + 1) , k = 0, 1, 2,, 9

Calculate Var( K 3) . (A) (B) (C) (D) (E) 1.1 1.2 1.3 1.4 1.5

22.

The graph of the density function for losses is:

0.012 0.010 0.008 f(x ) 0.006 0.004 0.002 0.000 0 80 Loss amount, x Calculate the loss elimination ratio for an ordinary deductible of 20. (A) (B) (C) (D) (E) 0.20 0.24 0.28 0.32 0.36 17 120

23.

Michel, age 45, is expected to experience higher than standard mortality only at age 64. For a special fully discrete whole life insurance of 1 on Michel, you are given: (i) (ii) (iii) The benefit premiums are not level. The benefit premium for year 20, 19 , exceeds P45 for a standard risk by 0.010. Benefit reserves on his insurance are the same as benefit reserves for a fully discrete whole life insurance of 1 on (45) with standard mortality and level benefit premiums.

(iv) (v)

i = 0.03
20 V45

= 0.427

Calculate the excess of q64 for Michel over the standard q64 .

(A) (B) (C) (D) (E)

0.012 0.014 0.016 0.018 0.020

18

24.

For a block of fully discrete whole life insurances of 1 on independent lives age x, you are given: (i) (ii) (iii) (iv) (v)

i = 0.06 Ax = 0.24905
2

Ax = 0.09476

= 0.025 , where is the contract premium for each policy.

Losses are based on the contract premium.

Using the normal approximation, calculate the minimum number of policies the insurer must issue so that the probability of a positive total loss on the policies issued is less than or equal to 0.05.

(A) (B) (C) (D) (E)

25 27 29 31 33

19

25.

Your company currently offers a whole life annuity product that pays the annuitant 12,000 at the beginning of each year. A member of your product development team suggests enhancing the product by adding a death benefit that will be paid at the end of the year of death. Using a discount rate, d, of 8%, calculate the death benefit that minimizes the variance of the present value random variable of the new product. (A) (B) (C) (D) (E) 0 50,000 100,000 150,000 200,000

26.

A towing company provides all towing services to members of the City Automobile Club. You are given: Towing Distance Towing Cost Frequency 0-9.99 miles 10-29.99 miles 30+ miles (i) 80 100 160 50% 40% 10%

The automobile owner must pay 10% of the cost and the remainder is paid by the City Automobile Club. The number of towings has a Poisson distribution with mean of 1000 per year. The number of towings and the costs of individual towings are all mutually independent.

(ii) (iii)

Using the normal approximation for the distribution of aggregate towing costs, calculate the probability that the City Automobile Club pays more than 90,000 in any given year. (A) (B) (C) (D) (E) 3% 10% 50% 90% 97%

20

27.

You are given: (i) (ii) (iii) Losses follow an exponential distribution with the same mean in all years. The loss elimination ratio this year is 70%. The ordinary deductible for the coming year is 4/3 of the current deductible.

Compute the loss elimination ratio for the coming year. (A) (B) (C) (D) (E) 70% 75% 80% 85% 90%

28.

For T, the future lifetime random variable for (0): (i) (ii) (iii) (iv)

> 70
40

p0 = 0.6

E(T) = 62 E(T t ) = t 0.005 t 2 ,

0 < t < 60

Calculate the complete expectation of life at 40. (A) (B) (C) (D) (E) 30 35 40 45 50

21

29.

Two actuaries use the same mortality table to price a fully discrete 2-year endowment insurance of 1000 on (x). (i) Kevin calculates non-level benefit premiums of 608 for the first year and 350 for the second year. Kira calculates level annual benefit premiums of .
d = 0.05

(ii) (iii)

Calculate .

(A) (B) (C) (D) (E)

482 489 497 508 517

22

30.

For a fully discrete 10-payment whole life insurance of 100,000 on (x), you are given: (i) (ii) (iii) (iv) (v) (vi)

i = 0.05 qx +9 = 0.011 qx +10 = 0.012 qx +11 = 0.014

The level annual benefit premium is 2078. The benefit reserve at the end of year 9 is 32,535.

Calculate 100,000 Ax +11 .

(A) (B) (C) (D) (E)

34,100 34,300 35,500 36,500 36,700

23

31.

You are given: (i) (ii) Mortality follows DeMoivres law with = 105. (45) and (65) have independent future lifetimes.

Calculate e 45:65 . (A) (B) (C) (D) (E) 33 34 35 36 37

24

32.

Given: The survival function s x , where 0 x <1 bg sb x g = 1 {de i / 100}, sb x g = 0, 4.5 x

bg

s x = 1,

1 x < 4.5

Calculate 4 .

bg

(A) (B) (C) (D) (E)

0.45 0.55 0.80 1.00 1.20

33.

For a triple decrement table, you are given: (i) (ii) (iii)

bg b g bt g = 0.5 , t > 0 b g bt g = 0.7 , t > 0

bx1g t = 0.3 , t > 0
2 x 3 x

b Calculate q x2 g .
(A) (B) (C) (D) (E) 0.26 0.30 0.33 0.36 0.39

25

34.

You are given: (i) the following select-and-ultimate mortality table with 3-year select period:

x
60 61 62 63 64 (ii)

qx

q x +1

q x +2

q x +3
0.15 0.16 0.17 0.18 0.19

x+3
63 64 65 66 67

0.09 0.10 0.11 0.12 0.13

0.11 0.12 0.13 0.14 0.15

0.13 0.14 0.15 0.16 0.17

i = 0.03

Calculate on 60 .

22

A 60 , the actuarial present value of a 2-year deferred 2-year term insurance

(A) (B) (C) (D) (E)

0.156 0.160 0.186 0.190 0.195

26

35.

You are given: (i) (ii) (iii)

bg bt g = 0.02,
x t = 0.01,
x

0t <5 5 t

= 0.06

Calculate a x . (A) (B) (C) (D) (E) 12.5 13.0 13.4 13.9 14.3

36.

Actuaries have modeled auto windshield claim frequencies. They have concluded that the number of windshield claims filed per year per driver follows the Poisson distribution with parameter , where follows the gamma distribution with mean 3 and variance 3.

Calculate the probability that a driver selected at random will file no more than 1 windshield claim next year.

(A) (B) (C) (D) (E)

0.15 0.19 0.20 0.24 0.31

27

37.

The number of auto vandalism claims reported per month at Sunny Daze Insurance Company (SDIC) has mean 110 and variance 750. Individual losses have mean 1101 and standard deviation 70. The number of claims and the amounts of individual losses are independent.

Using the normal approximation, calculate the probability that SDICs aggregate auto vandalism losses reported for a month will be less than 100,000.

(A) (B) (C) (D) (E)

0.24 0.31 0.36 0.39 0.49

38.

For an allosaur with 10,000 calories stored at the start of a day: (i) The allosaur uses calories uniformly at a rate of 5,000 per day. If his stored calories reach 0, he dies. Each day, the allosaur eats 1 scientist (10,000 calories) with probability 0.45 and no scientist with probability 0.55. The allosaur eats only scientists. The allosaur can store calories without limit until needed.

(ii)

(iii) (iv)

Calculate the probability that the allosaur ever has 15,000 or more calories stored.

(A) (B) (C) (D) (E)

0.54 0.57 0.60 0.63 0.66

28

39.

Lucky Tom finds coins on his way to work at a Poisson rate of 0.5 coins/minute. The denominations are randomly distributed: (i) (ii) (iii) 60% of the coins are worth 1 each 20% of the coins are worth 5 each 20% of the coins are worth 10 each.

Calculate the probability that in the first ten minutes of his walk he finds at least 2 coins worth 10 each, and in the first twenty minutes finds at least 3 coins worth 10 each.

(A) (B) (C) (D) (E)

0.08 0.12 0.16 0.20 0.24

29

40.

For a fully discrete whole life insurance of 1000 on (60), the annual benefit premium was calculated using the following: (i) (ii) (iii) (iv)

i = 0.06 q60 = 0.01376

1000 A60 = 369.33 1000 A61 = 383.00

A particular insured is expected to experience a first-year mortality rate ten times the rate used to calculate the annual benefit premium. The expected mortality rates for all other years are the ones originally used.

Calculate the expected loss at issue for this insured, based on the original benefit premium.

(A) (B) (C) (D) (E)

72 86 100 114 128

30

41.

For a fully discrete whole life insurance of 1000 on (40), you are given: (i) (ii) (iii) (iv) (v)

i = 0.06
Mortality follows the Illustrative Life Table.

a40:10 = 7.70 a50:10 = 7.57

1 1000 A40:20 = 60.00

At the end of the tenth year, the insured elects an option to retain the coverage of 1000 for life, but pay premiums for the next ten years only.

Calculate the revised annual benefit premium for the next 10 years.

(A) (B) (C) (D) (E)

11 15 17 19 21

31

42.

For a double-decrement table where cause 1 is death and cause 2 is withdrawal, you are given: (i) Deaths are uniformly distributed over each year of age in the single-decrement table. Withdrawals occur only at the end of each year of age.

(ii) (iii) (iv) (v)

b lx g = 1000 b q x2 g = 0.40 b b d x1g = 0.45 d x2 g

Calculate pxb 2 g .

(A) (B) (C) (D) (E)

0.51 0.53 0.55 0.57 0.59

32

43.

You intend to hire 200 employees for a new management-training program. To predict the number who will complete the program, you build a multiple decrement table. You decide that the following associated single decrement assumptions are appropriate: (i) Of 40 hires, the number who fail to make adequate progress in each of the first three years is 10, 6, and 8, respectively. Of 30 hires, the number who resign from the company in each of the first three years is 6, 8, and 2, respectively. Of 20 hires, the number who leave the program for other reasons in each of the first three years is 2, 2, and 4, respectively. You use the uniform distribution of decrements assumption in each year in the multiple decrement table.

(ii)

(iii)

(iv)

Calculate the expected number who fail to make adequate progress in the third year.

(A) (B) (C) (D) (E)

4 8 12 14 17

33

44.

Bob is an overworked underwriter. Applications arrive at his desk at a Poisson rate of 60 per day. Each application has a 1/3 chance of being a bad risk and a 2/3 chance of being a good risk. Since Bob is overworked, each time he gets an application he flips a fair coin. If it comes up heads, he accepts the application without looking at it. If the coin comes up tails, he accepts the application if and only if it is a good risk. The expected profit on a good risk is 300 with variance 10,000. The expected profit on a bad risk is 100 with variance 90,000. Calculate the variance of the profit on the applications he accepts today. (A) (B) (C) (D) (E) 4,000,000 4,500,000 5,000,000 5,500,000 6,000,000

45.

Prescription drug losses, S, are modeled assuming the number of claims has a geometric distribution with mean 4, and the amount of each prescription is 40. Calculate E S 100

(A) (B) (C) (D) (E)

60 82 92 114 146

34

46.

For a temporary life annuity-immediate on independent lives (30) and (40): (i) (ii) Mortality follows the Illustrative Life Table.

i = 0.06

Calculate a30:40:10 . (A) (B) (C) (D) (E) 6.64 7.17 7.88 8.74 9.86

47.

For a special whole life insurance on (35), you are given: (i) (ii) The annual benefit premium is payable at the beginning of each year. The death benefit is equal to 1000 plus the return of all benefit premiums paid in the past without interest. The death benefit is paid at the end of the year of death.

(iii) (iv) (v) (vi)

A35 = 0.42898

b IAg

35

= 616761 .

i = 0.05

Calculate the annual benefit premium for this insurance. (A) (B) (C) (D) (E) 73.66 75.28 77.42 78.95 81.66

35

48.

Subway trains arrive at a station at a Poisson rate of 20 per hour. 25% of the trains are express and 75% are local. The types of each train are independent. An express gets you to work in 16 minutes and a local gets you there in 28 minutes. You always take the first train to arrive. Your co-worker always takes the first express. You both are waiting at the same station.

Which of the following is true? (A) (B) (C) (D) (E) Your expected arrival time is 6 minutes earlier than your co-workers. Your expected arrival time is 4.5 minutes earlier than your co-workers. Your expected arrival times are the same. Your expected arrival time is 4.5 minutes later than your co-workers. Your expected arrival time is 6 minutes later than your co-workers.

49.

For a special fully continuous whole life insurance of 1 on the last-survivor of (x) and (y), you are given: (i) (ii) (iii) (iv)

T x and T y are independent.

x y

bg bg bt g = bt g = 0.07,

t>0

= 0.05
Premiums are payable until the first death.

Calculate the level annual benefit premium for this insurance.

(A) (B) (C) (D) (E)

0.04 0.07 0.08 0.10 0.14

36

50.

For a fully discrete whole life insurance of 1000 on (20), you are given: (i) (ii) (iii) (iv) (v) 1000 P20 = 10 1000 20V20 = 490 1000 21V20 = 545 1000 22V20 = 605

q40 = 0.022

Calculate q41 . (A) (B) (C) (D) (E) 0.024 0.025 0.026 0.027 0.028

51.

For a fully discrete whole life insurance of 1000 on (60), you are given: (i) (ii)

i = 0.06
Mortality follows the Illustrative Life Table, except that there are extra mortality risks at age 60 such that q60 = 0.015 .

Calculate the annual benefit premium for this insurance. (A) (B) (C) (D) (E) 31.5 32.0 32.1 33.1 33.2

37

52.

At the beginning of each round of a game of chance the player pays 12.5. The player then rolls one die with outcome N. The player then rolls N dice and wins an amount equal to the total of the numbers showing on the N dice. All dice have 6 sides and are fair. Using the normal approximation, calculate the probability that a player starting with 15,000 will have at least 15,000 after 1000 rounds. (A) (B) (C) (D) (E) 0.01 0.04 0.06 0.09 0.12

53.

X is a discrete random variable with a probability function which is a member of the (a,b,0) class of distributions.
You are given: (i) (ii)

P( X = 0) = P ( X = 1) = 0.25 P( X = 2) = 01875 .

Calculate P X = 3 .

(A) (B) (C) (D) (E)

0.120 0.125 0.130 0.135 0.140

38

54.

Nancy reviews the interest rates each year for a 30-year fixed mortgage issued on July 1. She models interest rate behavior by a Markov model assuming: (i) (ii) Interest rates always change between years. The change in any given year is dependent on the change in prior years as follows: from year t 3 to year t 2 Increase Decrease Increase Decrease from year t 2 to year t 1 Increase Decrease Decrease Increase Probability that year t will increase from year t 1 0.10 0.20 0.40 0.25

She notes that interest rates decreased from year 2000 to 2001 and from year 2001 to 2002.

Calculate the probability that interest rates will decrease from year 2003 to 2004.

(A) (B) (C) (D) (E)

0.76 0.79 0.82 0.84 0.87

39

55.

For a 20-year deferred whole life annuity-due of 1 per year on (45), you are given: (i) (ii) Mortality follows De Moivres law with = 105 .

i=0

Calculate the probability that the sum of the annuity payments actually made will exceed the actuarial present value at issue of the annuity. (A) (B) (C) (D) (E) 0.425 0.450 0.475 0.500 0.525

56.

For a continuously increasing whole life insurance on x , you are given: (i) (ii) (iii) The force of mortality is constant.

bg

= 0.06
2

Ax = 0.25

Calculate IA .
x

d i

(A) (B) (C) (D) (E)

2.889 3.125 4.000 4.667 5.500

40

57.

XYZ Co. has just purchased two new tools with independent future lifetimes. Each tool has its own distinct De Moivre survival pattern. One tool has a 10-year maximum lifetime and the other a 7-year maximum lifetime. Calculate the expected time until both tools have failed.

(A) (B) (C) (D) (E)

5.0 5.2 5.4 5.6 5.8

58.

XYZ Paper Mill purchases a 5-year special insurance paying a benefit in the event its machine breaks down. If the cause is minor (1), only a repair is needed. If the cause is major (2), the machine must be replaced. Given: (i) (ii) (iii) (iv) (v) The benefit for cause (1) is 2000 payable at the moment of breakdown. The benefit for cause (2) is 500,000 payable at the moment of breakdown. Once a benefit is paid, the insurance contract is terminated.

b1g t = 0100 and b 2 g t = 0.004 , for t > 0 .

= 0.04

bg

bg

Calculate the actuarial present value of this insurance. (A) (B) (C) (D) (E) 7840 7880 7920 7960 8000

41

59.

You are given: (i) (ii) (iii)

R = 1 e
x t dt
0

bg

c S = 1 e z

1 0

x t + k dt

bg h

k is a constant such that S = 0.75R

Determine an expression for k.

(A) (B) (C) (D) (E)

gh cb g b 1ncb1 0.75q g / b1 p gh 1ncb1 0.75 p g / b1 p gh 1ncb1 p g / b1 0.75q gh 1ncb1 0.75q g / b1 q gh

1n 1 q x / 1 0.75q x
x x x x x x x x

60.

The number of claims in a period has a geometric distribution with mean 4. The amount of each claim X follows P X = x = 0.25 , x = 1,2,3,4. The number of claims and the claim amounts are independent. S is the aggregate claim amount in the period.

Calculate Fs 3 .

bg

(A) (B) (C) (D) (E)

0.27 0.29 0.31 0.33 0.35

42

61.

Insurance agent Hunt N. Quotum will receive no annual bonus if the ratio of incurred losses to earned premiums for his book of business is 60% or more for the year. If the ratio is less than 60%, Hunts bonus will be a percentage of his earned premium equal to 15% of the difference between his ratio and 60%. Hunts annual earned premium is 800,000. Incurred losses are distributed according to the Pareto distribution, with = 500,000 and = 2. Calculate the expected value of Hunts bonus. (A) (B) (C) (D) (E) 13,000 17,000 24,000 29,000 35,000

62.

A large machine in the ABC Paper Mill is 25 years old when ABC purchases a 5-year term insurance paying a benefit in the event the machine breaks down. Given: (i) Annual benefit premiums of 6643 are payable at the beginning of the year. (ii) (iii) (iv) (v) A benefit of 500,000 is payable at the moment of breakdown. Once a benefit is paid, the insurance contract is terminated. Machine breakdowns follow De Moivres law with lx = 100 x .

i = 0.06

Calculate the benefit reserve for this insurance at the end of the third year. (A) (B) (C) (D) (E) 91 0 163 287 422

43

63.

For a whole life insurance of 1 on x , you are given: (i) The force of mortality is x t . (ii) (iii) The benefits are payable at the moment of death.

bg bg

= 0.06

(iv) Ax = 0.60 Calculate the revised actuarial present value of this insurance assuming x t is increased by 0.03 for all t and is decreased by 0.03.

bg

(A) (B) (C) (D) (E)

0.5 0.6 0.7 0.8 0.9

64.

A maintenance contract on a hotel promises to replace burned out light bulbs at the end of each year for three years. The hotel has 10,000 light bulbs. The light bulbs are all new. If a replacement bulb burns out, it too will be replaced with a new bulb. You are given: (i) For new light bulbs,

q0 = 010 . q1 = 0.30 q2 = 0.50

(ii)

Each light bulb costs 1.

i = 0.05 (iii) Calculate the actuarial present value of this contract.

(A) (B) (C) (D) (E) 6700 7000 7300 7600 8000

44

65.

You are given:

x =
Calculate e25:25 . (A) (B) (C) (D) (E) 14.0 14.4 14.8 15.2 15.6

b g R0..04,, S0 05 T

0 < x < 40 x > 40

66.

For a select-and-ultimate mortality table with a 3-year select period: (i) x 60 61 62 63 64 (ii) (iii) (iv)
qx q x +1 q x +2

qx +3 0.15 0.16 0.17 0.18 0.19

x +3
63 64 65 66 67

0.09 0.10 0.11 0.12 0.13

0.11 0.12 0.13 0.14 0.15

0.13 0.14 0.15 0.16 0.17

White was a newly selected life on 01/01/2000. Whites age on 01/01/2001 is 61.

P is the probability on 01/01/2001 that White will be alive on 01/01/2006.

Calculate P. (A) (B) (C) (D) (E) 0 P < 0.43 0.43 P < 0.45 0.45 P < 0.47 0.47 P < 0.49 0.49 P 1.00

45

67.

For a continuous whole life annuity of 1 on ( x ) : T ( x ) is the future lifetime random variable for ( x ) . (i) (ii) (iii) The force of interest and force of mortality are constant and equal.

a x = 12.50

Calculate the standard deviation of aT ( x ) . (A) (B) (C) (D) (E) 1.67 2.50 2.89 6.25 7.22

68.

For a special fully discrete whole life insurance on (x): (i) (ii) (iii) (iv) (v) (vi) The death benefit is 0 in the first year and 5000 thereafter. Level benefit premiums are payable for life.

qx = 0.05 v = 0.90 a x = 5.00

10Vx

= 0.20

(vii) 10V is the benefit reserve at the end of year 10 for this insurance. Calculate 10V . (A) 795 (B) (C) (D) (E) 1000 1090 1180 1225 46

69.

For a fully discrete 2-year term insurance of 1 on (x): (i) 0.95 is the lowest premium such that there is a 0% chance of loss in year 1. (ii) (iii) (iv)

px = 0.75 px +1 = 0.80 Z is the random variable for the present value at issue of future benefits.

Calculate Var Z . (A) 0.15 (B) (C) (D) (E) 0.17 0.19 0.21 0.23

bg

70.

A group dental policy has a negative binomial claim count distribution with mean 300 and variance 800. Ground-up severity is given by the following table: Severity 40 80 120 Probability 0.25 0.25 0.25

200 0.25 You expect severity to increase 50% with no change in frequency. You decide to impose a per claim deductible of 100. Calculate the expected total claim payment after these changes. (A) Less than 18,000 (B) (C) (D) (E) At least 18,000, but less than 20,000 At least 20,000, but less than 22,000 At least 22,000, but less than 24,000 At least 24,000

47

71.

You own a fancy light bulb factory. Your workforce is a bit clumsy they keep dropping boxes of light bulbs. The boxes have varying numbers of light bulbs in them, and when dropped, the entire box is destroyed. You are given: Expected number of boxes dropped per month: Variance of the number of boxes dropped per month: Expected value per box: Variance of the value per box:

50 100 200 400

You pay your employees a bonus if the value of light bulbs destroyed in a month is less than 8000. Assuming independence and using the normal approximation, calculate the probability that you will pay your employees a bonus next month. (A) (B) (C) (D) (E) 0.16 0.19 0.23 0.27 0.31

72.

Each of 100 independent lives purchase a single premium 5-year deferred whole life insurance of 10 payable at the moment of death. You are given: (i) (ii) (iii)

= 0.04
= 0.06
F is the aggregate amount the insurer receives from the 100 lives.

Using the normal approximation, calculate F such that the probability the insurer has sufficient funds to pay all claims is 0.95.

48

(A) (B) (C) (D) (E)

280 390 500 610 720

73.

For a select-and-ultimate table with a 2-year select period:

x
48 49 50 51

px

p x +1

px + 2
0.9713 0.9698 0.9682 0.9664

x+2
50 51 52 53

0.9865 0.9858 0.9849 0.9838

0.9841 0.9831 0.9819 0.9803

Keith and Clive are independent lives, both age 50. Keith was selected at age 45 and Clive was selected at age 50.

Calculate the probability that exactly one will be alive at the end of three years.

(A) (B) (C) (D) (E)

Less than 0.115 At least 0.115, but less than 0.125 At least 0.125, but less than 0.135 At least 0.135, but less than 0.145 At least 0.145

49

74-75.

Use the following information for questions 74 and 75.

For a tyrannosaur with 10,000 calories stored: (i) The tyrannosaur uses calories uniformly at a rate of 10,000 per day. If his stored calories reach 0, he dies. The tyrannosaur eats scientists (10,000 calories each) at a Poisson rate of 1 per day. The tyrannosaur eats only scientists. The tyrannosaur can store calories without limit until needed.

(ii) (iii) (iv)

74.

Calculate the probability that the tyrannosaur dies within the next 2.5 days.

(A) (B) (C) (D) (E)

0.30 0.40 0.50 0.60 0.70

75.

Calculate the expected calories eaten in the next 2.5 days.

(A) (B) (C) (D) (E)

17,800 18,800 19,800 20,800 21,800

50

76.

A fund is established by collecting an amount P from each of 100 independent lives age 70. The fund will pay the following benefits: 10, payable at the end of the year of death, for those who die before age 72, or

P, payable at age 72, to those who survive.

You are given: Mortality follows the Illustrative Life Table.

i = 0.08 (i) Calculate P, using the equivalence principle.

(A) (B) (C) (D) (E) 2.33 2.38 3.02 3.07 3.55

77.

You are given: (i) (ii) (iii)

Px = 0.090
nVx

= 0.563

1 Px:n = 0.00864

Calculate Px1:n . (A) (B) (C) (D) (E) 0.008 0.024 0.040 0.065 0.085

51

78.

You are given: (i) Mortality follows De Moivres law with = 100 . (ii) (iii)

i = 0.05
The following annuity-certain values:
a40 = 17.58 a50 = 18.71 a60 = 19.40

Calculate 10V A40 . (A) (B) (C) (D) (E) 0.075 0.077 0.079 0.081 0.083

c h

79.

For a group of individuals all age x, you are given: (i) 30% are smokers and 70% are non-smokers. (ii) (iii) (iv) The constant force of mortality for smokers is 0.06. The constant force of mortality for non-smokers is 0.03.

= 0.08

Calculate Var aT (A) (B) (C) (D) (E) 13.0 13.3 13.8 14.1 14.6

FH

bxg K

I for an individual chosen at random from this group.

52

80.

For a certain company, losses follow a Poisson frequency distribution with mean 2 per year, and the amount of a loss is 1, 2, or 3, each with probability 1/3. Loss amounts are independent of the number of losses, and of each other. An insurance policy covers all losses in a year, subject to an annual aggregate deductible of 2. Calculate the expected claim payments for this insurance policy. (A) (B) (C) (D) (E) 2.00 2.36 2.45 2.81 2.96

81.

A Poisson claims process has two types of claims, Type I and Type II. (i) (ii) (iii) (iv) The expected number of claims is 3000. The probability that a claim is Type I is 1/3. Type I claim amounts are exactly 10 each. The variance of aggregate claims is 2,100,000.

Calculate the variance of aggregate claims with Type I claims excluded. (A) (B) (C) (D) (E) 1,700,000 1,800,000 1,900,000 2,000,000 2,100,000

53

82.

Don, age 50, is an actuarial science professor. His career is subject to two decrements: (i) Decrement 1 is mortality. The associated single decrement table follows De Moivres law with = 100 . Decrement 2 is leaving academic employment, with

(ii)

b 2g t = 0.05, t 0 50
Calculate the probability that Don remains an actuarial science professor for at least five but less than ten years. (A) (B) (C) (D) (E) 0.22 0.25 0.28 0.31 0.34

bg

83.

For a double decrement model: (i) In the single decrement table associated with cause (1), q401g = 0100 and decrements . b are uniformly distributed over the year. In the single decrement table associated with cause (2), q402g = 0125 and all . b decrements occur at time 0.7.

(ii)

b2 Calculate q40g .
(A) (B) (C) (D) (E) 0.114 0.115 0.116 0.117 0.118

54

84.

For a special 2-payment whole life insurance on (80): (i) Premiums of are paid at the beginning of years 1 and 3. (ii) (iii) The death benefit is paid at the end of the year of death. There is a partial refund of premium feature: If (80) dies in either year 1 or year 3, the death benefit is 1000 +

Otherwise, the death benefit is 1000. (iv) (v) Mortality follows the Illustrative Life Table.

i = 0.06

Calculate , using the equivalence principle. (A) 369 (B) (C) (D) (E) 381 397 409 425

85.

For a special fully continuous whole life insurance on (65): (i) The death benefit at time t is bt = 1000 e0.04t , t 0 . (ii) (iii) (iv) Level benefit premiums are payable for life.

65 t = 0.02, t 0
= 0.04

bg

Calculate 2V , the benefit reserve at the end of year 2. (A) (B) (C) (D) (E) 0 29 37 61 83

55

86.

You are given: (i) (ii) (iii) (iv)

Ax = 0.28 Ax +20 = 0.40

1 Ax:20 = 0.25

i = 0.05

Calculate a x:20 . (A) (B) (C) (D) (E) 11.0 11.2 11.7 12.0 12.3

87.

On his walk to work, Lucky Tom finds coins on the ground at a Poisson rate. The Poisson rate, expressed in coins per minute, is constant during any one day, but varies from day to day according to a gamma distribution with mean 2 and variance 4.

Calculate the probability that Lucky Tom finds exactly one coin during the sixth minute of todays walk.

(A) (B) (C) (D) (E)

0.22 0.24 0.26 0.28 0.30

56

88.

The unlimited severity distribution for claim amounts under an auto liability insurance policy is given by the cumulative distribution:
F x = 1 0.8e 0.02 x 0.2e 0.001x ,

bg

x0

The insurance policy pays amounts up to a limit of 1000 per claim. Calculate the expected payment under this policy for one claim. (A) (B) (C) (D) (E) 57 108 166 205 240

89.

A machine is in one of four states (F, G, H, I) and migrates annually among them according to a Markov process with transition matrix: F F G H I 0.20 0.50 0.75 1.00 G 0.80 0.00 0.00 0.00 H 0.00 0.50 0.00 0.00 I 0.00 0.00 0.25 0.00

At time 0, the machine is in State F. A salvage company will pay 500 at the end of 3 years if the machine is in State F. Assuming v = 0.90 , calculate the actuarial present value at time 0 of this payment. (A) (B) (C) (D) (E) 150 155 160 165 170

57

90.

The claims department of an insurance company receives envelopes with claims for insurance coverage at a Poisson rate of = 50 envelopes per week. For any period of time, the number of envelopes and the numbers of claims in the envelopes are independent. The numbers of claims in the envelopes have the following distribution: Number of Claims

Probability

1 0.20 2 0.25 3 0.40 4 0.15 th Using the normal approximation, calculate the 90 percentile of the number of claims received in 13 weeks. (A) (B) (C) (D) (E) 1690 1710 1730 1750 1770

91.

You are given: (i) (ii) (iii) The survival function for males is s x = 1 Female mortality follows De Moivres law. At age 60, the female force of mortality is 60% of the male force of mortality.

bg

x , 0 < x < 75 . 75

For two independent lives, a male age 65 and a female age 60, calculate the expected time until the second death. (A) (B) (C) (D) (E) 4.33 5.63 7.23 11.88 13.17 58

92.

For a fully continuous whole life insurance of 1: (i) (ii) (iii)

= 0.04
= 0.08
L is the loss-at-issue random variable based on the benefit premium.

Calculate Var (L). (A) 1 10 1 5 1 4 1 3 1 2

(B)

(C)

(D)

(E)

93.

The random variable for a loss, X, has the following characteristics: F x E Xx x

bg

0 100 200

0.0 0.2 0.6

0 91 153 331

1000 1.0 Calculate the mean excess loss for a deductible of 100. (A) (B) (C) (D) (E) 250 300 350 400 450

59

94.

WidgetsRUs owns two factories. It buys insurance to protect itself against major repair costs. Profit equals revenues, less the sum of insurance premiums, retained major repair costs, and all other expenses. WidgetsRUs will pay a dividend equal to the profit, if it is positive. You are given: (i) (ii) (iii) Combined revenue for the two factories is 3. Major repair costs at the factories are independent. The distribution of major repair costs for each factory is

k
0 1 2 3 (iv)

Prob (k) 0.4 0.3 0.2 0.1

At each factory, the insurance policy pays the major repair costs in excess of that factorys ordinary deductible of 1. The insurance premium is 110% of the expected claims. All other expenses are 15% of revenues.

(v)

Calculate the expected dividend.

(A) (B) (C) (D) (E)

0.43 0.47 0.51 0.55 0.59

60

95.

For watches produced by a certain manufacturer: (i) Lifetimes follow a single-parameter Pareto distribution with > 1 and = 4. (ii) The expected lifetime of a watch is 8 years.

Calculate the probability that the lifetime of a watch is at least 6 years. (A) (B) (C) (D) (E) 0.44 0.50 0.56 0.61 0.67

96.

For a special 3-year deferred whole life annuity-due on (x): (i) (ii) (iii) (iv) (v)

i = 0.04
The first annual payment is 1000. Payments in the following years increase by 4% per year. There is no death benefit during the three year deferral period. Level benefit premiums are payable at the beginning of each of the first three years.

(vi) (vii)

ex = 1105 is the curtate expectation of life for (x). .

2 0.98 3 0.97

1 k 0.99 k px Calculate the annual benefit premium. (A) (B) (C) (D) (E) 2625 2825 3025 3225 3425 61

97.

For a special fully discrete 10-payment whole life insurance on (30) with level annual benefit premium : (i) The death benefit is equal to 1000 plus the refund, without interest, of the benefit premiums paid.

(ii) (iii) (iv) (v)

A30 = 0102 .
10

A30 = 0.088
1 30: 10

b IAg

= 0.078

a30: 10 = 7.747

Calculate .

(A) (B) (C) (D) (E)

14.9 15.0 15.1 15.2 15.3

62

98.

For a given life age 30, it is estimated that an impact of a medical breakthrough will be an increase of 4 years in e 30 , the complete expectation of life. Prior to the medical breakthrough, s(x) followed de Moivres law with = 100 as the limiting age. Assuming de Moivres law still applies after the medical breakthrough, calculate the new limiting age. (A) (B) (C) (D) (E) 104 105 106 107 108

99.

On January 1, 2002, Pat, age 40, purchases a 5-payment, 10-year term insurance of 100,000: (i) (ii) Death benefits are payable at the moment of death. Contract premiums of 4000 are payable annually at the beginning of each year for 5 years.

(iii) (iv)

i = 0.05 L is the loss random variable at time of issue.

Calculate the value of L if Pat dies on June 30, 2004.

(A) (B) (C) (D) (E)

77,100 80,700 82,700 85,900 88,000 63

100. Glen is practicing his simulation skills.

He generates 1000 values of the random variable X as follows: (i) He generates the observed value from the gamma distribution with = 2 and = 1 (hence with mean 2 and variance 2). (ii) (iii) He then generates x from the Poisson distribution with mean . He repeats the process 999 more times: first generating a value , then generating x from the Poisson distribution with mean . The repetitions are mutually independent.

(iv)

Calculate the expected number of times that his simulated value of X is 3. (A) (B) (C) (D) (E) 75 100 125 150 175

101. Lucky Tom finds coins on his way to work at a Poisson rate of 0.5 coins per minute.
The denominations are randomly distributed: (i) (ii) (iii) 60% of the coins are worth 1; 20% of the coins are worth 5; 20% of the coins are worth 10.

Calculate the variance of the value of the coins Tom finds during his one-hour walk to work. (A) (B) (C) (D) (E) 379 487 566 670 768

64

102. For a fully discrete 20-payment whole life insurance of 1000 on (x), you are given:
(i) (ii) (iii) (iv)

i = 0.06
qx +19 = 0.01254

The level annual benefit premium is 13.72. The benefit reserve at the end of year 19 is 342.03.

Calculate 1000 Px +20 , the level annual benefit premium for a fully discrete whole life insurance of 1000 on (x+20). (A) (B) (C) (D) (E) 27 29 31 33 35

103. For a multiple decrement model on (60):

(i) (ii)

60 (1) (t ), t 0, follows the Illustrative Life Table. 60 ( ) (t ) = 2 60 (1) (t ), t 0

( q60 ) , the probability that decrement occurs during the 11th year.

Calculate (A) (B) (C) (D) (E)

10

0.03 0.04 0.05 0.06 0.07

65

104. (x) and (y) are two lives with identical expected mortality.
You are given:

Px = Py = 0.1 Pxy = 0.06 , where Pxy is the annual benefit premium for a fully discrete
insurance of 1 on xy .

b g

d = 0.06 Calculate the premium Pxy , the annual benefit premium for a fully discrete insurance of 1
on xy . (A) (B) (C) (D) (E) 0.14 0.16 0.18 0.20 0.22

b g

105. For students entering a college, you are given the following from a multiple decrement
model: (i) (ii) (iii) 1000 students enter the college at t = 0 . Students leave the college for failure 1 or all other reasons 2 .

bg

bg

bg b g bt g = 0.04
b1g t =
2

0t 4 0t <4

48 students are expected to leave the college during their first year due to all causes. Calculate the expected number of students who will leave because of failure during their fourth year. (A) (B) (C) (D) (E) 8 10 24 34 41 66

(iv)

106. The following graph is related to current human mortality:

20

40 Age

60

80

100

Which of the following functions of age does the graph most likely show? (A) (B) (C) (D) (E)

bg l b x g
x
x

lx p x lx lx
2

107. An actuary for an automobile insurance company determines that the distribution of the
annual number of claims for an insured chosen at random is modeled by the negative binomial distribution with mean 0.2 and variance 0.4. The number of claims for each individual insured has a Poisson distribution and the means of these Poisson distributions are gamma distributed over the population of insureds. Calculate the variance of this gamma distribution. (A) (B) (C) (D) (E) 0.20 0.25 0.30 0.35 0.40 67

68

108. A dam is proposed for a river which is currently used for salmon breeding.
modeled: (i)

You have

For each hour the dam is opened the number of salmon that will pass through and reach the breeding grounds has a distribution with mean 100 and variance 900. The number of eggs released by each salmon has a distribution with mean of 5 and variance of 5. The number of salmon going through the dam each hour it is open and the numbers of eggs released by the salmon are independent.

(ii)

(iii)

Using the normal approximation for the aggregate number of eggs released, determine the least number of whole hours the dam should be left open so the probability that 10,000 eggs will be released is greater than 95%. (A) (B) (C) (D) (E) 20 23 26 29 32

109. For a special 3-year term insurance on ( x ) , you are given:

(i) (ii) (iii)

Z is the present-value random variable for the death benefits. qx + k = 0.02( k + 1) k = 0, 1, 2

The following death benefits, payable at the end of the year of death:

k
0 1 2 (iv)

bk +1
300,000 350,000 400,000

i = 0.06

69

Calculate E Z .

bg

(A) (B) (C) (D) (E)

36,800 39,100 41,400 43,700 46,000

110. For a special fully discrete 20-year endowment insurance on (55):

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Death benefits in year k are given by bk = 21 k , k = 1, 2, , 20. The maturity benefit is 1. Annual benefit premiums are level.
kV

denotes the benefit reserve at the end of year k, k = 1, 2,, 20. = 5.0 = 0.6

10 V 19 V

q65 = 0.10 i = 0.08

Calculate 11V. (A) (B) (C) (D) (E) 4.5 4.6 4.8 5.1 5.3

70

111. For a stop-loss insurance on a three person group:

(i) (ii) Loss amounts are independent. The distribution of loss amount for each person is: Probability Loss Amount 0 0.4 1 0.3 2 0.2 3 0.1 The stop-loss insurance has a deductible of 1 for the group.

(iii)

Calculate the net stop-loss premium. (A) (B) (C) (D) (E) 2.00 2.03 2.06 2.09 2.12

112. A continuous two-life annuity pays:

100 while both (30) and (40) are alive; 70 while (30) is alive but (40) is dead; and 50 while (40) is alive but (30) is dead. The actuarial present value of this annuity is 1180. Continuous single life annuities paying 100 per year are available for (30) and (40) with actuarial present values of 1200 and 1000, respectively. Calculate the actuarial present value of a two-life continuous annuity that pays 100 while at least one of them is alive. (A) (B) (C) (D) (E) 1400 1500 1600 1700 1800

71

113. For a disability insurance claim:

(i) The claimant will receive payments at the rate of 20,000 per year, payable continuously as long as she remains disabled. The length of the payment period in years is a random variable with the gamma distribution with parameters = 2 and = 1 . Payments begin immediately. (ii)

(iii) (iv)

= 0.05

Calculate the actuarial present value of the disability payments at the time of disability. (A) (B) (C) (D) (E) 36,400 37,200 38,100 39,200 40,000

114. For a discrete probability distribution, you are given the recursion relation
pk =
Determine p 4 .

bg

2 * p k 1 , k

b g

k = 1, 2,.

bg

(A) (B) (C) (D) (E)

0.07 0.08 0.09 0.10 0.11

72

115. A company insures a fleet of vehicles.

Aggregate losses have a compound Poisson distribution. The expected number of losses is 20. Loss amounts, regardless of vehicle type, have exponential distribution with = 200. In order to reduce the cost of the insurance, two modifications are to be made: (i) a certain type of vehicle will not be insured. It is estimated that this will reduce loss frequency by 20%. (ii) a deductible of 100 per loss will be imposed.

Calculate the expected aggregate amount paid by the insurer after the modifications. (A) (B) (C) (D) (E) 1600 1940 2520 3200 3880

116. For a population of individuals, you are given:

(i) (ii) Each individual has a constant force of mortality. The forces of mortality are uniformly distributed over the interval (0,2).

Calculate the probability that an individual drawn at random from this population dies within one year. (A) (B) (C) (D) (E) 0.37 0.43 0.50 0.57 0.63

73

117.

You are the producer of a television quiz show that gives cash prizes. The number of prizes, N, and prize amounts, X, have the following distributions:

n 1 2

Pr N = n 0.8 0.2

x
0 100 1000

Pr X = x 0.2 0.7 0.1

Your budget for prizes equals the expected prizes plus the standard deviation of prizes. Calculate your budget. (A) (B) (C) (D) (E) 306 316 416 510 518

118. For a special fully discrete 3-year term insurance on b x g :

(i) (ii) Level benefit premiums are paid at the beginning of each year.

(iii)

k 0 1 2 i = 0.06

bk +1
200,000 150,000 100,000

qx + k
0.03 0.06 0.09

Calculate the initial benefit reserve for year 2. (A) (B) (C) (D) (E) 6,500 7,500 8,100 9,400 10,300 74

75

119. For a special fully continuous whole life insurance on (x):

(i) (ii) (iii) (iv) The level premium is determined using the equivalence principle. Death benefits are given by bt = 1 + i where i is the interest rate.

b g

L is the loss random variable at t = 0 for the insurance. T is the future lifetime random variable of (x).

Which of the following expressions is equal to L ? (A)

(B)

(C)

(D)

c A h c1 A h c A hc1 + A h c A h c1 + A h c A hc1 A h
T x x T x x T x x T x x

(E)

dv + A i c1 + A h
T x x

76

120. For a 4-year college, you are given the following probabilities for dropout from all
causes:
. q0 = 015 . q1 = 010 q2 = 0.05 q3 = 0.01

Dropouts are uniformly distributed over each year.

Compute the temporary 1.5-year complete expected college lifetime of a student entering the second year, e115 . :.

(A) (B) (C) (D) (E)

1.25 1.30 1.35 1.40 1.45

77

121. Lee, age 63, considers the purchase of a single premium whole life insurance of 10,000
with death benefit payable at the end of the year of death. The company calculates benefit premiums using: (i) (ii) mortality based on the Illustrative Life Table,

i = 0.05

The company calculates contract premiums as 112% of benefit premiums. The single contract premium at age 63 is 5233. Lee decides to delay the purchase for two years and invests the 5233. Calculate the minimum annual rate of return that the investment must earn to accumulate to an amount equal to the single contract premium at age 65. (A) (B) (C) (D) (E) 0.030 0.035 0.040 0.045 0.050

122. You have calculated the actuarial present value of a last-survivor whole life insurance of
1 on (x) and (y). You assumed: (i) (ii) The death benefit is payable at the moment of death. The future lifetimes of (x) and (y) are independent, and each life has a constant force of mortality with = 0.06 .

(iii)

= 0.05

Your supervisor points out that these are not independent future lifetimes. Each mortality assumption is correct, but each includes a common shock component with constant force 0.02. Calculate the increase in the actuarial present value over what you originally calculated.

78

(A) (B) (C) (D) (E)

0.020 0.039 0.093 0.109 0.163

123. The number of accidents follows a Poisson distribution with mean 12.
1 1 1

Each accident generates 1, 2, or 3 claimants with probabilities 2 , 3 , 6 , respectively. Calculate the variance in the total number of claimants. (A) (B) (C) (D) (E) 20 25 30 35 40

79

124. For a claims process, you are given:

(i) The number of claims N t , t 0 is a nonhomogeneous Poisson process with intensity function:

m bg

R1, | ( t ) = S2, |3, T

(ii)

0 t <1 1 t < 2 2t

Claims amounts Yi are independently and identically distributed random variables that are also independent of N (t ) . Each Yi is uniformly distributed on [200,800]. The random variable P is the number of claims with claim amount less than 500 by time t = 3. The random variable Q is the number of claims with claim amount greater than 500 by time t = 3. R is the conditional expected value of P, given Q = 4.

(iii) (iv)

(v)

(vi)

Calculate R.

(A) (B) (C) (D) (E)

2.0 2.5 3.0 3.5 4.0

80

125. Lottery Life issues a special fully discrete whole life insurance on (25):
(i) At the end of the year of death there is a random drawing. With probability 0.2, the death benefit is 1000. With probability 0.8, the death benefit is 0. At the start of each year, including the first, while (25) is alive, there is a random drawing. With probability 0.8, the level premium is paid. With probability 0.2, no premium is paid. The random drawings are independent. Mortality follows the Illustrative Life Table. i = 0.06

(ii)

(iii) (iv) (v) (vi)

is determined using the equivalence principle.

Calculate the benefit reserve at the end of year 10. (A) (B) (C) (D) (E) 10.25 20.50 30.75 41.00 51.25

126. A government creates a fund to pay this years lottery winners.

You are given: (i) (ii) There are 100 winners each age 40. Each winner receives payments of 10 per year for life, payable annually, beginning immediately. Mortality follows the Illustrative Life Table. The lifetimes are independent. i = 0.06 The amount of the fund is determined, using the normal approximation, such that the probability that the fund is sufficient to make all payments is 95%. 81

(iii) (iv) (v) (vi)

Calculate the initial amount of the fund.

(A) (B) (C) (D) (E)

14,800 14,900 15,050 15,150 15,250

127. For a special fully discrete 35-payment whole life insurance on (30):
(i) (ii) The death benefit is 1 for the first 20 years and is 5 thereafter. The initial benefit premium paid during the each of the first 20 years is one fifth of the benefit premium paid during each of the 15 subsequent years. Mortality follows the Illustrative Life Table. i = 0.06 A30:20 = 0.32307 a30: 35 = 14.835

(iii) (iv) (v) (vi)

Calculate the initial annual benefit premium.

(A) (B) (C) (D) (F)

0.010 0.015 0.020 0.025 0.030

82

128. For independent lives (x) and (y):

(i) (ii) (iii) q x = 0.05 q y = 010 . Deaths are uniformly distributed over each year of age.

Calculate

0.75

q xy .

(A) (B) (C) (D) (E)

0.1088 0.1097 0.1106 0.1116 0.1125

129. In a clinic, physicians volunteer their time on a daily basis to provide care to those who
are not eligible to obtain care otherwise. The number of physicians who volunteer in any day is uniformly distributed on the integers 1 through 5. The number of patients that can be served by a given physician has a Poisson distribution with mean 30. Determine the probability that 120 or more patients can be served in a day at the clinic, using the normal approximation with continuity correction.

(A) (B) (C) (D) (E)

b g 1 b0.72g 1 b0.93g 1 b313g . 1 b316g .

1 0.68

83

130.

A person age 40 wins 10,000 in the actuarial lottery. Rather than receiving the money at once, the winner is offered the actuarially equivalent option of receiving an annual payment of K (at the beginning of each year) guaranteed for 10 years and continuing thereafter for life. You are given: (i) (ii) (iii) (iv) i = 0.04 A40 = 0.30 A50 = 0.35
1 A40: 10 = 0.09

Calculate K. (A) (B) (C) (D) (E) 538 541 545 548 551

131. Mortality for Audra, age 25, follows De Moivres law with = 100. If she takes up hot air
ballooning for the coming year, her assumed mortality will be adjusted so that for the coming year only, she will have a constant force of mortality of 0.1. Calculate the decrease in the 11-year temporary complete life expectancy for Audra if she takes up hot air ballooning. (A) (B) (C) (D) (E) 0.10 0.35 0.60 0.80 1.00

84

132.

For a 5-year fully continuous term insurance on (x): (i) (ii) (iii)

= 010 .
All the graphs below are to the same scale. All the graphs show x t on the vertical axis and t on the horizontal axis.

bg

Which of the following mortality assumptions would produce the highest benefit reserve at the end of year 2? (A)
0.08 0.06 0.04 0.02 0 0 1 2 3 4 5

(B)
0.08 0.06 0.04 0.02 0 0 1 2 3 4 5

(C)
0.08 0.06 0.04 0.02 0.00 0 1 2 3 4 5

(D)
0.08 0.06 0.04 0.02 0 0 1 2 3 4 5

(E)
0.08 0.06 0.04 0.02 0 0 1 2 3 4 5

85

133. For a multiple decrement table, you are given:

(i) Decrement 1 is death, decrement 2 is disability, and decrement 3 is withdrawal. q60(1) = 0.010 q60( 2 ) = 0.050 q60( 3) = 0100 . Withdrawals occur only at the end of the year. Mortality and disability are uniformly distributed over each year of age in the associated single decrement tables.

bg

bg

bg

(ii) (iii) (iv) (v) (vi)

(3 Calculate q60) .

(A) (B) (C) (D) (E)

0.088 0.091 0.094 0.097 0.100

86

134. The number of claims, N, made on an insurance portfolio follows the following distribution:
n 0 2 3 Pr(N=n) 0.7 0.2 0.1

If a claim occurs, the benefit is 0 or 10 with probability 0.8 and 0.2, respectively. The number of claims and the benefit for each claim are independent.

Calculate the probability that aggregate benefits will exceed expected benefits by more than 2 standard deviations.

(A) (B) (C) (D) (E)

0.02 0.05 0.07 0.09 0.12

87

135. For a special whole life insurance of 100,000 on (x), you are given:
(i) (ii) (iii) (iv) (v)

= 0.06
The death benefit is payable at the moment of death. If death occurs by accident during the first 30 years, the death benefit is doubled.

bg b g bt g = 0.001,
1 x

bx g t = 0.008, t 0
t 0, where bx1g is the force of decrement due to death by

accident. Calculate the single benefit premium for this insurance. (A) (B) (C) (D) (E) 11,765 12,195 12,622 13,044 13,235

136. You are given the following extract from a select-and-ultimate mortality table with a 2year select period: x
lx l x +1

lx + 2

x+2 62 63 64

60 80,625 79,954 78,839 61 79,137 78,402 77,252 62 77,575 76,770 75,578 Assume that deaths are uniformly distributed between integral ages. Calculate (A) (B) (C) (D) (E)
0.9 q 60 + 0.6 .

0.0102 0.0103 0.0104 0.0105 0.0106 88

137. A claim count distribution can be expressed as a mixed Poisson distribution.

of the Poisson distribution is uniformly distributed over the interval [0,5]. Calculate the probability that there are 2 or more claims.

The mean

(A) (B) (C) (D) (E)

0.61 0.66 0.71 0.76 0.81

89

b 138. For a double decrement table with l40g = 2000:

x 40 41

b Calculate l42 g .
(A) (B) (C) (D) (E) 800 820 840 860 880

b q x1g 0.24 --

b q x2 g 0.10 --

q x b1g 0.25 0.20

qxb2g y 2y

139. For a fully discrete whole life insurance of 10,000 on (30):

(i)

denotes the annual premium and L denotes the loss-at-issue random

variable for this insurance.

bg

(ii) (iii)

Mortality follows the Illustrative Life Table. i=0.06

Calculate the lowest premium, , such that the probability is less than 0.5 that the loss L is positive.

b g

(A) (B) (C) (D) (E)

34.6 36.6 36.8 39.0 39.1

90

140. Y is the present-value random variable for a special 3-year temporary life annuity-due on
(x). You are given: (i) (ii)
t

px = 0.9t , t 0

K is the curtate-future-lifetime random variable for (x). . R100, |187, Y=S. |2.72, T K =0 K =1 K = 2,3,....

(iii)

Calculate Var(Y). (A) (B) (C) (D) (E) 0.19 0.30 0.37 0.46 0.55

141. A claim severity distribution is exponential with mean 1000.

An insurance company will pay the amount of each claim in excess of a deductible of 100. Calculate the variance of the amount paid by the insurance company for one claim, including the possibility that the amount paid is 0. (A) (B) (C) (D) (E) 810,000 860,000 900,000 990,000 1,000,000

91

142. For a fully continuous whole life insurance of 1 on (x):

(i) (ii) (iii) (iv) (v) (vi)

is the benefit premium.

L is the loss-at-issue random variable with the premium equal to . L* is the loss-at-issue random variable with the premium equal to 1.25 . a x = 5.0

= 0.08
Var L = 0.5625

bg

Calculate the sum of the expected value and the standard deviation of L*.

(A) (B) (C) (D) (E)

0.59 0.71 0.86 0.89 1.01

143. Workers compensation claims are reported according to a Poisson process with mean
100 per month. The number of claims reported and the claim amounts are independently distributed. 2% of the claims exceed 30,000. Calculate the number of complete months of data that must be gathered to have at least a 90% chance of observing at least 3 claims each exceeding 30,000. (A) (B) (C) (D) (E) 1 2 3 4 5

92

144. For students entering a three-year law school, you are given:
(i) The following double decrement table: For a student at the beginning of that academic year, probability of Withdrawal for Survival Academic All Other Through Failure Reasons Academic Year 0.40 0.20 --0.30 ---0.60

Academic Year 1 2 3

(ii) (iii)

Ten times as many students survive year 2 as fail during year 3. The number of students who fail during year 2 is 40% of the number of students who survive year 2.

Calculate the probability that a student entering the school will withdraw for reasons other than academic failure before graduation.

(A) (B) (C) (D) (E)

Less than 0.35 At least 0.35, but less than 0.40 At least 0.40, but less than 0.45 At least 0.45, but less than 0.50 At least 0.50

93

145. Given:
(i) Superscripts M and N identify two forces of mortality and the curtate expectations of life calculated from them.
N 25

(ii)

R . bt g = | bbttgg + 01* b1 t g S | T
M 25 M 25 N e25 .

0 t 1 t >1

(iii)

M e25 = 10.0

Calculate (A) (B) (C) (D) (E) 9.2 9.3 9.4 9.5 9.6

146. A fund is established to pay annuities to 100 independent lives age x.

receive 10,000 per year continuously until death. You are given: (i) (ii) (iii)

Each annuitant will

= 0.06
Ax = 0.40
2

Ax = 0.25

Calculate the amount (in millions) needed in the fund so that the probability, using the normal approximation, is 0.90 that the fund will be sufficient to provide the payments. (A) (B) (C) (D) (E) 9.74 9.96 10.30 10.64 11.10 94

147. Total hospital claims for a health plan were previously modeled by a two-parameter
Pareto distribution with = 2 and = 500 . The health plan begins to provide financial incentives to physicians by paying a bonus of 50% of the amount by which total hospital claims are less than 500. No bonus is paid if total claims exceed 500. Total hospital claims for the health plan are now modeled by a new Pareto distribution with = 2 and = K . The expected claims plus the expected bonus under the revised model equals expected claims under the previous model. Calculate K. (A) (B) (C) (D) (E) 250 300 350 400 450

148. A decreasing term life insurance on (80) pays (20-k) at the end of the year of death if (80)
dies in year k+1, for k=0,1,2,,19. You are given: (i) i=0.06 (ii) For a certain mortality table with q80 = 0.2 , the single benefit premium for this insurance is 13. For this same mortality table, except that q80 = 01 , the single benefit premium for . this insurance is P.

(iii)

Calculate P. (A) (B) (C) (D) (E) 11.1 11.4 11.7 12.0 12.3 95

149. Job offers for a college graduate arrive according to a Poisson process with mean 2 per
month. A job offer is acceptable if the wages are at least 28,000. Wages offered are . . mutually independent and follow a lognormal distribution with = 1012 and = 012 . Calculate the probability that it will take a college graduate more than 3 months to receive an acceptable job offer. (A) (B) (C) (D) (E) 0.27 0.39 0.45 0.58 0.61

150. For independent lives (50) and (60):

x =

bg

1 , 100 x

0 x < 100

Calculate e50:60 .

(A) (B) (C) (D) (E)

30 31 32 33 34

96

151. For an industry-wide study of patients admitted to hospitals for treatment of

cardiovascular illness in 1998, you are given: (i) Duration In Days 0 5 10 15 20 25 30 35 40 (ii) Number of Patients Remaining Hospitalized 4,386,000 1,461,554 486,739 161,801 53,488 17,384 5,349 1,337 0

Discharges from the hospital are uniformly distributed between the durations shown in the table.

Calculate the mean residual time remaining hospitalized, in days, for a patient who has been hospitalized for 21 days.

(A) (B) (C) (D) (E)

4.4 4.9 5.3 5.8 6.3

97

152. For an individual over 65:

(i) (ii) (iii) The number of pharmacy claims is a Poisson random variable with mean 25. The amount of each pharmacy claim is uniformly distributed between 5 and 95. The amounts of the claims and the number of claims are mutually independent.

Determine the probability that aggregate claims for this individual will exceed 2000 using the normal approximation. (A) 1 133 . (B) (C) (D) (E)

b g 1 b166g . 1 b2.33g 1 b2.66g 1 b3.33g

i = 0.03

153. For a fully discrete three-year endowment insurance of 10,000 on (50), you are given:
(i) (ii) (iii) (iv) (v) (vi) 1000q50 = 8.32 1000q51 = 9.11 10,000 1V50:3 = 3209 10,000 2V50:3 = 6539
0

L is the prospective loss random variable at issue, based on the benefit premium. Calculate the variance of 0 L . (A) (B) (C) (D) (E) 277,000 303,000 357,000 403,000 454,000 98

154. For a special 30-year deferred annual whole life annuity-due of 1 on (35):
(i) If death occurs during the deferral period, the single benefit premium is refunded without interest at the end of the year of death. a65 = 9.90 A35:30 = 0.21
1 A35:30 = 0.07

(ii) (iii) (iv)

Calculate the single benefit premium for this special deferred annuity. (A) (B) (C) (D) (E) 1.3 1.4 1.5 1.6 1.7

155. Given:
(i) (ii)

x = F + e2 x ,
0.4

bg

x0

p0 = 0.50

Calculate F.

(A) (B) (C) (D) (E)

-0.20 -0.09 0.00 0.09 0.20

99

156-157

Use the following information for questions 156 and 157. An insurer has excess-of-loss reinsurance on auto insurance. You are given: (i) (ii) Total expected losses in the year 2001 are 10,000,000. In the year 2001 individual losses have a Pareto distribution with

F 2000 IJ , x > 0. F b xg = 1 G H x + 2000K

2

(iii) (iv)

Reinsurance will pay the excess of each loss over 3000. Each year, the reinsurer is paid a ceded premium, Cyear , equal to 110% of the expected losses covered by the reinsurance.

(v) (vi)

Individual losses increase 5% each year due to inflation. The frequency distribution does not change.

156. Calculate C2001.

(A) (B) (C) (D) (E) 2,200,000 3,300,000 4,400,000 5,500,000 6,600,000

157. Calculate C2002 / C2001 .

(A) (B) (C) (D) (E) 1.04 1.05 1.06 1.07 1.08

100

SOCIETY OF ACTUARIES

EXAM M ACTUARIAL MODELS

EXAM M SAMPLE SOLUTIONS

Copyright 2005 by the Society of Actuaries

Some of the questions in this study note are taken from past SOA examinations.

M-09-05

PRINTED IN U.S.A.

Question #1 Key: E
2

q30:34 = 2 p30:34 3 p30:34

2 2 2

p30 = ( 0.9 )( 0.8 ) = 0.72 p34 = ( 0.5 )( 0.4 ) = 0.20 p30:34 = ( 0.72 )( 0.20 ) = 0.144
2 3 3 3 3

p30 = ( 0.72 )( 0.7 ) = 0.504 p34 = ( 0.20 )( 0.3) = 0.06

p30:34 = 0.72 + 0.20 0.144 = 0.776

p30:34 = ( 0.504 )( 0.06 ) = 0.03024 p30:34 = 0.504 + 0.06 0.03024 = 0.53376

q30:34 = 0.776 0.53376 = 0.24224

Alternatively,
2 q30:34 = 2 q30 + 2 q34 2 q30:34

= 2 p30q32 + 2 p34q36 2 p30:34 1 p32:36 = (0.9)(0.8)(0.3) + (0.5)(0.4)(0.7) (0.9)(0.8)(0.5)(0.4) [1-(0.7)(0.3)] = 0.216 + 0.140 0.144(0.79) = 0.24224
Alternatively,
2

q30:34 = 3 q30 3 q34 2 q30 2 q34 = (1 3 p30 )(1 3 p34 ) (1 2 p30 )(1 2 p34 ) = (1 0.504 )(1 0.06 ) (1 0.72 )(1 0.20 ) = 0.24224

(see first solution for

p30 ,

p34 ,

p30 ,

p34 )

Question #2

Key: E
1 1000 Ax = 1000 Ax:10 + 10 Ax 10 0.04t 0.06t e (0.06)dt + e0.4e0.6 e0.05t e0.07t (0.07)dt = 1000 e 0 0 0.12t 10 0.1t dt = 1000 0.06 e dt + e 1 (0.07) e 0 0 0.10 t 10 + e 1 (0.07) e0.12t = 1000 0.06 e 0.10 0 0.12 0 = 1000 0.06 1 e 1 + 0.07 e 1 1 e1.2 0.12 0.10

= 1000 ( 0.37927 + 0.21460 ) = 593.87

Because this is a timed exam, many candidates will know common results for constant force and constant interest without integration.
1 For example Ax:10 = 10 E x

(1 10 Ex )

=e

10 ( + )

Ax =

With those relationships, the solution becomes 1 1000 Ax = 1000 Ax:10 + 10 Ex Ax +10 0.06 0.07 ( 0.06+ 0.04 )10 0.06+ 0.04 )10 = 1000 +e ( 1 e 0.07 + 0.05 0.06 + 0.04 = 1000 ( 0.60 ) 1 e 1 + 0.5833 e 1 = 593.86

Question #3 Key: A c ( 400 x ) x < 400 B= x 400 0 100 = E ( B ) = ci400 cE ( X 400 )

300 = ci400 ci300 1 300 + 400 4 = c 400 300i 7 100 c= = 0.44 228.6

Question #4

Key: C
Let N = # of computers in department Let X = cost of a maintenance call Let S = aggregate cost

Var ( X ) = Standard Deviation ( X ) = 2002 = 40,000

2

E X 2 = Var ( X ) + E ( X )

( )

= 40,000 + 802 = 46, 400 E ( S ) = N E ( X ) = N 3 80 = 240 N Var ( S ) = N E X 2 = N 3 46, 400 = 139, 200 N
We want 0.1 Pr ( S > 1.2 E ( S ) ) S E (S ) 0.2 E ( S ) Pr > 139, 200 N 139, 200 N 1.282 373.1 N = 99.3 48
2

( )

0.2 240 N 1.282 = ( 0.9 ) 373.1 N

Question #5

Key: B
( ( ( ( x ) = x1) + x2 ) + x3) = 0.0001045
t

( px ) = e 0.0001045t

1 APV Benefits = e t 1,000,000 t px ( ) x( ) dt 0

+ e
0 0

2 500,000 t px ( ) x( ) dt

3 + e 200,000 t px ( ) x( ) dt

1,000,000 0.0601045t 500,000 0.0601045t 250,000 0.0601045t dt + dt + e dt 0 e 0 e 2,000,000 250,000 10,000 0

= 27.5 (16.6377 ) = 457.54

Question #6

Key: B APV Benefits

1 = 1000 A40:20

k = 20

k E401000vq40+k

APV Premiums = a40:20 +

k = 20

k E401000vq40+k

Benefit premiums Equivalence principle

1 1000 A40:20

k = 20

k E401000vq40+k = a40:20 + k E401000vq40+k

20

1 = 1000 A40:20

161.32 ( 0.27414 )( 369.13) 14.8166 ( 0.27414 )(11.1454 )

/ a40:20

= 5.11
1 While this solution above recognized that = 1000P40:20 and was structured to take

advantage of that, it wasnt necessary, nor would it save much time. Instead, you could do:

APV Benefits = 1000 A40 = 161.32

APV Premiums = a40:20 + 20 E40 k E60 1000vq60+ k

k =0

= a40:20 + 20 E40 1000 A60 = 14.8166 ( 0.27414 )(11.1454 ) + ( 0.27414 )( 369.13) = 11.7612 + 101.19 11.7612 + 101.19 = 161.32 161.32 101.19 = = 5.11 11.7612
Question #7

Key: C
A70 = A70 = i ln (1.06 ) ( 0.53) = 0.5147 0.06 1 A70 1 0.5147 = = 8.5736 a70 = d 0.06 /1.06 0.97 a69 = 1 + vp69a70 = 1 + ( 8.5736 ) = 8.8457 1.06
2

( a69) = ( 2 ) a69 ( 2 ) = (1.00021)( 8.8457 ) 0.25739

= 8.5902

( m 1) works well (is closest to the exact answer, (m Note that the approximation ax ) ax 2m 1 only off by less than 0.01). Since m = 2, this estimate becomes 8.8457 = 8.5957 4
Question #8 Key: C The following steps would do in this multiple-choice context: 1. From the answer choices, this is a recursion for an insurance or pure endowment. 2. Only C and E would satisfy u(70) = 1.0. 1+ i u ( k 1) 3. It is not E. The recursion for a pure endowment is simpler: u ( k ) = pk 1 4. Thus, it must be C. More rigorously, transform the recursion to its backward equivalent, u ( k 1) in terms of u ( k ) :

 q 1+ i u ( k ) = k 1 + u ( k 1) pk 1 pk 1 pk 1u ( k ) = qk 1 + (1 + i ) u ( k 1) u ( k 1) = vqk 1 + vpk 1 u ( k )

This is the form of (a), (b) and (c) on page 119 of Bowers with x = k 1 . Thus, the recursion could be:

Ax = vqx + vpx Ax +1
or or
A1: y x = vq x + vp x Ax1 1: y x 1 x +

Ax: y x = vqx + vpx Ax +1: y x 1

Condition (iii) forces it to be answer choice C

u ( k 1) = Ax fails at x = 69 since it is not true that

A69 = vq69 + vp69 (1)

u ( k 1) = A1: y x fails at x = 69 since it is not true that x
1 A69:1 = vq69 + vp69 (1)

( (

) )

u ( k 1) = Ax: y x is OK at x = 69 since A69:1 = vq69 + vp69 (1)

Note: While writing recursion in backward form gave us something exactly like page 119 of Bowers, in its original forward form it is comparable to problem 8.7 on page 251. Reasoning from that formula, with h = 0 and bh +1 = 1 , should also lead to the correct answer.

Question #9 Key: A You arrive first if both (A) the first train to arrive is a local and (B) no express arrives in the 12 minutes after the local arrives. P ( A) = 0.75 Expresses arrive at Poisson rate of ( 0.25 )( 20 ) = 5 per hour, hence 1 per 12 minutes.

e 110 = 0.368 0! A and B are independent, so P ( A and B ) = ( 0.75 )( 0.368 ) = 0.276 f ( 0) =

Question #10

Key: E
d = 0.05 v = 0.095 At issue
A40 = v k +1 k q40 = 0.02 v1 + ... + v50 = 0.02v 1 v50 / d = 0.35076 and a40 = (1 A40 ) / d = (1 0.35076 ) / 0.05 = 12.9848 so P40 = 1000 A40 350.76 = = 27.013 a40 12.9848
k =0 49

10 L

K ( 40 ) 10 = 1000 A50

Revised

P40a50

Revised

= 549.18 ( 27.013)( 9.0164 ) = 305.62

where
A50
Revised k =0 Revised a50 =

= v k +1 k q50

24

Revised

= 0.04 v1 + ... + v 25 = 0.04v 1 v 25 / d = 0.54918

and

(1 A

Revised 50

) / d = (1 0.54918) / 0.05 = 9.0164

Question #11 Key: E Let NS denote non-smokers and S denote smokers. The shortest solution is based on the conditional variance formula

Var ( X ) = E Var ( X Y ) + Var E ( X Y )

Let Y = 1 if smoker; Y = 0 if non-smoker S 1 Ax S E aT Y = 1 = ax =

1 0.444 = 5.56 0.1 1 0.286 = 7.14 Similarly E aT Y = 0 = 0.1 =

E E aT Y

( (

) ) = E ( E ( aT 0 ) ) Prob ( Y=0 ) + E ( E ( aT 1) ) Prob ( Y=1)

= ( 7.14 )( 0.70 ) + ( 5.56 )( 0.30 ) = 6.67

E E aT Y

( (

))

Var E aT Y

) ) = 44.96 6.672 = 0.47 E ( Var ( aT Y ) ) = ( 8.503)( 0.70 ) + ( 8.818 )( 0.30 )

( (

2 2 = 7.14 ( 0.70 ) + 5.56 ( 0.30 ) = 44.96

Var aT = 8.60 + 0.47 = 9.07

Alternatively, here is a solution based on
Var(Y ) = E Y 2 E (Y ) , a formula for the variance of any random variable. This can be
2

( )

= 8.60

( )

transformed into E Y 2 = Var (Y ) + E (Y ) which we will use in its conditional form

2

E aT

(( )

NS = Var aT NS + E aT NS

( )

Var aT = E aT

( )

E aT

E aT = E aT S Prob [S] + E aT NS Prob [ NS]

= 0.30axS + 0.70axNS =
S 0.30 1 Ax

0.1 0.1 0.30 (1 0.444 ) + 0.70 (1 0.286 ) = = ( 0.30 )( 5.56 ) + ( 0.70 )( 7.14 ) 0.1 = 1.67 + 5.00 = 6.67 E aT

) + 0.70 (1 A )
NS x

( )

= E aT 2 S Prob [S] + E aT 2 NS Prob [ NS]

2 = 0.30 Var aT S + E aT S

( (
(

) (
)

+0.70 Var aT NS + E aT NS

2 2 = 0.30 8.818 + ( 5.56 ) + 0.70 8.503 + ( 7.14 ) 11.919 + 41.638 = 53.557

Var aT = 53.557 ( 6.67 ) = 9.1

2

Alternatively, here is a solution based on aT =

1 v Var aT = Var

1 vT

( )

vT = Var since Var ( X + constant ) = Var ( X ) = = Var vT

2
2

( ) since Var ( constant X ) = constant

2

Var ( X )

Ax ( Ax )

which is Bowers formula 5.2.9

2 This could be transformed into 2Ax = 2 Var aT + Ax , which we will use to get
2

( )

Ax NS and 2AxS .

Ax = E v 2T = E v 2T NS Prob ( NS) + E v 2T S Prob ( S ) 2 = 2 Var aT NS + Ax NS Prob ( NS) 2 + 2Var aT S + AxS Prob ( S)

) (

) ( )

= ( 0.01)( 8.503) + 0.2862 0.70 + ( 0.01)( 8.818 ) + 0.4442 0.30 = 0.20238

Ax = E vT = E vT NS Prob ( NS) + E vT S Prob ( S) = ( 0.286 )( 0.70 ) + ( 0.444 )( 0.30 ) = 0.3334 Var aT = =

= ( 0.16683)( 0.70 ) + ( 0.28532 )( 0.30 )

( )

Ax ( Ax )

2
0.20238 0.33342 = 9.12 0.01

Question #12 Key: A To be a density function, the integral of f must be 1 (i.e., everyone dies eventually). The solution is written for the general case, with upper limit . Given the distribution of f 2 ( t ) , we could have used upper limit 100 here. Preliminary calculations from the Illustrative Life Table:

l50 = 0.8951 l0 l40 = 0.9313 l0

1 = fT ( t ) dt = k f1 ( t ) dt + 1.2 f 2 ( t )dt
50 0 0 50

= k

50

= k F1 ( 50 ) + 1.2 ( F2 ( ) F2 ( 50 ) ) = k (1 50 p0 ) + 1.2 (1 0.5 ) = k (1 0.8951) + 0.6 k= 1 0.6 = 3.813 1 0.8951

x

f1 ( t ) dt + 1.2 f 2 ( t )dt
50

For x 50, FT ( x ) = 3.813 f1 ( t ) dt = 3.813F1 ( x )

0

l FT ( 40 ) = 3.813 1 40 = 3.813 (1 0.9313) = 0.262 l0 l FT ( 50 ) = 3.813 1 50 = 3.813 (1 0.8951) = 0.400 l0

10

p40 =

1 FT ( 50 ) 1 0.400 = = 0.813 1 FT ( 40 ) 1 0.262

Question #13 Key: D Let NS denote non-smokers, S denote smokers.

Prob (T < t ) = Prob (T < t NS) Prob ( NS ) + P rob (T < t S) P rob ( S ) = 1 e 0.1t 0.7 + 1 e 0.2t 0.3 = 1 0.7e 0.1t 0.3 e0.2t S ( t ) = 0.3e0.2 t + 0.7e0.1t

Want t such that 0.75 = 1 S ( t ) or 0.25 = S ( t )

0.25 = 0.3e2t + 0.7e 0.1t = 0.3 e0.1t

+ 0.7e0.1t

Substitute: let x = e 0.1t 0.3 x 2 + 0.7 x 0.25 = 0

This is quadratic, so x =
x = 0.3147 e 0.1t = 0.3147

0.7 0.49 + ( 0.3)( 0.25 ) 4 2 ( 0.3)

so t = 11.56

Question #14 Key: D The modified severity, X*, represents the conditional payment amount given that a payment occurs. Given that a payment is required (X > d), the payment must be uniformly distributed between 0 and c (b d ) . The modified frequency, N*, represents the number of losses that result in a payment. bd The deductible eliminates payments for losses below d, so only 1 Fx ( d ) = of b losses will require payments. Therefore, the Poisson parameter for the modified bd . (Reimbursing c% after the deductible affects only the frequency distribution is b payment amount and not the frequency of payments).

Question #15 Key: C Let N = number of sales on that day S = aggregate prospective loss at issue on those sales K = curtate future lifetime
N Poisson ( 0.2*50 )
0L

E [ N ] = Var [ N ] = 10

= 10,000v K +1 500aK +1

E [ 0 L ] = 10,000 A65 500a65 500 2 2 Var [ 0 L ] = 10,000 + A65 ( A65 ) d

2

500 K +1 500 0 L = 10,000 + v d d S = 0 L1 + 0 L2 + ... + 0 LN E [ S ] = E [ N ] E [ 0 L]

Var [ S ] = Var [ 0 L ] E [ N ] + ( E [ 0 L ]) Var [ N ]

2

 0 E [S ] Pr ( S < 0 ) = Pr Z < Var [ S ]

Substituting d = 0.06/(1+0.06), 2 A65 = 0.23603, A65 = 0.43980 and a65 = 9.8969 yields
Var [ 0 L ] = 15,112,000 E [ S ] = 5504.5 Var [ S ] = 154,150,000 E [ 0 L ] = 550.45

Std Dev (S) = 12,416 S + 5504.5 5504.5 Pr ( S < 0 ) = Pr < 12, 416 12,416
= Pr ( Z < 0.443) = 0.67

With the answer choices, it was sufficient to recognize that: 0.6554 = ( 0.4 ) < ( 0.443) < ( 0.5 ) = 0.6915 By interpolation, ( 0.443) ( 0.43) ( 0.5 ) + ( 0.57 ) ( 0.4 )

= ( 0.43)( 0.6915 ) + ( 0.57 )( 0.6554 ) = 0.6709

Question #16 Key: A

1000 P40 = A40 161.32 = = 10.89 a40 14.8166

a 11.1454 1000 20V40 = 1000 1 60 = 1000 1 = 247.78 14.8166 a40 ( 20V + 5000 P40 ) (1 + i) 5000q60 V 21 = P60

( 247.78 + (5)(10.89) ) 1.06 5000 ( 0.01376 ) = 255

1 0.01376

[Note: For this insurance, 20V = 1000 20V40 because retrospectively, this is identical to whole life] Though it would have taken much longer, you can do this as a prospective reserve. The prospective solution is included for educational purposes, not to suggest it would be suitable under exam time constraints.

1000 P40 = 10.89 as above

1 1000 A40 + 4000 20 E40 A60:5 = 1000 P40 + 5000 P40 20 E40 a60:5 + 1 where A60:5 = A60 5 E60 A65 = 0.06674 20 E40 5 E60

a65

a40:20 = a40 20 E40 a60 = 11.7612

1000 ( 0.16132 ) + ( 4000 )( 0.27414 )( 0.06674 ) = = (10.89 )(11.7612 ) + ( 5 )(10.89 )( 0.27414 )( 4.3407 ) + ( 0.27414 )( 0.68756 )( 9.8969 )

a60:5 = a60 5 E60 a65 = 4.3407

161.32 + 73.18 128.08 64.79 1.86544 = 22.32

20 V

Having struggled to solve for , you could calculate above) calculate 21V recursively.
20V 1 = 4000 A60:5 + 1000 A60 5000 P40 a60:5 5 E60 a65

prospectively then (as

= ( 4000 )( 0.06674 ) + 369.13 ( 5000 )( 0.01089 )( 4.3407 ) ( 22.32 )( 0.68756 )( 9.8969 ) = 247.86 (minor rounding difference from 1000 20V40 )

Or we can continue to
21V

21V

prospectively

1 5000 A61:4 4 E61

+ 1000 4 E61 A65 5000 P40 a61:4 4 E61 a65

where

l65 4 7,533,964 v = ( 0.79209 ) = 0.73898 l61 8,075, 403

1 A61:4 = A61 4 E61 A65 = 0.38279 0.73898 0.43980

a61:4

= 0.05779 = a61 4 E61 a65 = 10.9041 0.73898 9.8969

= 3.5905

21V

= ( 5000 )( 0.05779 ) + (1000 )( 0.73898 )( 0.43980 ) ( 5 )(10.89 )( 3.5905 ) 22.32 ( 0.73898 )( 9.8969 ) = 255

Finally. A moral victory. Under exam conditions since prospective benefit reserves must equal retrospective benefit reserves, calculate whichever is simpler.

Question #17 Key: C

Var ( Z ) = 2 A41 ( A41 )
2

A41 A40 = 0.00822 = A41 (vq40 + vp40 A41 ) A41 = 0.21650

2

= A41 (0.0028 /1.05 + ( 0.9972 /1.05 ) A41 )

A41 2 A40 = 0.00433 = 2 A41 v 2 q40 + v 2 p40 2 A41

) )
2

= 2 A41 (0.0028 /1.052 + 0.9972 /1.052

2

A41 )

A41 = 0.07193

Var ( Z ) = 0.07193 0.216502 = 0.02544

Question #18 Key: D This solution looks imposing because there is no standard notation. Try to focus on the big picture ideas rather than starting with the details of the formulas. Big picture ideas: 1. We can express the present values of the perpetuity recursively. 2. Because the interest rates follow a Markov process, the present value (at time t ) of the future payments at time t depends only on the state you are in at time t , not how you got there. 3. Because the interest rates follow a Markov process, the present value of the future payments at times t1 and t2 are equal if you are in the same state at times t1 and t2 . Method 1: Attack without considering the special characteristics of this transition matrix. Let sk = state you are in at time k ( thus sk = 0, 1 or 2 ) Let Yk = present value, at time k , of the future payments. Yk is a random variable because its value depends on the pattern of discount factors, which are random. The expected value of Yk is not constant; it depends on what state we are in at time k. Recursively we can write
Yk = v (1 + Yk +1 ) , where it would be better to have notation that indicates the vs are not

constant, but are realizations of a random variable, where the random variable itself has different distributions depending on what state were in. However, that would make the notation so complex as to mask the simplicity of the relationship. Every time we are in state 0 we have E Yk sk = 0 = 0.95 1 + E Yk +1 sk = 0

)
) = 1 s = 0]) = 2 s = 0])}
k k

= 0.95 1 + E Yk +1 sk +1 = 0 Pr ob s k+1 = 0 sk = 0]

( {(

( = ( E Y

+ E Yk +1 sk +1
k +1

sk +1

)) ( = 1 ) Pr ob ( s = 2 ) Pr ob ( s

k +1 k +1

= 0.95 1 + E Yk +1 sk +1 = 1

That last step follows because from the transition matrix if we are in state 0, we always move to state 1 one period later. Similarly, every time we are in state 2 we have E Yk sk = 2 = 0.93 1 + E Yk +1 sk = 2

= 0.93 1 + E Yk +1 sk +1 = 1

That last step follows because from the transition matrix if we are in state 2, we always move to state 1 one period later. Finally, every time we are in state 1 we have E Yk sk = 1 = 0.94 1 + E Yk +1 sk = 1

= 0.94 1 + E Yk +1 sk +1 = 0 Pr sk +1 = 0 sk = 1 + E Yk +1 sk +1 = 2 Pr sk +1 = 2 sk = 1

( {

= 0.94 1 + E Yk +1 sk +1 = 0 0.9 + E Yk +1 sk +1 = 2 0.1 . Those last two steps follow from the fact that from state 1 we always go to either state 0 (with probability 0.9) or state 2 (with probability 0.1).

( {

})

})

Now lets write those last three paragraphs using this shorter notation: xn = E Yk sk = n . We can do this because (big picture idea #3), the conditional expected value is only a function of the state we are in, not when we are in it or how we got there.

x0 = 0.95 (1 + x1 ) x1 = 0.94 (1 + 0.9 x0 + 0.1x2 ) x2 = 0.93 (1 + x1 )

Thats three equations in three unknowns. Solve (by substituting the first and third into the second) to get x1 = 16.82 . Thats the answer to the question, the expected present value of the future payments given in state 1. The solution above is almost exactly what we would have to do with any 3 3 transition matrix. As we worked through, we put only the non-zero entries into our formulas. But if for example the top row of the transition matrix had been ( 0.4 0.5 0.1) , then the first of our three equations would have become x0 = 0.95 (1 + 0.4 x0 + 0.5 x1 + 0.1x2 ) , similar in structure to our actual equation for x1 . We would still have ended up with three linear equations in three unknowns, just more tedious ones to solve. Method 2: Recognize the patterns of changes for this particular transition matrix.

This particular transition matrix has a recurring pattern that leads to a much quicker solution. We are starting in state 1 and are guaranteed to be back in state 1 two steps later, with the same prospective value then as we have now. Thus, E [Y ] = E Y first move is to 0 Pr [ first move is to 0] + E Y first move is to 2 Pr [first move is to 2 ]

= 0.94 1 + 0.95 (1 + E [Y ] 0.9 + 0.94 1 + 0.93 (1 + E [Y ]) 0.1

(Note that the equation above is exactly what you get when you substitute x0 and x2 into the formula for x1 in Method 1.)
= 1.6497 + 0.8037 E [Y ] + 0.1814 + 0.0874 E [Y ] E [Y ] = 1.6497 + 0.1814 (1 0.8037 0.0874 )

= 16.82

Question #19 Key: E The number of problems solved in 10 minutes is Poisson with mean 2. If she solves exactly one, there is 1/3 probability that it is #3. If she solves exactly two, there is a 2/3 probability that she solved #3. If she solves #3 or more, she got #3. f(0) = 0.1353 f(1) = 0.2707 f(2) = 0.2707

1 2 P = ( 0.2707 ) + ( 0.2707 ) + (1 0.1353 0.2707 0.2707 ) = 0.594 3 3

Question #20 Key: D

( ( ( x ) = x1) ( t ) + x2 ) ( t ) ( (2 = 0.2 x ) ( t ) + x ) ( t ) (2 ( x ) ( t ) = 0.8 x ) ( t )
0.2 k t '1 '1 qx( ) = 1 px( ) = 1 e 0
1 2

dt

= 1 e

0.2

k 3

= 0.04

ln (1 0.04 ) / ( 0.2 ) = 0.2041

k = 0.6123
( 2) 2 qx

0 t

2 ( ( 2 px ) x ) dt = 0.8 0

( ( px ) x ) ( t ) dt

( ( = 0.8 2 qx ) = 0.8 1 2 px )
x (t ) d t ( ) 0 2 px = e
2

kt = e 0

dt

8 k e 3 ( 8 ) ( 0.6123) 3 e

= = 0.19538
( 2) 2 qx

= 0.8 (1 0.19538 ) = 0.644

Question #21 Key: A k 0 1 2 3+

k 3

f(k) 0.1 (0.9)(0.2) = 0.18 (0.72)(0.3) = 0.216 1-0.1-0.18-0.216 = 0.504

f ( k ) ( k 3)

f ( k ) (k 3) 2
0 0.18 0.864 4.536 5.580

0 1 2 3

0 0.18 0.432 1.512 2.124

E ( K 3) = 2.124 E ( K 3)

) = 5.580

Var ( K 3) = 5.580 2.1242 = 1.07 Note that E [ K 3] is the temporary curtate life expectancy, ex:3 if the life is age x. Problem 3.17 in Bowers, pages 86 and 87, gives an alternative formula for the variance, basing the calculation on k px rather than k q x .

Question #22 Key: E

f ( x) = 0.01, 0 x 80 = 0.01 0.00025( x 80) = 0.03 0.00025 x,

E ( x) = 0.01x dx +
0 80 120 80

80 < x 120

( 0.03x 0.00025x ) dx
2 120 80

0.01x 2 80 0.03 x 2 120 0.00025 x3 + 2 0 2 80 3 = 32 + 120 101.33 = 50.66667 =

20 0

E ( X 20) + = E ( X ) x f ( x ) dx 20(1

20

f ( x ) dx)
20 0

0.01x 2 20 = 50.6667 20 1 0.01x 2 0 = 50.6667 2 20(0.8) = 32.6667

Loss Elimination Ratio = 1

32.6667 = 0.3553 50.6667

Question #23 Key: D Let q64 for Michel equal the standard q64 plus c. We need to solve for c. Recursion formula for a standard insurance:
20V45

= ( 19V45 + P45 ) (1.03) q64 (1 20V45 )

Recursion formula for Michels insurance

20V45

= ( 19V45 + P45 + 0.01) (1.03) ( q64 + c ) (1 20V45 )

19 V45

The values of

and

20V45

are the same in the two equations because we are told

Michels benefit reserves are the same as for a standard insurance. Subtract the second equation from the first to get:

0 = (1.03) (0.01) + c(1 20V45 ) c= = (1.03) ( 0.01) (1 20V45 )

0.0103 1 0.427 = 0.018

Question #24 Key: B K is the curtate future lifetime for one insured. L is the loss random variable for one insurance. LAGG is the aggregate loss random variables for the individual insurances. AGG is the standard deviation of LAGG . M is the number of policies.

L = v K +1 aK +1 = 1 + v K +1 d d (1 Ax ) E [ L ] = ( Ax ax ) = Ax d 0.75095 = 0.24905 0.025 = 0.082618 0.056604

 Var [ L ] = 1 + d

0.025 2 2 Ax Ax = 1 + 0.09476 ( 0.24905 ) = 0.068034 0.056604

E [ LAGG ] = M E [ L ] = 0.082618M Var [ LAGG ] = M Var [ L ] = M (0.068034) AGG = 0.260833 M

L E [ LAGG ] E ( LAGG ) > Pr [ LAGG > 0] = AGG AGG AGG 0.082618M Pr N (0,1) > M ( 0.260833) 0.082618 M 0.260833 M = 26.97 1.645 =

minimum number needed = 27

Question #25 Key: D Annuity benefit: Death benefit: New benefit:

1 v K +1 Z1 = 12,000 for K = 0,1, 2,... d Z 2 = Bv K +1 for K = 0,1, 2,... Z = Z1 + Z 2 = 12,000 1 v K +1 + Bv K +1 d 12,000 12,000 K +1 = +B v d d

12,000 K +1 Var( Z ) = B Var v d 12,000 Var ( Z ) = 0 if B = = 150,000 . 0.08

In the first formula for Var ( Z ) , we used the formula, valid for any constants a and b and random variable X,

Var ( a + bX ) = b 2Var ( X )

Question #26 Key: B First restate the table to be CACs cost, after the 10% payment by the auto owner: Towing Cost, x 72 90 144 p(x) 50% 40% 10%

Then E ( X ) = 0.5*72 + 0.4*90 + 0.1*144 = 86.4

E X 2 = 0.5*722 + 0.4*902 + 0.1*1442 = 7905.6 Var ( X ) = 7905.6 86.42 = 440.64

Because Poisson, E ( N ) = Var ( N ) = 1000
E ( S ) = E ( X ) E ( N ) = 86.4*1000 = 86, 400

( )

Var( S ) = E ( N )Var( X ) + E ( X )2 Var( N ) = 1000* 440.64 + 86.42 *1000 = 7,905,600 S E ( S ) 90,000 86, 400 > Pr( S > 90,000) + Pr = Pr( Z > 1.28) = 1 (1.28) = 0.10 Var( S ) 7,905,600
Since the frequency is Poisson, you could also have used Var ( S ) = E X 2 = (1000 )( 7905.6 ) = 7,905,600

( )

That way, you would not need to have calculated Var ( X ) .

Question #27

Key: C
d / E ( X d ) 1 e LER = = = 1 e d / E(X )

Last year Next year:

0.70 = 1 e d / d = log 0.30 d new = log(1 LER new ) 4 Hence log (1 LER new ) = d new = log 0.30 3 log (1 LER new ) = 1.6053

(1 LER new ) = e1.6053 = 0.20

LER new = 0.80

Question #28 Key: E

E ( X ) = e(d ) S (d ) + E ( X d )

[Klugman Study Note, formula 3.10]

62 = e 40 40 p0 + E (T 40 )
62 = (e 40 )(0.6) + 40 (0.005)(402 ) = 0.6 e 40 + 32 e40 = 0.6

( 62 32 ) = 50

The first equation, in the notation of Bowers, is e0 = e40 40 p0 + e0:40 . The corresponding formula, with i > 0 , is a very commonly used one:

ax = ax:n + n Ex ax + n

Question #29 Key: B

d = 0.05 v = 0.95

Step 1 Determine px from Kevins work:

608 + 350vpx = 1000vqx + 1000v 2 px ( px +1 + qx +1 )

608 + 332.5 px = 950 (1 px ) + 902.5 px px = 342 / 380 = 0.9

608 + 350 ( 0.95 ) px = 1000 ( 0.95 ) (1 px ) + 1000 ( 0.9025 ) px (1)

Step 2 Calculate 1000 Px:2 , as Kira did:

608 + 350 ( 0.95 )( 0.9 ) = 1000 Px:2 1 + ( 0.95 )( 0.9 ) [ 299.25 + 608] = 489.08 1000 Px:2 = 1.855

The first line of Kiras solution is that the actuarial present value of Kevins benefit premiums is equal to the actuarial present value of Kiras, since each must equal the actuarial present value of benefits. The actuarial present value of benefits would also have been easy to calculate as (1000 )( 0.95 )( 0.1) + (1000 ) 0.952 ( 0.9 ) = 907.25

Question #30 Key: E Because no premiums are paid after year 10 for (x), 11Vx = Ax +11 Rearranging 8.3.10 from Bowers, we get
10V

V h +1

( hV + h ) (1 + i ) bh+1qx+ h
px + h

0.989 ( 35,635.642 + 0 ) (1.05) 100,000 0.012 = 36,657.31 = A V 11 = x +11 0.988

( 32,535 + 2,078 ) (1.05) 100,000 0.011 = 35,635.642

Question #31 Key: B

x For De Moivres law where s ( x ) = 1 : t and t px = 1 2 x 105 45 e 45 = = 30 2 105 65 e65 = = 20 2 ex =

e 45:65 =
=

40 0 t

p45:65dt =

40 60 t 0

60

40 t dt 40

1 60 + 40 2 1 3 t + t 60 40 t 60 40 2 3

FG H

IJ K

40 0

= 1556 . e 45:65 = e 45 + e 65 e 45:65 = 30 + 20 1556 = 34 .

In the integral for e45:65 , the upper limit is 40 since 65 (and thus the joint status also) can survive a maximum of 40 years.

Question #32 Answer: E

bg bg bg d e / 100i =
4 = s' 4 / s 4
4

1 e4 / 100

e4 / 100 1 e4 / 100 e4 100 e4

= 1202553 .
Question # 33 Answer: A
bi g = q b g L ln pxbi g O = q b g L ln e O M P qx x M M ln p b g PP x M ln e-b g P

bi g

b g b g = qx b g
i

x b g = x b1g + x b 2 g + x b 3g = 15 .

b q x g = 1 e b g = 1 e 1.5
=0.7769

b b0.7769g q x2 g = b g
= 0.2590

b2g

b0.5gb0.7769g
15 .

Question # 34 Answer: D

22

A 60 = v 3

2 p 60

q 60 + 2

pay at end of year 3

live then die 2 years in year 3

+ v4

3p 60

q60+ 3 then die in year 4

pay at end of year 4

live 3 years

1 . . . . . b1 0.09gb1 011gb013g + b103g b1 0.09gb1 011gb1 013gb015g . . b103g 1

3 4

= 019 .

Question # 35 Answer: B

a x = a x:5 +5 E x a x +5
1 e 0.07b5g = = 4.219 , where 0.07 = + for t < 5 0.07 = e 0.07b5g = 0.705

a x:5
5 Ex

a x +5 =

1 = 12.5 , where 0.08 = + for t 5 0.08

a x = 4.219 + 0.705 12.5 = 13.03

gb g

Question # 36 Answer: E

The distribution of claims (a gamma mixture of Poissons) is negative binomial.

b g d c hi b g Var b N g = E dVar c N hi + Var d E c N hi = E b g + Var b g = 6 r = 3 r b1 + g = 6 b1 + g = 6 / 3 = 2 ; = 1

E N = E E N = E = 3

r = 3 r=3

. b g = 0125 . b g = 01875 Pr obbat most 1g = p + p p0 = 1 + r p1 = 1+

r
r +1 0

= 0.3125

Question # 37 Answer: A

bg b g b g Var b S g = E b N g Var b X g + E b X g Var b N g

2

E S = E N E X = 110 1101 = 121110 , ,

= 110 702 + 11012 750 = 909,689,750

Std Dev S = 30,161

Pr S < 100,000 = Pr Z < 100,000 121110 / 30,161 where Z has standard normal ,

bg

distribution

g c b = Pr b Z < 0.70g = 0.242

Question # 38 Answer: C This is just the Gamblers Ruin problem, in units of 5,000 calories. Each day, up one with p = 0.45 ; down 1 with q = 0.55 Will Allosaur ever be up 1 before being down 2?

e1 b0.55 / 0.45g 2j = 0.598 P = e1 b0.55 / 0.45g 3j

Or, by general principles instead of applying a memorized formula: Let P = probability of ever reaching 3 (15,000 calories) if at 1 (5,000 calories). 1 Let P2 = probability of ever reaching 3 (15,000 calories) if at 2 (10,000 calories). From either, we go up with p = 0.45 , down with q = 0.55 P(reaching 3) = P(up) P(reaching 3 after up) + P(down) P(reaching 3 after down)

P2 = 0.45 1 + 0.55 P 1 P = 0.45 P2 + 0.55 0 = 0.45 P2 1 P2 = 0.45 + 0.55 P = 0.45 + 0.55 0.45 P2 = 0.45 + 0.2475 P2 1 P2 = 0.45 / 1 0.2475 = 0.598

Here is another approach, feasible since the number of states is small. Let states 0,1,2,3 correspond to 0; 5,000; 10,000; ever reached 15,000 calories. For purposes of this problem, state 3 is absorbing, since once the allosaur reaches 15,000 we dont care what happens thereafter.

The transition matrix is

LM1 MM 0.55 MN 0 0

0 0 0 0.45 0.55 0 0 0

0 0 0.45 1

OP PP PQ

Starting with the allosaur in state 2; [0 0 1 0] at inception [0 0.55 0 0.45] after 1 [0.3025 0 0.2475 0.45] after 2 [0.3025 0.1361 0 0.5614] after 3 [0.3774 0 0.0612 0.5614] after 4 [0.3774 0.0337 0 0.5889] after 5 [0.3959 0 0.0152 0.5889] after 6 By this step, if not before, Prob(state 3) must be converging to 0.60. Its already closer to 0.60 than 0.57, and its maximum is 0.5889 + 0.0152

Question # 39 Answer: D Per 10 minutes, find coins worth exactly 10 at Poisson rate 0.5 0.2 10 = 1 Per 10 minutes,

b gb gb g

f f f f

b0g = 0.3679 b1g = 0.3679 . b2g = 01839 b3g = 0.0613

b gh b

F 0 = 0.3679 F 1 = 0.7358 F 2 = 0.9197 F 3 = 0.9810

bg bg bg bg

Let Period 1 = first 10 minutes; period 2 = next 10. Method 1, succeed with 3 or more in period 1; or exactly 2, then one or more in period 2 P = 1 F 2 + f 2 1 F 0 = 1 0.9197 + 01839 1 0.3679 .

b gh b gc

g b

gb

= 01965 .

Method 2: fail in period 1 if < 2; fail in period 2 if exactly 2 in period 1, then 0; Succeed if fail neither period;

Pr ob = F 1 = 0.7358 Pr ob = f 2 f 0 = 01839 0.3679 = 0.0677 . Pr ob = 1 0.7358 0.0677 = 01965 .

bg bg bg b gb

(Method 1 is attacking the problem as a stochastic process model; method 2 attacks it as a ruin model.)

Question # 40 Answer: D

Use Mod to designate values unique to this insured.

a60 = 1 A60 / d = 1 0.36933 / 0.06 / 106 = 111418 . .

1000 P60 = 1000 A60 / a60

g b gb g = 1000b0.36933 / 111418g = 3315 . .

Mod Mod Mod A60 = v q60 + p60 A61 =

1 . 01376 + 0.8624 0.383 = 0.44141 . 106

gb

Mod a Mod = 1 A60 / d = 1 0.44141 / 0.06 / 106 = 9.8684 .

Mod Mod E 0 LMod = 1000 A60 P60a60

i
b g

= 1000 0.44141 0.03315 9.8684

= 114.27

Question # 41 Answer: D

The prospective reserve at age 60 per 1 of insurance is A60 , since there will be no future premiums. Equating that to the retrospective reserve per 1 of coverage, we have: s40:10 A60 = P40 + P Mod s50:10 20 k40 50 10 E50
A A60 = 40 a40 a40:10
10 E40 10 E50

Mod P50

a50:10
10 E50

1 A40:20 20 E40

0.36913 =

016132 . 7.70 7.57 0.06 + P Mod 50 14.8166 0.53667 0.51081 0.51081 0.27414

gb

0.36913 = 0.30582 + 14.8196 P Mod 0.21887 50 1000 P Mod = 19.04 50

Alternatively, you could equate the retrospective and prospective reserves at age 50. Your equation would be:
A50
Mod P50

a50:10

1 A40 a40:10 A40:10 = a40 10 E40 10 E40

1 where A40:10 = A40 10 E40 A50

= 016132 0.53667 0.24905 . = 0.02766

gb

Mod 0.24905 P50 7.57 = Mod 1000 P50

016132 . 7.70 02766 ib g 14.8166 0.53667 0..53667 0 . 1000gb014437g b = = 19.07 7.57

Alternatively, you could set the actuarial present value of benefits at age 40 to the actuarial present value of benefit premiums. The change at age 50 did not change the benefits, only the pattern of paying for them.
Mod A40 = P40 a40:10 + P50 10 E40

016132 = . 1000 P Mod 50

. FG 016132 IJ b7.70g + d P ib0.53667gb7.57g H 14.8166K b1000gb0.07748g = 19.07 =

Mod 50

a50:10

4.0626

Question # 42 Answer: A

b b b d x2 g = q x2 g lx g = 400 b d x1g = 0.45 400 = 180

qx b2g =

b g

b b lx g d x1g

b d x2 g

400 = 0.488 1000 180

pxb 2 g = 1 0.488 = 0.512

Note: The UDD assumption was not critical except to have all deaths during the year so that 1000 - 180 lives are subject to decrement 2.

Question #43 Answer: D

Use age subscripts for years completed in program. E.g., p0 applies to a person newly hired (age 0). Let decrement 1 = fail, 2 = resign, 3 = other. Then q0b1g = 1 4 , q1 b1g = 15 , q2b1g = 1 3
q b 3g = 1
0

q0b 2 g =

5,

q1 b 2 g =
1

10 ,

q b3g = 1

3, 9,

q2b 2 g =
2

q b 3g = 1

8 4

b This gives p0 g = 1 1 / 4 1 1 / 5 1 1 / 10 = 0.54 b p1 g = 1 1 / 5 1 1 / 3 1 1 / 9 = 0.474

b gb gb g pb g = b1 1 / 3gb1 1 / 8gb1 1 / 4g = 0.438 . So 1b g = 200, 1b g = 200 b0.54g = 108 , and 1b g = 108 b0.474g = 512

gb

gb

b b b q21g = log p2b1g / log p2 g q2 g

b q21g = log
2 3

c h / logb0.438g 1 0.438 = b0.405 / 0.826gb0.562g

= 0.276

b b b d21g = l2 g q21g = 512 0.276 = 14 .

b gb

Question #44 Answer: C

Let:

N = number X = profit S = aggregate profit subscripts G = good, B = bad, AB = accepted bad

G = AB

c hb60g = 40 = c hc hb60g = 10
2 3 1 2 1 3

(If you have trouble accepting this, think instead of a heads-tails

rule, that the application is accepted if the applicants government-issued identification number, e.g. U.S. Social Security Number, is odd. It is not the same as saying he automatically alternates accepting and rejecting.)

Var SG = E N G Var X G + Var N G E X G

b g b g

b g

b g b g

b gb g b gd i Var b S g = E b N g Var b X g + Var b N g E b X g = b10gb90,000g + b10gb100g = 1,000,000 S and S are independent, so Var b S g = Var b S g + Var b S g = 4,000,000 + 1,000,000
= 40 10,000 + 40 3002 = 4,000,000
AB AB AB AB AB 2

AB

AB

= 5,000,000

If you dont treat it as three streams (goods, accepted bads, rejected bads), you can compute the mean and variance of the profit per bad received. B = 1 60 = 20 3

c hb g

If all bads were accepted, we would have E X 2 B = Var X B + E X B

2

d i
b

b g b g = 90,000 + b100g = 100,000

2

Since the probability a bad will be accepted is only 50%, E X B = Prob accepted E X B accepted + Prob not accepted E X B not accepted

b g c h = b0.5gb 100g + b0.5gb0g = 50 E d X i = b0.5gb100,000g + b0.5gb0g = 50,000

2 B 2

b g

g c

Likewise, Now Var S B = E N B Var X B + Var N B E X B

b g b g b g b g b g = b20gb47,500g + b20gd50 i = 1,000,000 b g b g

SG and S B are independent, so Var S = Var SG + Var S B = 4,000,000 + 1,000,000 = 5,000,000

bg

Question # 45 Answer: C Let N = number of prescriptions then S = N 40

n 0 1 2 3
E N = 4 = 1 F j
j =0

fN n 0.2000 0.1600 0.1280 0.1024

bg

FN n 0.2000 0.3600 0.4880 0.5904

bg

1 FN n 0.8000 0.6400 0.5120 0.4096

bg

b g

c b gh

E S 80

b gh L O = 40 M c1 F b j gh c1 F b j ghP MN PQ = 40b4 144g = 40 2.56 = 102.40 .

= 40 E N 2

= 40 1 F j
j =2
1

j =0

j =0

E S 120

= 40 E N 3

c b gh L O = 40 M c1 F b j gh c1 F b j ghP MN PQ = 40b4 1952g = 40 2.048 = 8192 . .

+

= 40 1 F j
j =3
2

j =0

j =0

Since no values of S between 80 and 120 are possible,

E S 100

b
b

+ g = b120 100g E bS 80g 120b100 80g E bS 120g

+ +

= 92.16

Alternatively,
E S 100

= 40 j 100 f N j + 100 f N 0 + 60 f N 1 + 20 f N 2
j =0

g bg

bg

bg

bg

(The correction terms are needed because 40 j 100 would be negative for j = 0, 1, 2; we need to add back the amount those terms would be negative)
= 40 j f N j 100 f N j + 100 0.200 + 016 60 + 0128 20 . .
j=0

bg

= 40 E N 100 + 20 + 9.6 + 2.56 = 160 67.84 = 92.16

b g

j=0

b g b gb

g b gb g b

gb g

Question #46 Answer: B

10 E30:40 = 10 p30 10

p40 v10 =

d p v id p v ib1 + i g = b E gb E gb1 + i g = b0.54733gb0.53667 gb179085g .

10 10 10 10 30 10 40 10 10 30 10 40

= 0.52604
The above is only one of many possible ways to evaluate should give 0.52604
a30:40:10 = a30:40 10 E30:40 a30+10:40+10
10

p30

10

p40 v10 , all of which

b g b gb g . = b13.2068g b0.52604gb114784g
= a30:40 1 0.52604 a40:50 1 = 7.1687

Question #47 Answer: A Equivalence Principle, where is annual benefit premium, gives

1000 A35 + IA

b g

35

= a x

1000 A35 1000 0.42898 = (1199143 616761) . . a35 IA 35

b gi

428.98 . 582382 = 73.66 =

We obtained a35 from

a35 =

1 A35 1 0.42898 = = 1199143 . 0.047619 d

Question #48 Answer: C

Time until arrival = waiting time plus travel time. Waiting time is exponentially distributed with mean 1 . The time you may already have been waiting is irrelevant: exponential is memoryless.
1 You: E (wait) = 20 hour = 3 minutes E (travel) = 0.25 16 + 0.75 28 = 25 minutes E (total) = 28 minutes

b gb g b gb g

Co-worker:

E (wait) = 1 hour = 12 minutes 5 E (travel) = 16 minutes E (total) = 28 minutes

Question #49 Answer: C

xy = x + y = 014 . 0.07 Ax = Ay = = = 0.5833 + 0.07 + 0.05 xy 014 . 014 . 1 1 Axy = = = = 0.7368 and a xy = = = 5.2632 xy + 014 + 0.05 019 xy + 014 + 0.05 . . .
P= Axy a xy
=

Ax + Ay Axy a xy

2 0.5833 0.7368 = 0.0817 5.2632

Question #50 Answer: E

b V + P gb1 + ig q b1 V g= V b0.49 + 0.01gb1 + ig 0.022b1 0.545g = 0.545 b1 + ig = b0.545gb1 0.022g + 0.022

20 20 20 40 21 20 21 20

0.50

= 111 .

b V + P gb1 + ig q b1 V g= V . b0.545+.01gb111g q b1 0.605g = 0.605

21 20 20 41 22 20 22 20 41

q41 =

0.61605 0.605 0.395

= 0.028

Question #51 Answer: E

1000 P60 = 1000 A60 / a60

gb g = 1000bq + p A g / b106 + p a g . = c15 + b0.985gb382.79gh / c106 + b0.985gb10.9041gh = 33.22 .

= 1000 v q60 + p60 A61 / 1 + p60 v a61
60 60 61 60 61

Question #52 Answer: E

Method 1: In each round, N = result of first roll, to see how many dice you will roll X = result of for one of the N dice you roll S = sum of X for the N dice

b g b g b g b g E b S g = E b N g * E b X g = 12.25 Var b S g = E b N gVar b X g + Var b N g E b X g = b 35gb2.9167 g + b 2.9167 gb 35g . .

E X = E N = 35 . Var X = Var N = 2.9167
2

= 45.938
Let S1000 = the sum of the winnings after 1000 rounds

b g Stddevb S g = sqrt b1000 * 45.938g = 214.33

E S1000 = 1000 *12.25 = 12,250
1000

After 1000 rounds, you have your initial 15,000, less payments of 12,500, plus winnings of S1000 . Since actual possible outcomes are discrete, the solution tests for continuous outcomes greater than 15000-0.5. In this problem, that continuity correction has negligible impact.

Pr 15000 12500 + S1000 > 14999.5 =

= Pr S1000 12250 / 214.33 > 14999.5 2500 12250 / 214.33 = = 1 117 = 012 . .
Method 2 Realize that you are going to determine N 1000 times and roll the sum of those 1000 Ns dice, adding the numbers showing. Let N1000 = sum of those Ns

cb

b g

E N1000 = 1000 E N = 1000 35 = 3500 .

b g b g b g b gb g Var b S g = E b N g Var b X g + Var b N g E b X g = b3500gb2.9167g + b2916.7gb35g = 45.938 .

E S1000 = E N1000 E X = 3500 35 = 12.250 .
1000 1000 1000 2 2

Var N1000 = 1000Var ( N ) = 2916.7

b g b gb g

Stddev S1000 = 214.33

Now that you have the mean and standard deviation of S1000 (same values as method 1), use the normal approximation as shown with method 1.

b g

Question #53 Answer: B

IJ K 0.25 = ba + bg 0.25 a + b = 1 F bI F bI 01875 = G a + J 0.25 G 1 J 0.25 = 01875 . . H 2K H 2K

pk = a + b pk 1 k

FG H

b = 0.5 a = 0.5 p3 = 0.5 +

FG H

0.5 01875 = 0125 . . 3

IJ K

Question #54 Answer: B

Transform these scenarios into a four-state Markov chain, where the final disposition of rates in any scenario is that they decrease, rather than if rates increase, as what is given. State 0 1 2 3 from year t 3 to year t 2 Decrease Increase Decrease Increase from year t 2 to year t 1 Decrease Decrease Increase Increase Probability that year t will decrease from year t - 1 0.8 0.6 0.75 0.9

LM0.80 0.60 Transition matrix is M MM0.00 N0.00

2 2 P00 + P01 = 0.8 * 0.8 + 0.2 * 0.75 = 0.79

0.00 0.00 0.75 0.90

0.20 0.40 0.00 0.00

0.00 0.00 0.25 010 .

OP PP PQ

For this problem, you dont need the full transition matrix. There are two cases to consider. Case 1: decrease in 2003, then decrease in 2004; Case 2: increase in 2003, then decrease in 2004. For Case 1: decrease in 2003 (following 2 decreases) is 0.8; decrease in 2004 (following 2 decreases is 0.8. Prob(both) = 0.8 0.8 = 0.64 For Case 2: increase in 2003 (following 2 decreases) is 0.2; decrease in 2004 (following a decrease, then increase) is 0.75. Prob(both) = 0.2 0.75 = 0.15 Combined probability of Case 1 and Case 2 is 0.64 + 0.15 = 0.79

Question #55 Answer: B

lx = x = 105 x t P45 = l45+ t / l45 = 60 t / 60

Let K be the curtate future lifetime of (45). Then the sum of the payments is 0 if K 19 and is K 19 if K 20 .
20 a45 =

F 60 K IJ 1 60 K b40 + 39+...+1g = b40gb41g = 13.66 = 60 2b60g

K = 20

1 G H
60

Hence,
Prob K 19 > 13.66 = Prob K > 32.66

b g = ProbbT 33g
= 33p45 = = 0.450

= Prob K 33 since K is an integer

l78 27 = l45 60

Question #56 Answer: C

Ax =

+ 2

= 0.25 = 0.04

Ax =

+
=

= 0.4

d IAi

0 s

Ax ds

E 0s x

Ax ds e 0.1s 0.4 ds
0.1s

zd

ib g

F e I = b0.4 gG . H 01 JK

=
0

0.4 =4 01 .

Alternatively, using a more fundamental formula but requiring more difficult integration.

c IA h

= =

z z

t t px x t e t dt t e 0.04 t
0.06 t

= 0.04

bg b0.04g e

dt

t e 0.1t dt

(integration by parts, not shown) 1 t e 0.1 t = 0.04 0 01 0.01 . 0.04 = =4 0.01

FG H

IJ K

Question #57 Answer: E

Subscripts A and B here just distinguish between the tools and do not represent ages. We have to find e AB
eA =

eB =

e AB =

z z FGH z FGH
10 0 7 0 7

FG 1 t IJ dt = t t H 10K 20
t t2 dt = t 7 14 t 7

2 10

= 10 5 = 5

IJ K

7 0

= 49

49 = 35 . 14
2

IJ FG 1 t IJ dt = z FG 1 t t + t IJ dt K H 10K H 10 7 70K
7 0 7 0

t2 t2 t3 =t + 20 14 210

= 7

49 49 343 + = 2.683 20 14 210

e AB = e A + e B e AB = 5 + 35 2.683 = 5817 . .

Question #58 Answer: A

bx g t = 0100 + 0.004 = 0104 . .

t

bg

b px g = e 0.104 t

Actuarial present value (APV) = APV for cause 1 + APV for cause 2.

2000 e 0.04 t e 0.104 t 0100 dt + 500,000 e 0.04 t e 0.104 t 0.400 dt .

0 0

= 2000 010 + 500,000 0.004 . = 2200 1 e 0.144b5g = 7841 . 0144

c b g e

ghz e
0

5 0.144 t

dt

Question #59 Answer: A

R = 1 px = q x
S = 1 px eb k g since

d e z

1 0

x t + k dt

bg i

=e z =e z

x t dt k dt
0 0

bg bg

x t dt k dt
0 0

e z

So S = 0.75R 1 px e k = 0.75q x

1 0.75q x px 1 qx px ek = = 1 0.75q x 1 0.75q x e k =

k = ln

LM 1 q OP N1 0.75q Q
x x

Question #60 Answer: E

= mean = 4;
n
0 1 2 3

pk = k / 1 + P N =n
0.2 0.16 0.128 0.1024

b g

k +1

x
0 1 2 3

f b1g x

bg
0

f b2g x
0 0.0625 0.125

bg
0

f b 3g x
0 0 0 0.0156

bg

0.25 0.25 0.25

bg f b g b x g = f b x g; the claim amount distribution for a single claim f b g b x g = e f b g b j gj x f b x j g

1

f b k g x = probability that, given exactly k claims occur, that the aggregate amount is x.
x

k 1

j =0

bg possible claim size 1, f b g b x g = 0 for k > x f b0g = 0.2 f b1g = 016 * 0.25 = 0.04 . f b2g = 016 * 0.25 + 0128 * 0.0625 = 0.048 . . f b3g = 016 * 0.25 + 0128 * 0125 + 01024 * 0.0156 = 0.0576 . . . . F b3g = 0.2 + 0.04 + 0.048 + 0.0576 = 0.346
x k =0

f s x = P N = k f b k g x ; upper limit of sum is really , but here with smallest

k

bg

s s s s

Question #61 Answer: E

Let L = incurred losses; P = earned premium = 800,000 L Bonus = 015 0.60 . P if positive P = 015 0.60 P L if positive . = 015 480,000 L if positive .

b b g = 015 c480,000 b L 480,000gh . E (Bonus) = 0.15 (480,000 E c L 480,000gh

FG H

IJ K g

From Appendix A.2.3.1 = 0.15{480,000 [500,000 (1 (500,000 / (480,000+500,000)))]} = 35,265

Question #62 Answer: D

1 A28:2 =

2 t e 1 72 dt 0

a28:2
3V

1 . 1 e 2 = 0.02622 since = ln 106 = 0.05827 72 71 = 19303 . = 1+ v 72 =

d i FG IJ H K

b g

1 = 500,000 A28:2 6643 a28:2

= 287

Question #63 Answer: D Let Ax and a x be calculated with x t and = 0.06

* *

bg

Let Ax and a x be the corresponding values with x t increased by 0.03 and decreased by 0.03

bg

ax =
*

1 Ax

0.4 = 6.667 0.06

ax = ax

LM Proof: a N

= =

= ax

z z z
0

d e z

t 0 t

x s + 0.03 ds 0.03t

bg

dt dt

0 x s ds 0.06 t

e z z e
t

x s ds 0.03t 0.03t 0

bg

bg

dt

Ax* = 1 0.03 a x * = 1 0.03 a x = 0.8

Question #64 Answer: A

= 1 0.03 6.667

b gb

bulb ages Year 0 1 2 3 0 1 2 0 0 6300 3 0 0 0 # replaced 1000 2800 3700

10000 0 1000 9000 100+2700 900 280+270+3150

The diagonals represent bulbs that dont burn out. E.g., of the initial 10,000, (10,000) (1-0.1) = 9000 reach year 1. (9000) (1-0.3) = 6300 of those reach year 2. Replacement bulbs are new, so they start at age 0. At the end of year 1, thats (10,000) (0.1) = 1000 At the end of 2, its (9000) (0.3) + (1000) (0.1) = 2700 + 100 At the end of 3, its (2800) (0.1) + (900) (0.3) + (6300) (0.5) = 3700 Actuarial present value =

1000 2800 3700 + + . 105 1052 1053 . . = 6688

Question #65 Key: E Model Solution:

e25:25 = = =

z z

15

0 t

p25dt +15 p25 dt + e

15 .04 t

1 .60 1 e.60 .04 . = 112797 + 4.3187 = 15.60

FG z IJ e H Kz 1 i + e LMN.05 d1 e
15 0

10

0t

p40 dt

.04 ds

10 .05t

dt

.50

iOPQ

Question #66 Key: C Model Solution:

5

p 60 +1 =
60 +1 60 + 2 63 64 65

e1 q je1 q jb1 q gb1 q gb1 q g = b0.89gb0.87gb0.85gb0.84gb0.83g

= 0.4589
Question # 67 Key: E Model Solution:

12.50 = a x =

1 + = 0.08 = = 0.04 +
= 0.5

+ 1 2 Ax = = + 2 3

Ax =

Var aT =

e j

Ax Ax2

2
1

= 3 4 = 52.083 0.0016
S.D. = 52.083 = 7.217

Question # 68 Key: D Model Solution:

v = 0.90 d = 010 . Ax = 1 da x = 1 010 5 = 0.5 .

b gb g
=

Benefit premium =

b5000gb0.5g 5000b0.90gb0.05g = 455

5

5000 Ax 5000vqx ax

10Vx

a x +10 ax a 0.2 = 1 x +10 a x +10 = 4 5 = 1

Ax +10 = 1 da x +10 = 1 010 4 = 0.6 .

10V

= 5000 Ax +10

b gb g a = b5000gb0.6g b455gb4g = 1180

x +10

Question #68 Key: D Model Solution: v is the lowest premium to ensure a zero % chance of loss in year 1 (The present value of the payment upon death is v, so you must collect at least v to avoid a loss should death occur). Thus v = 0.95.

E Z = vqx + v 2 px qx +1 = 0.95 0.25 + 0.95 0.75 0.2 E Z2 = v 2qx + v 4 px qx +1 = 0.95 0.25 + 0.95 0.75 0.2 = 0.3478
Var Z = E Z2 E Z

bg

b g

d i

= 0.3729

b g

b g
g
2

b g d i c b gh

= 0.3478 0.3729 = 0.21

Question # 70 Key: D Model Solution: Severity after increase 60 120 180 300 Severity after increase and deductible 0 20 80 200

Expected payment per loss = 0.25 0 + 0.25 20 + 0.25 80 + 0.25 200 = 75 Expected payments = Expected number of losses Expected payment per loss = 75 300 = 22,500

Question # 71 Key: A Model Solution: E (S) = E (N) E (X) = 50 200 = 10,000 2 Var S = E N Var X + E X Var N

bg b g b g b g b g = b50gb400g + d200 ib100g

2

= 4,020,000

Pr S < 8,000 = Pr Z <

FG 8,000 10,000 IJ 4,020,000 K H = Prb Z < 0.998g 16%

Question #72 Key: A Model Solution: Let Z be the present value random variable for one life. Let S be the present value random variable for the 100 lives.
E Z = 10 = 10

bg

t t

e e dt e b + g 5

FG IJ e b g H 2 + K F 0.04IJ de i = 11233 = 10 G . H 0.16K Var b Z g = E d Z i c E b Z gh

E Z 2 = 102
2

= 2.426

d i

2 + 5

0.8

= 11233 2.4262 . = 5.348

bg bg VarbSg = 100 Varb Zg = 534.8

E S = 100 E Z = 242.6

F 242.6 = 1645 F = 281 . 534.8

Question #73 Key: D Model Solution: Prob{only 1 survives} = 1-Prob{both survive}-Prob{neither survives}

= 1 3p50 3p 50 1 3p50 1 3p 50

= 1 0.9713 0.9698 0.9682 0.9849 0.9819 0.9682 1 0.912012 1 0.93632

= 0.912012

gb

gb

ge

gb

gb

gb

g b

gb

0.936320

= 0.140461

Question # 74 Key: C Model Solution: The tyrannosaur dies at the end of the first day if it eats no scientists that day. It dies at the end of the second day if it eats exactly one the first day and none the second day. If it does not die by the end of the second day, it will have at least 10,000 calories then, and will survive beyond 2.5. Prob (ruin) = f 0 + f 1 f 0 = 0.368 + 0.368 0.368

b g bg b g b gb g

= 0.503
since f 0 =

e 110 = 0.368 0! e 111 f 1 = = 0.368 1!

bg bg

Question #75 Key: B Model Solution: Let X = expected scientists eaten. For each period, E X = E X dead Prob already dead + E X alive Prob alive
= 0 Prob dead + E X alive Prob alive

b g

b g

b g

Day 1, E X1 = 1

e 1 01 Prob dead at end of day 1 = f 0 = = 0.368 0! Day 2, E X 2 = 0 0.368 + 1 1 0.368 = 0.632 Prob (dead at end of day 2) = 0.503 [per problem 10]

g bg b

Day 2.5, E X 2.5 = 0 0.503 + 0.5 1 0.503 = 0.249 where E X 2.5 alive = 0.5 since only
1 2

day in period.

E X = E X1 + E X 2 + E X 2.5 = 1 + 0.632 + 0.249 = 1881 . E 10,000 X = 18,810

Question # 76 Key: C Model Solution: This solution applies the equivalence principle to each life. Applying the equivalence principle to the 100 life group just multiplies both sides of the first equation by 100, producing the same result for P.
APV Prems = P = APV Benefits = 10q70 v + 10 p70q71v 2 + Pp70 p71v 2

. 108 . 1082 = 0.3072 + 0.3006 + 0.7988 P 0.6078 P= = 3.02 0.2012

b g g b10gb0.03318g + b10gb1 0.03318gb0.03626g + Pb1 0.03318gb1 0.03626g P=

. 1082

(APV above means Actuarial Present Value).

Question #77 Key: E Model Solution: One approach is to recognize an interpretation of formula 7.4.11 or exercise 7.17a: Level benefit premiums can be split into two pieces: one piece to provide term insurance for n years; one to fund the reserve for those who survive. If you think along those lines, you can derive formula 7.4.11:
1 Px = Px1:n + Px:n nVx

And plug in to get

0.090 = Px1:n + 0.00864 0.563 Px1:n = 0.0851

gb

Another approach is to think in terms of retrospective reserves. Here is one such solution:
nVx

= Px Px1:n sx:n
1

e j a = eP P j E
x x:n n

x:n x

= Px Px1:n
1

jP

a x:n
1

x:n

a x:n

eP P j = eP j
x x:n
1

x:n

0.563 = 0.090 Px1:n / 0.00864 Px1:n = 0.090 0.00864 0.563 = 0.0851

gb

Question #78 Key: A Model Solution:

= ln 1.05 = 0.04879

b g

Ax = = =

z z

x
t

px x t e t dt

bg

1 e t dt for DeMoivre x

1 a x x

From here, many formulas for Since

10 V

c A h could be used.
40

One approach is:

A50 = A40 = so P A40 =

10 40

a50 50 a60 60

= =

18.71 1 A50 = 12.83 = 0.3742 so a50 = 50 19.40 = 0.3233 so a40 60

40

FG H F1 A =G H

IJ K IJ = 1387 K .

.3233 c h 01387 = 0.02331 . V c A h = A P c A ha = 0.3742 b0.02331gb12.83g = 0.0751.

50 40 50

Question #79 Key: D Model Solution:

Ax = E v T b x g = E v T b x g NS Prob NS + E v T b x g S Prob S

b g bg F 0.03 IJ 0.70 + FG 0.6 IJ 0.30 =G H 0.03 + 0.08 K H 0.06 + 0.08 K

FG 0.03 IJ 0.70 + FG 0.06 IJ 0.30 = 01923. . H 0.03 + 0.16K H 0.06 + 0.16K
2
= 01923 0.31952 . . = 141. 0.082

= 0.3195

Similarly, 2 Ax =

Var aT

F H

I b gK =
x

Ax Ax2

Question #80 Key: B Model Solution: Let S denote aggregate losses before deductible.

E S = 2 2 = 4, since mean severity is 2.

e 2 20 . fS 0 = = 01353, since must have 0 number to get aggregate losses = 0. 0!

bg

F e 2 I FG 1IJ = 0.0902, since must have 1 loss whose size is 1 to get aggregate losses = 1. f b1g = G H 1! JK H 3K E b S 2g = 0 f b0g + 1 f + 2 c1 f b0g f b1gh . . = 0 01353 + 1 0.0902 + 2 b1 01353 0.0902g
2 S

. = 16392
E S 2

= E S E S 2 . = 4 16392 = 2.3608

Question #81 Key: D Model Solution: Poisson processes are separable. The aggregate claims process is therefore equivalent to two independent processes, one for Type I claims with expected frequency one for Type II claims. Let
S I = aggregate Type I claims. N I = number of Type I claims. X I = severity of a Type I claim (here = 10).

FG 1IJ b3000g = 1000 and H 3K

Since X I = 10, a constant , E X I = 10; Var X I = 0.

Var S I = E N I Var X I + Var N I E X I
2

b g

b g
2

b g b g b g b g b g = b1000gb0g + b1000gb10g
= 100,000

b g 2,100,000 = 100,000 + Var b S g Var b S g = 2 ,000,000

II II

Var S = Var S I + Var S II since independent

bg

b g

Question #82 Key: A Model Solution:

5

b p50g = 5 p501g 5 p502g b b

=

FG 100 55IJ e b gb g H 100 50K = b0.9gb0.7788g = 0.7009

0.05 5

Similarly
10

b p50g =

FG 100 60IJ e b g b g H 100 50 K = b0.8gb0.6065g = 0.4852

0.05 10
5 50 10 50

5 5 q50

b g = pb g pb g = 0.7009 0.4852
= 0.2157

Question #83 Key: C Model Solution: Only decrement 1 operates before t = 0.7

1 0.7 q40

b g = b0.7g qb1g = b0.7gb010g = 0.07 .

40

since UDD is 1-0.07 = 0.93

Probability of reaching t = 0.7

Decrement 2 operates only at t = 0.7, eliminating 0.125 of those who reached 0.7

b2 q40g = 0.93 0125 = 011625 . .

b gb

Question #84 Key: C Model Solution:

1+ 2 p80v 2 = 1000 A80 +

vq80 v 3 2 p80q82 + 2 2

1+

FG H

0.83910 1.062

IJ = 665.75 + FG 0.08030 + 0.83910 0.09561IJ K . 2b1.06g H 2b106g K

3

b g b b167524g = 665.75 .
= 397.41

174680 = 665.75 + 0.07156 .

Where 2 p80 =

3,284 ,542 = 0.83910 3,914 ,365

Or 2 p80 = 1 0.08030 1 0.08764 = 0.83910 Question #85 Key: E Model Solution: At issue, actuarial present value (APV) of benefits
=

gb

= 1000 e0.04 t e 0.04 t t p65 65 t dt

0

z z

bt v t t p65

65

bt gdt bg

= 1000

d id

bg

p 0 t 65

65 t dt = 1000 q65 = 1000

APV of premiums = a65 =

Benefit premium = 1000 / 16.667 = 60

2V

FG 1 IJ = 16.667 H 0.04 + 0.02K b g b gb g

= =

z z

b2+u v u u p67 65 2 + u du a67

b g

1000 e0.04b 2+uge 0.04u u p67 65 2 + u du 60 16.667

= 1000e0.08

= 1083.29 q67 1000 = 1083.29 1000 = 83.29

0 u

p67 65 2 + u du 1000

b g

Question #86 Key: B Model Solution:

a x:20 = a x:20 1+ 20 Ex

(1) (2) (3) (4)

a x:20 =
Ax:20 =

1 Ax:20 d
A1:20 x
1 + Ax:20

Ax = A1:20 + 20 Ex Ax +20 x

0.28 = A1:20 + 0.25 0.40 x A1:20 = 018 . x

b gb g
Ax:20 = 018 + 0.25 = 0.43 .
a x:20 =

Now plug into (3):

Now plug into (2):

1 0.43 = 1197 . 0.05 / 105 .

Now plug into (1):

a x:20 = 1197 1 + 0.25 = 1122 . .

Question #87 Key: A Model Solution:

E N = E E N = E = 2
Var N = E Var N + Var E N = E + Var = 2 + 4 = 6

Distribution is negative binomial.

r = 2 and r 1 + = 6

b g

Per supplied tables:

1+ = 3 =2 r = 2 r = 1

p1 =

1! 1+

b g

r 1

r +1

b1gb2g = 0.22 b1gb3g

2

Alternatively, if you dont recognize that N will have a negative binomial distribution, derive gamma density from moments (hoping is an integer).
Mean = = 2
Var = E 2 E
2

= 2 2 + 2 2 = 2 = 4

2 4 = =2 2 =1 = =

p1 =

c p h f b gd = z
1

e 1 1!

1 2 = e d 2 0 Integrate by parts; not shown 1 2 2 4 2 = e e 2 3 9 = 2 = 0.22 9

b / 2ge b b1g

/2

F GH

I JK

Question #88 Key: C Model Solution: Limited expected value =

1000

z c1 Fbxghdx = z d0.8e
1000 0 0

0.02 x

+ 0.2e0.001x dx = 40e0.02 x 200e0.001x

1000 0

= 40 + 126.4
= 166.4

Question #89 Key: E Model Solution:

M = Initial state matrix = 1 0 0 0

LM0.20 0.50 T = One year transition matrix = M MM0.75 N1.00

M T = 0.20 0.80 0 0

0.80 0 0 0

0 0.50 0 0

OP P 0.25P P 0 Q
0 0

. b M T g T = 0.44 016 0.40 0 . cb M T g T h T = 0.468 0.352 0.08 010

Probability of being in state F after three years = 0.468.

Actuarial present value = 0.468v 3 500 = 171

Notes: 1. Only the first entry of the last matrix need be calculated (verifying that the four sum to 1 is useful quality control.) 2. Compare this with solution 23. It would be valid to calculate T 3 here, but advancing M one year at a time seems easier.

ib g

Question #90 Key: B Model Solution: Let Yi be the number of claims in the ith envelope. Let X 13 be the aggregate number of claims received in 13 weeks.

b g

g b g b g b g E Y = b1 0.2g + b4 0.25g + b9 0.4g + b16 015g = 7.2 . E X b13g = 50 13 2.5 = 1625 Var X b13g = 50 13 7.2 = 4680 . ProbmXb13g Zr = 0.90 = b1282g R X b13g 1625 1282U Prob S . V T 4680 W X b13g 1712.7
E Yi = 1 0.2 + 2 0.25 + 3 0.4 + 4 015 = 2.5 .
2 i

Note: The formula for Var X 13 took advantage of the frequencys being Poisson. The more general formula for the variance of a compound distribution, 2 Var S = E N Var X + Var N E X , would give the same result.

b g

bg b g b g

b gb g

Question #91 Key: E Model Solution:

M 60 = F
t

1 1 b g 1 60 = 75 60 = 15 1 1 3 1 b60g = 60 = 15 5 = 25 = 85

M p65 = 1 F p60

t 10 t = 1 25

Let x denote the male and y denote the female.

ex ey e xy

cmean for uniform distribution over b0,10gh = 12 .5 c mean for uniform distribution over b0,25gh FG1 t IJ FG1 t IJ dt = H 10K H 25K F1 7 t + t I dt = GH 50 250JK F 7 t + t I = 10 7 100 + 1000 = Gt 100 750 H 100 750JK
=5

z z

10

10

10 0

= 10 7 +

4 13 = 3 3

exy = ex + e y exy = 5 +

25 13 30 + 75 26 = = 1317 . 2 3 6

Question #92 Key: B Model Solution:

1 = + 3 1 2 Ax = = + 2 5

Ax =

P Ax = = 0.04

c h

F Pc A hI A A Var b Lg = G 1 + j H JK e F 0.04 IJ FG 1 FG 1IJ IJ = G1 + H 0.08 K H 5 H 3K K F 3I F 4 I =G J G J H 2 K H 45K

2 x 2 x 2 x 2 2 2

1 5

Question #93 Key: B Model Solution:

Mean excess loss = = E X E X 100 1 F 100 331 91 = 300 0.8

b g b g b g b g

E X = E X 1000 since F 1000 = 10 .

b g b

Question #94 Key: E Model Solution: Expected insurance benefits per factory = E X 1 +
= 0.2 1 + 01 2 = 0.4. .

Insurance premium = (1.1) (2 factories) (0.4 per factory) = 0.88. Let R = retained major repair costs, then

bg f b1g = 2 0.4 0.6 = 0.48 f b2g = 0.6 = 0.36

f R 0 = 0.42 = 016 .
R 2 R

. Dividend = 3 0.88 R 015 3 , if positive = 167 R , if positive .

b gb g

E Dividend = 016 167 0 + 0.48 167 1 + 0.36 0 = 0.5888 . . .

g b gb

g b gb

g b gb g

[The (0.36)(0) term in the last line represents that with probability 0.36, 167 R is . negative so the dividend is 0.]

Question #95 Key: A Model Solution:

E X =

4 = = 8 4 = 8 8 1 1 =2

F 6 =1

bg

FG IJ H 6K

=1

FG 4 IJ H 6K

= 0.555

s 6 = 1 F 6 = 0.444

bg

bg

Question #96 Key: B Model Solution:

ex = px + 2 px + 3 px + ... = 1105 .

Annuity = v 3 3 p x 1000 + v 4 4 p x 1000 104 + ... .

= . 1000b104g

k 3 k

b g

k px

k =3

= 1000v 3

k px
k =3

= 1000v 3 ex 0.99 0.98 = 1000

FG 1 IJ H 104 K .

9.08 = 8072

Let = benefit premium.

1 + 0.99v + 0.98v 2 = 8072

2.8580 = 8072 = 2824

Question #97 Key B Model Solution:

1 a30:10 = 1000 A30 + P IA 30:10 + 10

b g

b ge g

10

A30

a30:10 IA

b g

1000 A30
1 30:10

1010 A30

= =

1000 0102 . 7.747 0.078 10 0.088

g b

102 6.789 = 15.024

Test Question: 98 Key: E

For de Moivres law,

e 30 =

FG1 t IJ dt H 30K L t OP = Mt N 2b 30g Q

30

30

30
2

Prior to medical breakthrough

= 100 e30 =

100 30 = 35 2

After medical breakthrough so

e 30 = e 30 + 4 = 39 = 108

e30 = 39 =

30
2

Test Question: 99
= 100,000v 2.5 4000a3

Key: A

0L

@5%

= 77,079

Test Question: 100

Key: C

= = = 2 Var = Var + Var E N

= + Var = 2 + 2 = 4 Distribution is negative binomial (Loss Models, 3.3.2) Per supplied tables mean = r = 2

Var = r 1 + = 4

b g b1 + g = 2
=1 r = 2
r=2

From tables 2 3 4 13 r r +1 r + 2 3 4 . = = = 0125 p3 = 5 r +3 32 3! 2 3! 1 + 1000 p3 = 125

b gb g b g

b gb gb g

Test Question: 101

Key: E

E N = Var N = 60 0.5 = 30 E X = 0.6 1 + 0.2 5 + 0.2 10 = 3.6 E X2

b gb g b gb g b gb g b gb g = b0.6gb1g + b0.2gb25g + b0.2gb100g = 25.6

c h
2

Var X = 25.6 3.62 = 12.64

For any compound distribution, per Loss Models

Var S = E N Var X + Var N E X

= (30) (12.64) + (30) 3.62 = 768

d i

For specifically Compound Poisson, per Probability Models Var S = t E X 2 = (60) (0.5) (25.6) = 768 Alternatively, consider this as 3 Compound Poisson processes (coins worth 1; worth 5; 2 worth 10), where for each Var X = 0 , thus for each Var S = Var N E X . Processes are independent, so total Var is

b g bg b g Var = b60gb0.5gb0.6g1 + b60gb0.5gb0.2g5 + b60gb0.5gb0.2gb10g

2 2

= 768
Test Question: 102 Key: D

1000

20 20Vx

= 1000 Ax +20 = = a x +20 =

1000

20 x 19Vx + 20 P

. ib106g q b1000g
x +19

. b342.03 + 13.72gb106g 0.01254b1000g = 36918 . 0.98746 1 0.36918 . = 111445 . 0.06 / 106

px +19

so 1000 Px +20 = 1000

Ax +20 36918 . = = 331 . a x +20 111445 .

Test Question: 103

Key: B

b px g = e

bx g t dt

bg

z b gb g F b g b g IJ = Ge z H K = b p g where
=e

k 0

2 x1 t dt

x1 t dt

k px

is from Illustrative Life Table, since b1g follows I.L.T.

10

p60 =

11 p60

10

b b b q60g =10 p60g 11p60g

=

6,616,155 = 0.80802 8,188,074 6,396,609 = = 0.78121 8,188,074

10

p60

g b
2

11 p60

from I.L.T.

= 0.80802 2 0.781212 = 0.0426

Test Question: 104

Key: C

Ps =

1 d , where s can stand for any of the statuses under consideration. as

1 Ps + d

as =

ax = a y = a xy

1 = 6.25 . 01 + 0.06 1 = = 8.333 0.06 + 0.06

a xy + a xy = a x + a y

a xy = 6.25 + 6.25 8.333 = 4.167 Pxy = 1 0.06 = 018 . 4.167

Test Question: 105

Key: A

b d 0 g = 1000 e b + 0.04 gt + 0.04 dt

1

= 1000 1 e b + 0.04

b g g j = 48

e b + 0.04 g = 0.952

+ 0.04 = ln 0.952
= 0.049 = 0.009

g
g

b d 31g = 1000 e 0.049 t 0.009 dt

4 3

= 1000

0.009 b 0.049 gb 3g b 0.049 gb 4 g e e = 7.6 0.049

Test Question: 106 This is a graph of lx x .

Key: B

x would be increasing in the interval 80,100 .

2 The graphs of lx px , lx and lx would be decreasing everywhere. The graph shown is comparable to Figure 3.3.2 on page 65 of Actuarial Mathematics

bg

bg

Test Question: 107

Key: A

Using the conditional mean and variance formulas:

E N = E N

c h

Var N = Var E N + E Var N

d c hj

d c hj

Since N, given lambda, is just a Poisson distribution, this simplifies to:

E N = E Var N = Var + E

bg bg

bg bg
Key: B

We are given that E N = 0.2 and Var N = 0.4 , subtraction gives Var = 0.2 Test Question: 108

N = number of salmon X = eggs from one salmon S = total eggs. E(N) = 100t Var(N) = 900t

bg b gb g Var b S g = E b N gVar b X g + E b X gVar b N g = 100t 5 + 25 900t = 23,000t F S 500t > 10,000 500t IJ =.95 Pb S > 10,000g = PG H 23,000t 23,000t K
E S = E N E X = 500t
2

10,000 500t = 1645 23000 t = 250 t . 40 2t = t 2

d ti
t=

t 40 = 0

1 1 + 320 = 4.73 4 t = 22.4 round up to 23

Test Question: 109

Key: A

A P V (xs benefits) = v k +1bk +1 k px q x + k

k =0

= 1000 300v 0.02 + 350v 2 0.98 0.04 + 400v 3 0.98 0.96 0.06 = 36,829

b g

b gb g

b gb gb g

Test Question: 110

Key: E

denotes benefit premium

19 V

= APV future benefits - APV future premiums 1 0.6 = = 0.326 108 . . 10V + 108 q65 10 11V = p65

gb g b gb g
1 010 .

. . b5.0 + 0.326gb108g b010gb10g

=5.28

Test Question: 111

Key: C

X = losses on one life E X = 0.3 1 + 0.2 2 + 01 3 .

b gb g b gb g b gb g

=1
S = total losses E S = 3E X = 3

E S 1 + = E S 1 1 Fs 0
s 3

b g

c b gh = E S b1gc1 f b0gh = 3 b1gd1 0.4 i

= 3 0.936

= 2.064

Test Question: 112

Key: A

1180 = 70a30 + 50a40 20a30:40 1180 = 70 12 + 50 10 20a30:40 a30:40 = 8 a30:40 = a30 + a40 a30:40 = 12 + 10 8 = 14 100a30:40 = 1400

b gb g b gb g

Test Question: 113

Key: B

a = a f t dt = t

bg

1 e 0.05t

0.05

1 te t dt 2

bg

LM b g FG IJ H K N 1 L F 1 I O = . M1 G . J P = 185941 0.05 M H 105K P Q N

2

1 0.05

zb

te

te 1.05t dt

1 1 t = t + 1 et + + e 1.05t 2 0.05 105 105 . .

OP Q

20,000 185941 = 37,188 .

Test Question: 114

Key: C

pk =

bg

2 p k 1 k 2 = 0+ p k 1 k

b g LM OP b g N Q

Thus an (a, b, 0) distribution with a = 0, b = 2. Thus Poisson with = 2 . e 2 2 4 p4 = 4! = 0.09

bg

Test Question: 115

Key: B

By the memoryless property, the distribution of amounts paid in excess of 100 is still exponential with mean 200. With the deductible, the probability that the amount paid is 0 is F 100 = 1 e 100/ 200 = 0.393.

b g

Thus the average amount paid per loss is (0.393) (0) + (0.607) (200) = 121.4 The expected number of losses is (20) (0.8) = 16. The expected amount paid is (16) (121.4) = 1942.

Test Question: 116

Key: D

Let M = the force of mortality of an individual drawn at random; and T = future lifetime of the individual.

Pr T 1

= E Pr T 1 M = = =

z zz zd

0 2 0

Pr T 1 M = f M d

bg

2 1

0 0

e t dt d
1 1 i 2 du = 2 d2 + e
2

1 2

1 e

1 =

1 i 2 d1 + e i
2

= 0.56767

Test Question: 117

Key: E

b gb g b gb g E N = b0.8g1 + b0.2gb4g = 16 . . . . Var b N g = 16 12 = 016

2 2

E N = 0.8 1 + 0.2 2 = 12 .

b g E S = E N E X = 12b170g = 204 . VarbSg = E N Varb Xg + E X Varb N g = 12b78,100g + 170 b016g = 98,344 . . Std dev b S g = 98,344 = 313.6
Var X = E X 2 E X
2

E X = 70 + 100 = 170

bg

= 7000 + 100,000 1702 = 78,100

2 2

So B = 204 + 314 = 518

Test Question: 118 Let = benefit premium

Key: D

Actuarial present value of benefits = = 0.03 200,000 v + 0.97 0.06 150,000 v 2 + 0.97 0.94 0.09 100,000 v 3

b gb

g b gb gb

g b gb gb gb

= 5660.38 + 7769.67 + 6890.08 = 20,32013 .

Actuarial present value of benefit premiums = a x:3

= 1 + 0.97v + 0.97 0.94 v 2 = 2.7266 20,32013 . = = 7452.55 2.7266

1V

b gb g

. b7452.55gb106g b200,000gb0.03g 1 0.03

= 1958.46

Initial reserve, year 2 = 1V + = 1958.56 + 7452.55 = 9411.01 Test Question: 119 Key: A

Let denote the premium.

L = bT v T aT = 1+ i = 1 aT E L = 1 ax = 0 L = 1 aT = 1 =

b g
=

v T aT
1

= aT ax

ax

ax 1 v T ax

v T 1 ax v T Ax = ax 1 Ax

Test Question: 120

Key: D

(0, 1)

(1, 0.9) (1.5, 0.8775) (2, 0.885)

tp1

1 2

p1 = (1 01) = 0.9 .

p1 = 0.9 1 0.05 = 0.855

b gb

since uniform, 1.5 p1 = 0.9 + 0.855 / 2 = 0.8775

e1:1.5 = Area between t = 0 and t = 15 . =

FG 1 + 0.9 IJ b1g + FG 0.9 + 0.8775IJ b0.5g H 2 K H 2 K

= 0.95 + 0.444 = 1394 .

Alternatively,
e11.5 = : = =

z z zb
1.5 0 t 1 0

p1dt

0.5 t p1dt +1p1 0 x 0 1

1 01t dt + 0.9 .
2

p2 dx

0.5

b1 0.05xgdx
2

= t 0.1t 2

1 0

+ 0.9 x 0.05 x 2

0.5 0

= 0.95 + 0.444 = 1394 .

Test Question: 121

Key: A

10,000 A63 112 = 5233 . A63 = 0.4672 Ax +1 = A64 = Ax 1 + i qx px

b g

b g

. b0.4672gb105g 0.01788 1 0.01788 . b0.4813gb105g 0.01952 1 0.01952

= 0.4813 A65 =

= 0.4955 Single contract premium at 65 = (1.12) (10,000) (0.4955) = 5550

b1 + ig

5550 5233

i=

5550 1 = 0.02984 5233

Test Question: 122

Key: B

Original Calculation (assuming independence):

x = 0.06 y = 0.06 xy = 0.06 + 0.06 = 012 . x 0.06 Ax = = = 0.54545 x + 0.06 + 0.05 y 0.06 Ay = = = 0.54545 y + 0.06 + 0.05 xy 012 . Axy = = = 0.70588 xy + 012 + 0.05 .
Axy = Ax + Ay Axy = 0.54545 + 0.54545 0.70588 = 0.38502
Revised Calculation (common shock model):

x = 0.06, T *b x g = 0.04 x

xy = T *b x g + T *b y g + Z + 0.04 + 0.04 + 0.02 = 010 . x y x 0.06 Ax = = = 0.54545 x + 0.06 + 0.05 y 0.06 Ay = = = 0.54545 y + 0.06 + 0.05 xy 010 . Axy = = = 0.66667 xy + 010 + 0.05 .
Axy = Ax + Ay Axy = 0.54545 + 0.54545 0.66667 = 0.42423
Difference = 0.42423 0.38502 = 0.03921

y = 0.06, T *b y g = 0.04 y

Test Question: 123

Key: E

Treat as three independent Poisson variables, corresponding to 1, 2 or 3 claimants.

rate1 = 6 rate 2 = 4 rate 3 = 2 Var1 = 6 Var2 = 16 Var3 = 18

LM= 1 12OP N 2 Q

= 4 22

total Var = 6 + 16 + 18 = 40, since independent. Alternatively,

E X2 =

d i

12 2 2 32 10 + + = 2 3 6 3

For compound Poisson, Var S = E N E X 2

= 12

gFGH 10IJK = 40 3
Key: C

Test Question: 124

t dt = 6 so N 3 is Poisson with = 6.

bg

bg

P is Poisson with mean 3 (with mean 3 since Prob yi < 500 = 0.5

g g

P and Q are independent, so the mean of P is 3, no matter what the value of Q is.

Test Question: 125

Key: A

At age x: Actuarial Present value (APV) of future benefits = APV of future premiums =

FG 4 a IJ H5 K
x

FG 1 A IJ 1000 H5 K
x

1000 4 A25 = a25 by equivalence principle 5 5 1000 A25 1 8165 . = = = 1258 . 4 a25 4 16.2242
10V

= APV (Future benefits) APV (Future benefit premiums)

1000 4 A35 a35 5 5 4 1 . = 128.72 1258 15.3926 5 5 = 10.25

g b gb

g
Key: E

Test Question: 126

Let

Y = present value random variable for payments on one life S = Y = present value random variable for all payments

E Y = 10a40 = 148166 . Var Y = 10

2

2 A40 A40

i ib g
2

= 100 0.04863 016132 2 106 / 0.06 . . = 70555 . E S = 100 E Y = 14,816.6

Var S = 100 Var Y = 70,555

Standard deviation S = 70,555 = 265.62 By normal approximation, need E [S] + 1.645 Standard deviations = 14,816.6 + (1.645) (265.62) = 15,254

Test Question: 127

Key: B

Initial Benefit Prem =

= =

1 5 A30 4 A30:20

j
g g

5a30:35 4a30:20

5 010248 4 0.02933 . 5 14.835 4 11959 .

g b g b

0.5124 011732 0.39508 . = = 0.015 74.175 47.836 26.339

Where and

1 1 A30:20 = A30:20 A30:20 = 0.32307 0.29374 = 0.02933

a30:20 =

1 A30:20 d

1 0.32307 = 11959 . 0.06 106 .

FG IJ H K

Comment: the numerator could equally well have been calculated as A30 + 4 20 E30 A50 = 0.10248 + (4) (0.29374) (0.24905) = 0.39510

Test Question: 128

Key: B

0.75

px = 1 0.75 0.05 = 0.9625 p y = 1 0.75 .10

b gb g b gb g
0.75
x

0.75

= 0.925 0.75 qxy = 1 0.75 pxy = 1

b p gd p i since independent = 1- b0.9625gb0.925g

0.75
y

= 01097 .

Test Question:

129 Key:

N = number of physicians X = visits per physician

E(N) = 3 E(X) = 30

Var (N) = 2 Var (X) = 30

S = total visits E(S) = E (N) E(X) = 90 Var(S) = E(N) Var(X) + E2 X Var(N) = = 3 30 + 900 2 = 1890 Standard deviation (S) = 43.5

bg

Pr(S>119.5) = Pr Test Question:

FG S 90 > 119.5 90 IJ = 1 b0.68g Course 3: November 2000 H 435 435 K . .

130 Key: A

The person receives K per year guaranteed for 10 years Ka10 = 8.4353K The person receives K per years alive starting 10 years from now 10 a40 K *Hence we have 10000 = 8.4353+10 E40a50 K Derive
10 E40 : 1 A40 = A4010 + :

10 E40

gA

50

10 E40

1 A40 A4010 :

A50

0.30 0.09 = 0.60 0.35

Derive a50 =

1 A50 1 0.35 = = 16.90 .04 d 104 .

Plug in values: 10,000 = 8.4353 + 0.60 16.90 K

b gb

gh

= 18.5753K K = 538.35

Test Question: STANDARD: e25:11 =

131 Key:

D
2 11 0

11

FG1 t IJ dt = t t H 75K 2 75
= e .1 = 0.90484

= 101933 .

MODIFIED:

p25

=e z

0.1ds
0

e2511 = :

z
=

p dt 0 t 25

+ p25

IJ K F t I 1 e = + e Gt 01 . H 2 74 JK = 0.95163 + 0.90484b9.32432g = 9.3886

1 0.1t

dt + e0.1

z FGH z FGH
10 0

t dt 74 1 t dt 74

IJ K

10

0.1

0.1

10 0

Difference

=0.8047

Test Question:

132

Key: B

Comparing B & D: Prospectively at time 2, they have the same future benefits. At issue, B has the lower benefit premium. Thus, by formula 7.2.2, B has the higher reserve. Comparing A to B: use formula 7.3.5. At issue, B has the higher benefit premium. Until time 2, they have had the same benefits, so B has the higher reserve. Comparing B to C: Visualize a graph C* that matches graph B on one side of t=2 and matches graph C on the other side. By using the logic of the two preceding paragraphs, Cs reserve is lower than C*s which is lower than Bs. Comparing B to E: Reserves on E are constant at 0.

Test Question:

133 Key:

Since only decrements (1) and (2) occur during the year, probability of reaching the end of the year is p601g p602g = 1 0.01 1 0.05 = 0.9405 b b

gb

Probability of remaining through the year is p601g p602g p603g = 1 0.01 1 0.05 1 010 = 0.84645 . b b b

gb

gb

Probability of exiting at the end of the year is b3 q60g = 0.9405 0.84645 = 0.09405

Test Question:

134 Key:

b g b g b g b g bg Var b S g = Eb N g Var b X g + E b X g Var b N g = =.7 16 + 4 121 = 16.04 . Standard Devb S g = 4 Eb S g + 2 Standard Devb S g = 14 + 2 4 = 9.4 . Since there are no possible values of S between 0 and 10, Prb S > 9.4g = 1 Prb S = 0g
E N =.7 Var N = 4.2 + 9.1.49 = 121 . E X =2 Var X = 100.2 4 = 16 E S = 2.7 = 14 .
2

= 1.7.2.82 .1.83 =.12

Test Question:

135 Key:

APV of regular death benefit =

= 100000 0.008 / 0.06 + 0.008 = 11,764.71

zb

100000 e-0.06t 0.008 e-0.008t dt

gd

ib

gd

zb

100000 e- t 0.008 e- t dt

gd ib

gd i

APV of accidental death benefit =

zb
30 0

100000 e-0.06t 0.001 e-0.008t dt

gd

ib

gd

zb
30 0

100000 e- t 0.001 e- t dt

gd ib

gd i

= 100 1 e-2.04 / 0.068 = 1,279.37

Total APV = 11765 + 1279 = 13044

Test Question:

136 Key:

l 60 +.6 = .6 79,954 + .4 80,625 = 80,222.4 l 60 +1.5 = .5 79,954 + .5 78,839 = 79,396.5

0.9 q 60 +.6

b gb b gb
=

g b gb

g b gb

80222.4 79,396.5 80,222.4 = 0.0103

1 P0 = 11 = 9.0909%

Test Question:

137 Key:

P0 =

bg bg b

5 1 5 0 e d

P1 =

5 1 5 0 e d

z z
g

1 5

d e i

5 0

1 5

. d1 e i = 01987
5

1 5

d e

5 0

1 5

. d1 6e i = 01919
5

P N 2 = 1.1987.1919 =.6094

Test Question:

138 Key:

b b1 b2 q40g = q40g + q40g = 0.34

0.34 = 1 0.75 p40b 2g p40b 2g = 0.88 = 1 p401g p402g b b

q40b 2g = 012 = y .
q41b 2g = 2 y = 0.24

b gb g l b g = 2000b1 0.34gb1 0.392g = 803

b q41g = 1 0.8 1 0.24 = 0.392

42

Test Question:
Pr L ' > 0 < 0.5

139 Key:

b g

Pr 10,000 v K +1 ' a K +1 > 0 < 0.5

From Illustrative Life Table,
47

p30 = 0.50816 and

48

p30 =.47681

Since L is a decreasing function of K, to have Pr L > 0 < 0.5 means we must have L 0 for K 47.

b g

Highest value of L for K 47 is at K = 47.

L at K = 47 = 10,000 v 47+1 a47+1 L 0 609.98 16.589 0 > 609.98 = 36.77 16.589

140 Key: B

b g b g

b g

b g

= 609.98 16.589

Test Question:

b g Prb K = 1g = p p = 0.9 0.81 = 0.09 Prb K > 1g = p = 0.81 E bY g = .1 1+.09 187+.81 2.72 = 2.4715 . E dY i = .1 1 +.09 187 +.81 2.72 = 6.407 . VARbY g = 6.407 2.4715 = 0.299
Pr K = 0 = 1 px = 01 .
1 x 2 x 2 x 2 2 2 2 2

Test Question:

141 Key:

Let X be the occurrence amount, Y = max(X-100, 0) be the amount paid. E[X] = 1,000 2 Var[X] = 1,000 P(X>100) = exp(-100/1,000) = .904837

The distribution of Y given that X>100, is also exponential with mean 1,000 (memoryless property). So Y is

R 0 with prob .095163 Sexponential mean 1000 with prob .904837 T

b g
2

E Y =.095163 0+.904837 1,000 = 904.837

E Y 2 =.095163 0+.904837 2 1,000 = 1,809,675

Var Y = 1,809,675 904.837 = 990,944

2

Alternatively, think of this as a compound distribution whose frequency is Bernoulli with p = .904837, and severity is exponential with mean 1,000. 2 Var = Var N E X + Var X E N = p 1 p 1,000,000 + p 1,000,000

b gb

g b

Test Question:

142 Key:

P In general Var L = 1 +

b g b g c AA h
2 2 x 2 x 2 2

Here P Ax =

c h

F .12 I So Var b Lg = G 1 + J c A A h =.5625 H .08K F b.12gIJ c A A h and Var b L *g = G 1 + H .08 K b1 + g b0.5625g =.744 So Var b L *g = b1 + g E L * = A .15a = 1 a b +.15g = 1 5b.23g = .15 E L * + Var b L *g =.7125
x
2 x 5 4 2 2

1 1 = .08 =.12 ax 5

2 x

15 2 8 12 2 8

Test Question:

143 Key:

Serious claims are reported according to a Poisson process at an average rate of 2 per month. The chance of seeing at least 3 claims is (1 the chance of seeing 0, 1, or 2 claims).

P 3 + 0.9 is the same as P 0,1,2 01 is the same as P 0 + P 1 + P 2 01 . . 01 e + e + 2 / 2 e .

The expected value is 2 per month, so we would expect it to be at least 2 months =4 . Plug in and try e 4 + 4e 4 + 42 / 2 e4 =.238, too high, so try 3 months = 6

b g

b g

b g bg b g

e 6 + 6e 6

d i + d6 / 2ie
2

=.062, okay. The answer is 3 months.

[While 2 is a reasonable first guess, it was not critical to the solution. Wherever you start, you should conclude 2 is too few, and 3 is enough].

Test Question:

144 Key:

b Let l0 g = number of students entering year 1 superscript (f) denote academic failure superscript (w) denote withdrawal subscript is age at start of year; equals year - 1 b p0 g = 1 0.40 0.20 = 0.40 b b b b l2 g = 10 l2 g q2 f g q2 f g = 01 .
b b b q2w g = q2 g q2 f g = 10 0.6 01 = 0.3 . . b b b l1b gq1 f g = 0.4 l1b g 1 q1 f g q1 wg

b b q1 f g = 0.4 1 q1 f g 0.3

b q1 f g =

0.28 = 0.2 14 .

b b b p1 g = 1 q1 f g q1 w g = 1 0.2 0.3 = 0.5

w 3 q0

b g = q b w g + p b g q b w g + p b g p b g q b w g
0 0 1 0 1 2

= 0.2 + 0.4 0.3 + 0.4 0.5 0.3 = 0.38

b gb g b gb gb g

Test Question:

145 Key:

e25 = p25 1 + e26

N M e26 = e26 since same

N p25

=e z =e z

M 25 t + 0.1 1 t dt

bg c h

M 25 t dt 0.1 1 t dt 0 0

bg

c h

=e z

M 25 t dt 0.1 1 t dt 0 0

bg

e z
2

c h

L F M M H = p25 e N
M = e0.05 p25
N N e25 = p25 1 + e26

0.1 t t2

I OP1 K Q0

g g gb g b

M = e0.05 p25 1 + e26

M = 0.951 e25 = 0.951 10.0 = 9.5

Test Question:

146 Key:

E YAGG = 100E Y = 100 10,000 a x

b g F c1 A hI = 10,000,000 = 100b10,000gG H JK
x 2 2 2 x 2 x

Y = Var Y =

b10,000g 1 c A A h b10,000g b0.25g b016g = 50,000 . =

b g
0.90 = Pr

AGG = 100 Y = 10 50,000 = 500,000

LM F E Y N
AGG

AGG

>0

AGG

OP Q

1282 = .

F E YAGG

F = 1282 AGG + E YAGG .

F = 1282 500,000 + 10,000,000 = 10,641,000 .

Test Question:

147 Key:

Expected claims under current distribution = 500 = parameter of new distribution X = claims E X = bonus =.5 500 X 500

b g

E (claims + bonus) = +.5 500 1

FG H

FG H

IJ IJ = 500 500 + K K

FG 500 IJ = 250 2 H 500 + K 2b500 + g 500 = 250b500 + g 2

1000 + 2 2 500 = 2 250 500 + 500 = 250 500 = 354

Test Question:

148

Key: E

b DAg
q80 =.2 13 =

1 80:20

q80 =.1

20 .2 .8 1 + DA 81:19 106 106 . . 13 106 4 . 1 DA 8119 = = 12.225 : .8 1 DA80:20 = 20 v .1 + v .9 12.225 106 .

b g b g b g b g b gb g 2+.9b12.225g = = 12.267

bg

= 20vq80 + vp80 DA

eb g j
1 8119 :

Test Question:

149 Key:

Let T denote the random variable of time until the college graduate finds a job Let N t , t 0 denote the job offer process

m bg

Each offer can be classified as either Type I - - accept with probability p N1 t

m b gr - reject with probability b1 pg mN bt gr By proposition 5.2, mN bt gr is Poisson process with = p p = Prb w > 28,000g = Prbln w > ln 28,000g . . F ln w 1012 > 10.24 1012 IJ = 1 b1g = Prbln w > 10.24g = Pr G H 012 K . 012 .
2 1 1

R | SType II | T

1 = 01587 2 = 0.3174 .
T has an exponential distribution with = Pr T > 3 = 1 F 3 =
3 3.15 e

= 01587 .

bg

1 = 315 . .3174

= 0.386

Test Question:

150 Key:

px = exp

LM N

ds = exp ln 100 x s 0 100 x s

t

OP Q

t 0

100 x t 100 x

e50:60 = e50 + e60 e50:60 e50

e60 e50:60

LM OP = 25 =z N Q 40 t 1 L dt = =z MN40t t2 OPQ = 20 40 40 F 50 t IJ FG 40 t IJ dt = z 1 d2000 90t + t idt =z G H 50 K H 40 K 2000 I = 14.67 1 F t 2000t 45t + = 2000 G 3 J H K
50 50 t 0

t2 1 50t dt = 50 50 2

50

40

2 40

40

40

40 0

e50:60 = 25 + 20 14.67 = 30.33

Test Question:

151 Key:

UDD l21 = 0.8 53,488 + 0.2 17,384 = 46,267.2 Mrl 21 = e21 =

b gb

g b gb

b g

z z bb

t p21

= areas

S 21 + t dt S 21

S X i S 21

b gb g

. = 2.751 + 1228 + 0.361 + 0.072 = 4.412

1.000

0.375731 .115611 .028897

2 1

4 3

xi
21 25 30 35 40

Test: 152

Key: Question

1 = E N = 25 n x 2 = Var X = 675 N 2 = Var N = 25

E X = 50 E S = E X E N = 25 50 = 1250 Var S = E N Var X + Var N E X
2

= 25 675 + 25 2500 = 79,375

Standard Deviation S = 79,375 = 28174 .

Pr S > 2000 = Pr S 1250 / 28174 > 2000 1250 / 28174 = 1 2.66 . .

b g

Test Question:

153

Key: E

b g Var b g
Var 0 L
0

b g b g since Varb g = 0 = v bb V g p q b10,000 3,209g b0.00832gb0.99168g =

= Var 0 + v 2 Var 1
2 1 1 50 50
2

= 358664.09

1032 .

Var 1

b g

= v b2 2V

b10,000 6,539g b0.99168gb0.00911gb0.99089g =

2

p50q51 p51

= 101075.09

1032 .

Var 0 L

b g

= 358664.09 +

101075.09 = 453937.06 1032 .

Alternative solution:

= 10,000 v 2V50:3 = 9708.74 6539 = 3169.74

R10,000 v a = 6539 | | L = S10,000 v a = 3178.80 |10,000 v a = 83.52 | T

1 2 2 3 3

for for for

K=0 K =1 K >1

Pr K = 0 = q50 = 0.00832
50 51

b g Prb K = 1g = p q = b0.99168gb0.00911g = 0.0090342 Prb K > 1g = 1 Prb K = 0g Prb K = 1g = 0.98265 Varb Lg = E L E L = E L since is benefit premium = 0.00832 6539 + 0.00903 3178.80 + 0.98265 b83.52g
2 2 2 0 0 0 0 2 2

= 453,895 [difference from the other solution is due to rounding]

Test Question:

154 Key:

Let denote the single benefit premium. 1 = 30 a35 + A35:30

30

a35

1 1 A35:30

eA =

35:30

1 A35:30 a65 1 A35:30

1 = =

b.21.07g9.9 b1.07g

1.386 .93 = 1.49

Test Question:
0.4 p0

155 Key:

=.5 = e z

0. 4

e F +e2 x jdx

.5 = e.4 F .6128

LM e22x OP.4 N Q0 =e 0.8 .4 F F e 2 1 I H K =e

.4 F

ln .5 = .4 F .6128 .6931 = .4F .6128 F = 0.20

bg

Test Question:

156 Key:

bgbg F 2000 IJ LM1 2000 OP = 2000 FG1 2IJ = 2000 3 = 1200 E X 3000 = G H 1 K N b3000 + 2000g Q H 5K 5
E X = 2000 1! / 1! = 2000
So the fraction of the losses expected to be covered by the reinsurance 2000 1200 = 0.4. is 2000 The expected ceded losses are 4,000,000 the ceded premium is 4,400,000.

Test Question:

157 Key:

X 2002 = 105 X 2001 .

so:

F x IJ = 1 LM FG H 105 K N b x . L = 1 M Nx
2002

2000 . 2002 / 105 + 2000

2100 2002 + 2100

OP Q

OP gQ

This is just another Pareto distribution with = 2, = 2100. E X 2002 = 2100. and

E X 2002 3000 =

FG 2100 IJ LM1 FG 2100 IJ OP H 1 K MN H b3000 + 2100gK PQ L 3000 OP = 1235 = 2100 M N 5100 Q

So the fraction of the losses expected to be covered by the reinsurance is 2100 1235 = 0.412. 2100

The total expected losses have increased to 10,500,000, so C2002 = 11 0.412 10,500,000 = 4,758,600 . And

C2002 4,758,600 = = 108 . C2001 4,400,000