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

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

Homework Assignment # 4 (max. points = 10) Due at the beginning of class on Thursday, February 28, 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)

Let ground up individual loss severity in 2012 follow a continuous uniform distribution, between 0 and 1,000. It is assumed that the ground up loss distribution for 2014 will be the same, except that every possible loss size from 2012 will be increased by 20% per year for inflation. Consider an insurance policy in 2014 with an ordinary deductible of 200, and a policy limit (maximum insurer loss per claim) of 1,000. Find E[Y P ] , the insurers expected loss per payment in 2014. Let ground up individual loss severity in 2009 follow a one-parameter Pareto distribution, with 1 and 1.002 . It is assumed that the ground up loss distribution for 2013 will be the same, except that every possible loss size from 2009 will be increased by 12% per year for inflation. Find the probability that an individual claim severity will exceed 100 in 2013.

(2)

(3)

, an estimator of parameter . To You are considering a method by which to calculate evaluate the quality of this estimator, you simulate the estimator five times, resulting in : the following values for
124 205 173 158 165

By presuming that each of the above simulated values is equally likely, you calculate that bias [ ] 7 . Find (4) For the situation in problem (3) above, calculate the mean squared error (MSE) of the estimator. Below, I have simulated (using Excel) four samples of five random values each, from a two-parameter Pareto distribution with = 4, and = 3000: Sample 1: Sample 2: Sample 3: Sample 4: 41, 680, 3199, 768, 94 381, 123, 550, 825, 393 127, 159, 5327, 801, 982 1020, 457, 100, 165, 1486

(5)

Based on these four samples, calculate the bias of the sample mean as an estimator of the true distribution mean. (6) (7) For the situation in problem (5) above, calculate the variance of the estimator. A random variable X has a Gamma distribution with parameters with 5 and . Let X 1 , where X is a random sample from the Gamma distribution X. Find the 1 mean-squared error of this estimator.
X X2 , where X 1 and X 2 are Same situation as problem (7) above, but let 1 2 independent random samples from the Gamma distribution X. Find the mean-squared error of this estimator.

(8)

(9)

Below are ten observations from a distribution. Draw, on two separate graphs, an ogive and a histogram for this sample of size ten. Fully label the x- and y-axes. 1 4 2 2 3 1 2 3 2 5

(10)

You are given the following information: Number of Claims of Size X 50 30 15 5 Total dollars of loss on those claims $ 2,200 4,300 4,800 3,900

Individual loss size range (X) $ 0 100 101 200 201 500 501 1,000

Determine E[ X 200] using this empirical distribution.