UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN Actuarial Science Program DEPARTMENT OF MATHEMATICS

Math 478 / 568 Actuarial Modeling Prof. Rick Gorvett Spring 2013

Homework Assignment # 7 (max. points = 10) Due at the beginning of class on Tuesday, April 30, 2013 You are encouraged to work on these problems in groups of no more than 3 or 4. However, each student must hand in her/his own answer sheet. Please show your work enough to show that you understand how to do the problem and circle your final answer. Full credit can only be given if the answer and approach are appropriate. Please provide answers to two decimal places. Each problem is worth one point. Note: Homework assignments are due at the beginning of the class. If you arrive at the class after it has started, you must hand in your assignment upon entering the classroom. Assignments will not be accepted at the end of the class period. Note: For many problems below, formulas in Appendix A of the course textbook are useful. (The Appendix is also available online at http://www.soa.org/files/pdf/edu-2009-fall-exam-ctable.pdf .)

(1)

Suppose that the number of claims per year for a policyholder follows a Poisson distribution with mean parameter , and the prior distribution of is ( ) 0.125e 0.125 . Empirically, there were 12, 15, and 9 claims, respectively, observed in years 1 through 3 for this policyholder. Determine the Bhlmann credibility estimate for this policyholders expected claim frequency in year 4. Same problem as (1) above, except determine the Bayesian credibility estimate for this policyholders expected claim frequency in year 4. Suppose that policyholders all fall into one of two homogeneous risk groups. Policyholders in each risk level group have the following size-of-loss distributions per period: Size of Loss $ 0 1,000 5,000 Group 1 40% 50 10 Group 2 60% 30 10

(2)

(3)

There are four times as many Group 1 policyholders as there are Group 2 policyholders. An insurer randomly selects a policyholder, and observes two periods of loss experience for that policyholder. Suppose that the insurer observes a $ 1,000 loss in the first period,
1

and then a $ 0 loss in the second period. Determine the expected value of the policyholders loss in the third period using a Bhlmann credibility approach. (4) Same problem as (3) above, except determine the expected value of the policyholders loss in the third period using a Bayesian approach. You are given the following: i) ii) iii) iv) A policyholder will have either zero or one loss during any given year. The probability that a policyholder will have a loss during a year is p. The prior distribution for p is uniform on [0.20, 0.40]. A policyholder is randomly selected and observed for 1 year. The observed number of losses during that year is 1.

(5)

Determine the posterior Bayesian probability that this policyholder will have a loss during year 2. (6) Suppose that, prior to observing any claims, you believe that claim sizes follow an 1 x exponential distribution with pdf f ( x) e , where = 100 or 200 (with the

probability of a value of 200 being twice as likely as a value of 100). You then observe one claim, from a randomly selected insured, of size 80. Determine the posterior Bayesian probability that the next claim for this insured will be greater than 200. (7) You are given the following information on large commercial insurance policies: i) ii) iii) iv) The numbers of losses per exposure for a given policyholder are independent and have a common mean and variance. The number of losses per exposure is Poisson with a mean of . The prior distribution of is uniform from 1 to 3. The following experience is observed for a randomly selected policyholder: Total Number of Claims Across All Exposures in the Year 60 125 78 Number of Exposures in the Year 40 50 60

Year 1 2 3

Determine the Bhlmann-Straub credibility value for the expected number of claims per year per exposure for this policyholder.

(8)

You are given the following total claim figures for two policyholders: Year 1 2 3 4 Policyholder A 10 12 18 20 Policyholder B 15 25 35 45

Assume that both policyholders have the same underlying exposure level in all years. Using the nonparametric empirical Bayes method, determine the Bhlmann credibility estimate of the expected number of claims per year for Policyholder A. (9) Determine the 95% Value-at-Risk (VaR) of loss random variable X, where X is a twoparameter Pareto distribution with = 4 and = 7,500. Consider the following loss distribution: Size of Loss $ 50 100 500 1,000 2,000 5,000 Probability 0.50 0.30 0.10 0.05 0.03 0.02

(10)

Determine the 95% Tail VaR (i.e., the 95% Conditional Tail Expectation).