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Stat 5657 • Fall 2018 Homework 6 • Due 11/8

Problem 1: Consider the present value of loss random variable for a discrete whole life in-
surance with annual contract premium P = 0.025 (Note that the premium has not necessarily
been determined by the equivalence principle. ) Using normal approximation determine the
minimum number of contracts to be issued to independent lives all age x so that the proba-
bility of a positive loss on the collection of contracts does not exceed 0.05, given the values
Ax = 0.24905, 2 Ax = 0.09476 and i = 0.06.

Problem 2: The annual premiums defined in the deferred annuity payments are made only
if (x) survives through the n-year deferred period. This implies that no benefit is paid, and
premiums are therefore forfeited, in the case of failure during the deferred period. In practice,
this is not the case, and a failure benefit is paid in the event of failure during the deferred
period. Suppose the deferred period of failure benefit is the return of net annual premiums
paid, with interest at the same rate i as is used to discount the benefit back to issue. Find an
expression for the net annual premium in this case.

Problem 3: As an alternative to determining net annual premiums by the equivalence princi-

ple, we might select the premium such that the probability of a positive loss is less than some
tolerance limit. For example, let us find the premium for a unit discrete whole life insurance
issue to (40) such that P (L40 > 0) < 0.25, where L40 is the loss at issue random variable.
Assuming i = 0.05 and a uniform distribution of future lifetime with w = 110.

Problem 4: A fully discrete $19, 700 whole life policy with 20 annual benefit premiums is
issued to (x). A premium refund feature is in effect during the premium payment period which
provides that one-half of the last premium paid to the insurer is to be refunded as an extra
death benefit. Find the annual premium if:
Ax = .4, äx:19| = 9.7, äx:20| = 10.0, äx:21| = 10.2 and äx = 12.

Problem 5: A fully continuous whole life insurance with unit benefit has a level premium.
The time until death random variable, T (x) has an exponential distribution with E[T (x)] = 50
and force of interest is δ = 0.06.
(a) If the principle of equivalence is used, find the benefit premium rate
(b) Find the premium rate if it is to be such that P (L > 0) = 0.5.
Problem 6: If δ = 0, show that P̄ (Āx ) = .

Problem 7: Let l(t) = v t − P̄ āt̄| .

(a) Establish that l′′ (t) ≥ 0
v ex
(b) Use Jensen Inequality to prove that P̄ (Āx ) ≥ ā


Try all problems in Chapter 6. No turn in.