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NAME: ———————————————————————————

STUDENT I.D.: ———————————————————————–

University of Toronto
ACT466 - TERM TEST
25th of February 2016
Instructor - Andrei Badescu

NOTES:

1. Only non-programmable calculators are allowed.

2. A booklet is to be handed in with this exam paper.

3. This is a closed book test.

4. Timing: 90 minutes.

5. Please stay in your seats and do not talk till all papers have been collected.

10. Photo ID on desk during exam please.

11. Good luck!

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1. (10 points) You are given the following information:

i) the number of claims follows a Poisson distribution.

ii) Claim severity is independent of the number of claims and has the following distribution,
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f (x) = 52 x− 2 , x > 1.

a) (3 points) Determine the coefficient of variation of the claim severity distribution.

b) (7 points) A full credibility standard is determined so that the total number of claims is within
5% of the expected number with probability 98%. If the same exmpected number of claims for
full credibility is applied to the total cost of claims, the actual total cost would be within 100K%
of the expected cost with 95% probability. Using the normal approximation of the aggregate loss
distribution, determine K.

2. (10 points) For an insurance portfolio, you are given the following:

i) The number of claims for each insured follows a Poisson distribution.

ii) The mean claim count for each insured varies. The distribution of the mean claim counts is a
gamma distribution with α = 0.5 and θ = 4.

iii) The size of the claims for each insured follows a Pareto distribution with parameters α = 3
and θ = 6000.

iv) The credibility standard is that the aggregate claims must be within 10% of expected p of the
time

v) 1812 claims were observed, resulting in 80% credibility.

Find p.

3. (10 points) There are two classes of insureds, A and B.

For class A, claim frequency follows a distribution which is a mixture of a Poisson with mean 0.1
with weight 2/3 and a Poisson with mean 0.2 with weight 1/3.

For class B, claim frequency follows a distribution which is a mixture of a Poisson with mean 0.1
with weight 1/3 and a Poisson with mean 0.2 with weight 2/3.

Half of the insureds are in each class. A certain insured submits at least one claim in the first year.
Calculate the probability that the same insured submits at least one claim in the second year.

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4. (10 points) You are given the following probability distribution for the prior hypothesis Θ:

Θ
0 1
0 0.4 0.1
X 1 0.1 0.2
2 0.1 0.1

Two observations for a randomly selected individual are 0, 1. Calculate the Bayesian prediction
of the expected value of the next observation from this individual.

5. (10 points) Claim sizes follow an inverse Pareto distribution with parameters τ = 2 and θ. The
improper (does not integrate to 1) prior density of θ is π(θ) = 1θ , θ > 2. You observe a claim of size
1. Determine the posterior expected value of θ.

6. (10 points) Claim frequency follows a mixture of a Poisson distribution with mean 0.1 with
a weight α and a Poisson distribution with mean 0.2 with a weight 1 − α. The weight α varies by
insured, and has a probability density function f (α) = 2(1 − α), 0 < α < 1. There is one claim in
year 1. Determine the posterior mean of α.