ACTL 5106 INSURANCE RISK MODELS

Quiz 1

Please write your name and student number at the spaces provided:

Name: Student ID:

There are four (4) questions here and you are to answer all four. Provide details
of your workings. Please return this questionnaire. We will NOT mark your
paper if you do not return it.

Question No. 1: [25 points]

Insurer XYZ has utility function

u1 (w) = exp (0:25w) , for w > 0:

Michel faces two random losses, X1 and X2 , and he wishes to increase his expected utility by
purchasing an insurance policy from Insurer XYZ. Michel has determined that for a wealth
level of w, his utility function is

u2 (w) = log w, for w > 0:

X1 and X2 are identically and independently distributed as follows:

x P (X = x)
0 0:5
10 0:5

Determine the maximum level of current wealth of Michel so that an insurance contract is
possible between him and Insurer XYZ.

Question No. 2: [25 points]

An insurance company has a portfolio of two classes of policies with the following character-
istics:
Insured Number Probability
Class Amount of Policies of a Claim
1 1 400 0:02
2 10 100 0:02

The company reinsures the amount in excess of R (R > 1) per policy at a cost of 0:025 per
unit (or dollar) of coverage. The company wants to minimize the probability, as determined
by the Normal approximation, that retained claims plus cost of reinsurance exceeds 34.

Determine the value of R.

1
Question No. 3: [25 points]

Aggregate claims S has a compound Poisson distribution with = log 4 and individual claim
amount probability function is given by

2x
p (x) = , for x = 1; 2; 3; :::
x log 2
Show that S has actually a Negative Binomial distribution. Specify the parameter values.

Question No. 4: [25 points]

Aggregate claims
S = X1 + X2 + + XN
where:

Xi has a uniform distribution on (1; 5), i = 1; 2; :::;

N has the distribution

n P (N = n)
0 0:3
1 0:2
2 0:5

N , X1 , X2 , . . . are mutually independent.

Determine P (S < 4).

- end of Quiz 1 questions -