STOR 472Exam 1

February 8, 2012

Pledge: I hereby certify that during this exam I have neither given nor received aid.
Sign here
Print here

(1) A health insurer will pay your medical expenses this year subject to a deductible of 200. The
probability that you wont have any medical expenses is 82.9%. If you do have medical expenses,
assume that they are exponentially distributed with a mean of 1,000.
Given that you have medical expenses, YL is the amount the insurer will pay. (We call YL the claim
payment per loss random variable.)
Given that you have medical expenses that exceed the deductible, YP is the amount the insurer will pay.
(We call YP the claim payment per payment random variable.)
(a)
(b)
(c)
(d)

What is the probability that the insurer will not pay anything? (86%)
What is the probability that YL 600? (55%)
What is the probability that YP 600? (45%)
What is the probability that the insurer wont pay you more than 600? (92%)

ROUND YOUR ANSWERS TO THE NEAREST WHOLE PERCENT.

(2) An insurance policy will reimburse a loss subject to a deductible of 2. For those policyholders who
suffer a loss, assume that the amount of the loss, X, follows a distribution with density function fX(x) =
1/10, 0<x<10 and 0 elsewhere.
Given that a loss occurs, YL is a random variable for the amount the insurer will pay.
(a) Express YL in terms of X.
(YL = 0 when 0 < X 2 and X 2 when 2 < X < 10)
(b) Find the distribution function of YL. (Remember to include all outcomes between + and infinity.)
(F(y) = 0 when y<0, (y+2)/10 when 0y<8 and 1 when y8)
(c) Calculate the Loss Elimination Ratio. (0.36)
(3) A companys dental plan pays the annual dental expenses above a deductible of 100 for each of 50
employees. You are given the distribution of annual dental expenses for a single employee:
Expense
0
100
200
500
1000

Probability
0.1
0.2
0.4
0.2
0.1

(a) Find the mean and the variance of the annual claim payments for a single employee. (210, 72900)
(b) Find the mean and the variance of the total annual claim payments for the 50 employees. (10500,
3645000)
(c) Using the normal approximation, find the 95th percentile of the distribution of total annual claim
payments for the 50 employees. (13640.61)

(4) An insurance policy will reimburse your surf shop for revenue it loses this year due to hurricanes,
subject to an annual deductible of . The total amount of revenue your shop will lose this year due to
hurricanes has distribution function F(x) = x2, 0 x 1, and 0 elsewhere. The premium for the policy
is 120% of the expected value of the claim payments.
(a)
(b)
(c)
(d)

Calculate the expected value of your revenue loss. (2/3)

Calculate the expected value of your revenue loss that the insurance will not reimburse. (11/24)
Calculate the insurance premium. (1/4)
Calculate the expected value of the claim payments given that the total loss in revenue exceeds the
deductible. (5/18)

(5) The Sunshine State Insurance Company establishes a fund of 2 million dollars for the purpose of
contributing an amount, C, to a humanitarian relief organization each time that a major hurricane
strikes Florida between June 1 and November 30 of this year. The company assumes that there can be
at most one major hurricane in any month, and that the probability of a major hurricane in any month is
8.47%. It also assumes that the number of major hurricanes in any month is independent of the
number of major hurricanes in any other month.
Without using special probability functions on your calculator (like binompdf or poissonpdf):
(a) Calculate the binomial probability that exactly one hurricane will strike Florida between June 1
and November 30. (0.3265)
(b) Approximate the binomial probability in part (a) by using a Poisson distribution with the same
mean as the binomial distribution. (0.3057)
(c) Calculate the binomial probability that more than one hurricane will strike Florida between June 1
and November 30. (0.0855)
(d) Calculate the maximum value of C for which the binomial probability is at least 99% that the fund
will be adequate to provide the contributions. (1 million)
(6) For 2012, loss sizes follow a uniform distribution with f(x) = 1/1000, 0 < x < 1000. An insurance
contract calls for a deductible of 100 on each loss. Inflation of 10% impacts all loses uniformly from
2012 to 2013. The deductible remains at 100 in 2013.
Calculate the percentage increase in the expected value of the claim payment per loss from 2012 to
2013. (Your answer should be greater than the inflation rate. This effect is known as deductible
leveraging.)
(12.23%)
(7) This years hospital claims for a health plan are modeled by a Pareto distribution with = 2 and =
300. The health plan will pay a bonus to physicians as an incentive to control hospital claims.
If X is a random variable for hospital claims, then
B = .4[400 (X 400)]
is a random variable for the bonus.
As the health plans actuary, you assume that next years hospital claims will be uniformly 20% higher
than this years.
(a)
(b)
(c)
(d)

How much is the bonus if hospital claims are 400 or more? (0)
What is the probability that the physicians will get a bonus next year? (0.7756)
Calculate the expected value of next years hospital claims. (360)
Calculate the expected value of next years bonus. (84.21)