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ACTL3001 Practice Final Exam 2013

Question 1 (Module 4) - 8 Marks
The family of Weibull distribution is characterised by its hazard rate being (x) = x1 , x > 0.
(a) [4 marks] Prove that the Weibull distribution can be parametrised as both a proportional hazards
model and an accelerated failure time (AFT) model.
(b) [4 marks] Prove that the Weibull distribution is the only family with a continuous hazard rate that
can be parametrised as both a proportional hazards model and an AFT model.

Question 2 (Module 5) - 26 Marks

Consider the following transition rates for a 4-state Markov model (, i > 0, i = 1, 2, 3)

1
1
0

0
2
2

.
Q=

0
3
3
0
0
0
0
The corresponding embedded matrix is

0 1 /(1 + )
0
/(1 + )
0
0
2 /(2 + ) /(2 + )
P =
0 3 /(nu3 + )
0
/(nu3 + )
0
0
0
0

(a) [3 marks] Briefly explain the assumptions of the Markov model.

(b) [4 marks] Suppose g {1, 2, 3, 4} is a state such that t px gg = t pgg
x . Identify the possible value(s) of g
and justify your identification with reasons.
(c) [3 marks] Write down the Kolmogorov Forward Equation for t p14
x , then express the RHS in terms of
14
t px and only.
(d) [3 marks] Solve the differential equation found in (c) to find t p14
x .
13
(e) [6 marks] By first finding t p11
x or otherwise, find t px .

(f) [3 marks] Suppose a large number of lives are in the system and they all behave independently. Over
a year, it is observed that there are nij transitions from state i to state j and the total waiting time
in state i is ti . Derive the MLE of and 1 , and their standard errors.
(g) [3 marks] Explain, in detail, how you would test whether < 1 .

Question 3 (Module 6) - 12 Marks

A mortality investigation of 10 lives yields the following data:
Life
1
2
3
4
5
6
7
8
9
10

ai
0.1
0.1
0
0
0.4
0.5
0
0
0
0.3

bi
0.8
1
0.9
1
0.8
1
1
1
0.6
1

ti di vi
0 0
0 0
0 0
0 0
0.6 1
0.7 1
0 0
0.9 1
0.2 1
0 0

For each life, ai is the exact time since age 40 that he/she comes under observation, bi is the exact time
since age 40 that he/she is censored, and di = 1 if death occurs prior to censoring, ti is the exact time after
40 when death occurs under observation.
(a) [2 marks] Complete the vi column, where vi is the time for which the lives were observed.
(b) [2 marks] Outline the advantages of using a Binomial model as opposed to a Poisson model.
(c) [3 marks] What is the main advantage of using mortality assumptions in the maximum likelihood
estimation?
B and q
P which are obtained from the
(d) [5 marks] Find the difference between the mortality rate q40
40
Binomial model and the Poisson model respectively.

Question 4 (Module 7) - 20 Marks

You are an actuary in the life insurance firm ASOC Pty Ltd. It has been a conventional practice of the firm
to assume that policies occur uniformly throughout the year. Census data demonstrate that:
Calendar Year
2008
2009
2010
2011
2012
2013

Population Aged 50 Last Birthday on 1 Jan

25,600
26,300
24,400
27,500
28,900
30,000

(a) [4 marks] Explain the Principle of Correspondence.

(b) [3 marks] Outline some of the reasons which potentially undermine the assumption that policies are
uniformly distributed.
(c) [4 marks] Estimate the central exposed to risk which may be used to calculate 50+f1 aged 50 last
1
1
birthday for the 5 year period 2008 - 2013 by using the assumption P50 (t+s)
= (1 s) P501(t) + s P50 (t+1)
,
where t = 1, 2, 3, 4; s [0, 1). State the value of f1 .
(d) [4 marks] Deduce whether this would be higher or lower than another estimate 50+f2 , which is based
on the assumption P50 (s) = (1 s)P50 (t) + sP50 (t + 1), t = 1, 2, 3, 4; s [0, 1).
(e) [5 marks] Are f1 and f2 equal? Justify your answer.
3

Question 5 (Module 8) - 24 Marks

Kevin is building life tables for fun and he has asked for your help. He has compiled death data classified by
(2)
age nearest birthday on 1 January preceding or coincident with death (dx ), and the corresponding number
of lives investigated are classified by age last birthday at entry plus curtate duration at the census date 1
January (Px (k)). The data is as follows:
Age
20
21
22
23
24
25
26
27
28

(2)

dx
2
5
7
10
20
10
13
12
12

Px (k)
320
300
420
510
600
550
720
400
450

Px (k + 1)
370
350
400
500
600
600
670
350
400

(2)

qx

(2)

(a) [1 mark] State the type of rate interval to be used to build the qx s.
(2)

(b) [3 marks] Compute the value of qx for each age, then test the smoothness of the data.
(c) [8 marks] Determine whether the data adheres to the mortality rates in AM92 Ultimate by conducting
the Chi Squared Test and the Group of Signs Test. Outline the features of the crude rates which
significantly departs from that of the standard table.
o

(d) [6 marks] Graduate the crude rates by reference to the AM92 using the relationship q x = aqxs .
qx .
Determine the parameters by minimising weighted least squares, where the weights wx = Exc /
(e) [6 marks] Conduct the Cumulative Deviations Test to determine whether the graduation is suitable.
Which features of the graduated rates seem to be suitable/unsuitable?

Question 6 (Module 9) - 10 Marks

(a) [5 marks] Raise an example of a paradox in which every age specific rates for population A is less
than that of population B, but the total death rate for A is higher than that of B.
(b) [5 marks] Show that the paradox may be resolved by directly standardising the mortality rates with
a standard population of 50 from age group A and 50 from age group B.

Hints - Question 1
(a) A distribution with hazard rate (x) can be parametrised as a proportional hazards model if and only
if (x) exp(z T ) is the hazard rate of a valid distribution. A distribution can be parametrised as an
AFT model iff S(x; z) = S0 (x exp(z T )).
(b) Try starting on the assumption that a hazard rate follows a proportional hazards model, then mathematically incorporate the fact that it is also an AFT model (what requirements are there for a hazard
rate in the AFT model?). After that, prove the hazard rate follows the form x1 .

Hints - Question 2
(a) Recall the Markov assumption, the probability of transitioning to a state and the probability of
transitioning more than once.
(b) t px gg = t pgg
x implies that there are no alternative pathways from g to g except by not changing states
for the entire duration [x, x + t]. What does that imply about the probabilities from g to other states
and/or other states to g?
P ik
ij

(c) Kolgomorov Forward Equations could be expressed as t

t px =
k t px qkj .
(d) Recall that ky + y 0 = ekx (ekx y)0 , and initial condition 0 p14
x = 0.
14
(e) Find t p11
x using similar method to t px .
2

(f) L = 1n12 2n23 3n32 n14 +n24 +n34 e(1 +)t1 e(2 +)t2 e(3 +)t3 . Also, V ar() = 1/ L2 for parameter .
(g) MLEs are asymptotically normal. Moreover, the difference of two random variables that are normal
is still a normal random variable.

Hints - Question 3
(a) vi = bi ai if no death occurs; and ti ai if death occurs.
(b) Consider the Binomial model assumes that all lives are subject to one qx over the whole year, whilst
the Poisson model assumes that the whole set of lives are subject to a constant over the year.
(c) Mortality assumptions include UDD, constant force of mortality and Balducci.
B is directly derived from deaths and initial exposed to risk; whilst q
P requires deriving
(d) q40
40
40 from
deaths and central exposed to risks first.

Hints - Question 4
(a) What happens if dx and Ex describe different periods?
(b) What would people do if the premium is about to rise? Or if they are to pay taxes soon? Or if you
are an employer that uses a group scheme?
R4
(c) Recall Exc = 0 P50 (t)dt. You would need to break it into 4 integrals.
(d) This may be done in a few ways. One method is to simply derive the other Exc,2 .
(e) Since they operate on different assumptions, probably not equal. Recall f is the average of the actual
ages of the people who are counted as age x.

Hints - Question 5
(a) Is it policy year rate interval or calendar year rate interval?
(2)

(2)

(b) qx = dx /Ex . What assumption(s) did you make?

(c) Chi Squared Test involves adding the standardised deviations, whilst the grouping of signs test involves
looking at the longest run of each sign.
(d) First determine the weights
(e) Cumulative Deviations Test statistic is the sum of the deviations divided by the square root of the
sum of the variances.

Hints - Question 6
(a) The overall population mortality would be higher if there are more risky individuals in that group
(selection effects).
(b) Standardising involves scaling the individual mortalities with the central exposed to risk.

Solutions - Question 1
(a) For proportional hazards, consider for a member of the Weibull family with hazard rate (x) = x1 ,
(x) exp(z T ) = x1 exp(z T )


1

T
z
.
= x exp
1
Therefore, since the hazard rate is still in the form of (x0 )1 , it has a valid distribution (in the
Weibull family). Hence Weibull can be modelled with a proportional hazards model.
For AFT models,

 Z x
1
t
dt
S0 (x) = exp
0

= exp (x ) .


S(x; z) = exp x exp(z T )



 
T
= exp x exp
z

= S0 (x exp(z T )),

where =

Therefore, Weibull can also be represented by the accelerated-failure time model.

(b) Suppose (x) = 0 (x) exp(z T ) and S(x; z) = S0 (x exp(z T )). Then,
 Z

S(x; z) = exp
0 (t) exp(z T )dt
x


Z
T
0 (t)dt .
= exp exp(z )
x
!
Z

Now, S0 (x exp(z T )) = exp

0 (t)dt .
x exp(z T )


Z
T
exp exp(z )


Z
0 (t)dt
= exp

0 (t)dt

x exp(z T )

x
T

exp(z )

0 (t)dt =

0 (t)dt
x exp(z T )

exp(z T )0 (x) = 0 (x exp(z T )) exp(z T )

0 (x exp(z T )) = 0 (x) exp(( )z T ),

x>0

Set f (x) = 0 (x)/(x1 ), where = /; then

(x exp(z T ))1 f (x exp(z T )) = x1 f (x) exp(( )z T )
exp(( 1)z T )f (x exp(z T )) = f (x) exp(( 1)z T )

f (x exp(z T )) = f (x).

Now, consider exp(z T ) > 1 or exp(z T ) < 1 (if exp(z T ) = 1 then this problem is trivial). In each
case either x exp(z T ) > x or x exp(z T ) < x. Hence for every real number x, there exists a lesser
number x0 such that f (x) = f (x0 ). Now suppose for some y, f (y) 6= f (0) but f (x) = f (0) for all
x. Then there exists a number y 0 < y such that f (y) = f (y 0 ) = f (0) which contradicts the original
assumption. Therefore f (x) = , a constant. (Note this can only be done because the hazard rate is
assumed to be continuous). Hence Weibull is the only family with a continuous hazard rate that can
be used to model both the PH model and the AFT model.
7

Solutions - Question 2
(a) The Markov assumption is of three folds:
1. The probability of future states only depend on the current state;
2. dt pij
x = ij dt + o(dt);
3. The probability of two or more transitions within dt time is o(dt).
gg
(b) t pgg
x =t px iff current state g cannot exit g then travel back to g. This may occur in two
circumstances: (1) g is an absorbing state (0 row in P ), thus one cannot exit g; or (2) no state
accessible to g can travel back to g (0 column in P ). Therefore, the required states are states 1 and 4.

(c)
4
X
14
1j
p
=
t
t px qj4
t x

=
=
=

(Kolmogorovs Forward Equation)

j=1
11
12
13
t px + t px + t px
12
13
(t p11
x + t px + t px )
(1 t p14
x ).

+0

(d)
d 14
=
tp
dt x
0
= et
(et t p14
x )

t p14
x +

0 14
= et e0
et t p14
x e 0 px
t
et t p14
x 0 = e 1

= et 1
et t p14
x
14
t px

= 1 et .

(e)
11
t px

11
t px

= exp((1 + )t).
Now,

13
12
13
14
= t p11
tp
x q13 + t px q23 + t px q33 + t px q43
t x
13
= 0 + t p12
x 2 + t px (3 ) + 0
13
14
13
= (1 t p11
x t px t px )2 (3 + )t px

= (1 e(1 +)t 1 + et )2 (2 + 3 + )t p13

x
d 13
= 2 (et e(+1 )t )
tp
dt x


(2 +3 )t
(2 +3 1 )t
0
(e(2 +3 +)t t p13
)
=

e
2
x

(2 + 3 + )t p13
x +

(2 +3 +)t

!
e(2 +3 )0
e(2 +3 1 )0
e
= 2
2

2 + 3
2 + 3 1
!


e(2 +3 )t
e(2 +3 1 )t
1
1
(2 +3 +)t 13
e

t px 0 = 2
2 + 3
2 + 3 1
2 + 3 2 + 3 1
2
2
1 2
e(2 +3 +)t t p13
=
e(2 +3 )t
e(2 +3 1 )t +
x
2 + 3
2 + 3 1
(2 + 3 )(2 + 3 1 )

13
t px

(2 +3 +)0

e(2 +3 )t
e(2 +3 1 )t

2 + 3
2 + 3 1

13
0 px

13
t px

2 et
2 e(+1 )t
1 2 e(2 +3 +)t

+
.
2 + 3 2 + 3 1 (2 + 3 )(2 + 3 1 )
8

(f)
L = 1n12 2n23 3n32 n14 +n24 +n34 e(1 +)t1 e(2 +)t2 e(3 +)t3
1n12 n14 +n24 +n34 e(1 +)t1 et2 et3 .

l = n12 ln(1 ) + (n14 + n24 + n34 ) ln() (1 + )t1 t2 t3 + c,

n14 + n24 + n34

l =
t1 t2 t3 = 0
(for stationary points)

n14 + n24 + n34

M LE =
.
t1 + t2 + t3

n12
=
t1 = 0
(for stationary points)
1
1
n12
1M LE =
.
t1

c R.

It is trivial to observe that the values are where the likelihood is maximised. (use second derivative)
(g) Use the fact that MLE are asymptotically normal. Therefore, 1 is normally distributed. Moreover,
2l
2l
Var( 1 ) = Var() + Var(1 ) =
2 2 . Therefore, we may conduct the following test:
1

(
H0 : 1 = 0
H1 : 1 < 0
1
; where Z|H0 N (0, 1).
Test statistic: Z =
1

Critical region: C := {z : z < 1.645}.

Solutions - Question 3
(a)
Life
1
2
3
4
5
6
7
8
9
10

ai
0.1
0.1
0
0
0.4
0.5
0
0
0
0.3

bi
0.8
1
0.9
1
0.8
1
1
1
0.6
1

ti di
0 0
0 0
0 0
0 0
0.6 1
0.7 1
0 0
0.9 1
0.2 1
0 0

vi
0.7
0.9
0.9
1
0.2
0.2
1
0.9
0.2
0.7

(b) In a Binomial model, lives can only die once. In a Poisson model, lives can potentially die multiple
times. Moreover. a Binomial model is simpler to set up when there are only two states.
(c) The use of mortality assumptions lessens the number of parameters needed to be estimated. Instead
of estimating qx+a for each a [0, 1), mortality assumptions require only qx be estimated.

(d)
d40
E40

B
q40
=

=
=

40 =
=
=
P
q40

4
0.7 + 0.9 + 0.9 + 1 + 0.6 + 0.5 + 1 + 1 + 1 + 0.7
0.48193.
d40
C
E40
4
0.7 + 0.9 + 0.9 + 1 + 0.2 + 0.2 + 1 + 0.9 + 0.2 + 0.7
0.59702.

= 1 e0.59702
= 0.44955.

B
q40

P
q40

= 0.03238.

Solutions - Question 4
(a) The Principle of Correspondence states that A life alive at time t should be included in the exposure
Px,t iff were that life to die immediately, he/she would be counted in the deaths data dx . That implies
Px,t should be defined around dx if the two are defined differently.
(b) Policies tend to be taken out in large numbers just before the end of the tax year; or just before
when premiums would rise. Employers who purchase group schemes would have the same policy
anniversaries.
(c)
Exc

Z
=
=

P50 (t)dt
0
3 Z 1
X

P50 (t + s)ds

t=0 0
3 Z 1
X
t=0 0
3 Z 1
X
t=0 0
3 Z 1
X
t=0 0
3
X

1s
P50 (t)

1
ds
s
+ P50 (t+1)

P50 (t)P50 (t + 1)
ds
(1 s)P50 (t + 1) + sP50 (t)
P50 (t)P50 (t + 1)
ds
P50 (t + 1) + s(P50 (t) P50 (t + 1))

P50 (t)P50 (t + 1)
[ln(P50 (t + 1) + s(P50 (t) P50 (t + 1)))]10
P50 (t) P50 (t + 1)
t=0


3
X
P50 (t)P50 (t + 1)
P50 (t)
=
ln
.
P50 (t) P50 (t + 1)
P50 (t + 1)

t=0

= 134, 792.9.
a
ab
ln
,
where a = P50 (0); b = P50 (1)
For f1 ,
P50 (f1 ) =
ab
b
a
ab
ab
=
ln
b + f1 (a b)
ab
b
1
b

f1 =

.
ln(a) ln(b) a b
10

(d)
Exc,2

Z
=

P50 (t)dt
0

1
(P50 (0) + 2P50 (1) + 2P50 (2) + 2P50 (3) + P50 (4))
2
= 134, 900.
=

(e)
1
.
2
6
=
f2 .

f2 =
f1

Solutions - Question 5
(2)

(a) From Principle of Correspondence, should use the same rate interval as that for dx ; ie, Calendar year
rate interval.
(2)

(b) qx =
Ex =

(2)

dx
Ex . Assume
Px1 (k)+Px (k)
.
2

Age
20
21
22
23
24
25
26
27
28

that birthdays and policies are uniformly distributed throughout each year, then

(2)

dx
2
5
7
10
20
10
13
12
12

Px (k)
320
300
420
510
600
550
720
400
450

Px (k + 1)
370
350
400
500
600
600
670
350
400

(2)

(2)

qx

qx

0.016129
0.019444
0.021505
0.036036
0.017391
0.020472
0.021429
0.028235

0.003315
0.002061
0.014531
-0.01864
0.003081
0.000956
0.006807

(2)

2 qx

-0.00125
0.01247
-0.03318
0.021726
-0.00213
0.005851

(2)

3 qx

0.013724
-0.045651
0.054901
-0.023851
0.007976

Since the third differences are quite different, the data is not smooth.
(c) Chi Squared Test:

x
21
22
23
24
25
26
27
28

Ex
310
360
465
555
575
635
560
425

dx
5
7
10
20
10
13
12
12

qx
0.00058
0.00057
0.00057
0.00057
0.00057
0.00057
0.00057
0.00057

zx
11.4026
14.9763
18.9320
35.1017
16.9634
21.0713
20.6807
23.8087

P
2
Test statistic = 8x=1 zx+20
= 3671.15. Clearly, p-value = 0 (with degrees of freedom 8-1=7). Therefore, data does not adhere to that of AM92. This indicates the overall fit is inadequate.

11

Group of Signs Test:

x
21
22
23
24
25
26
27
28

dx
5
7
10
20
10
13
12
13

Ex q x
0.1789
0.2059
0.2646
0.3147
0.3255
0.3600
0.3192
0.2440

Dev
4.8211
6.7941
9.7354
19.6853
9.6746
12.6400
11.6808
11.7561

Test statistic = number of positive zx s = 8. This clearly exceeds the critical value (determined by
the hypergeometric distribution). This indicate that there is a clear positive bias.
(d) Consider to minimise least squares,
28
28
X
Ex qxs
X Ex
(
qx aqxs )2 = 2
(
qx aqxs ) = 0.
a
qx
qx
x=21

x=21
28
X

Ex qxs
(
qx aqxs ) = 0
qx
x=21
P28

a =
a
=

x
21
22
23
24
25
26
27
28
Total
a
=

Ex qxs
0.1789
0.2059
0.2646
0.3147
0.3255
0.3600
0.3192
0.2440
2.2127

Ex qxs
x
x=21 qx q
P28 Ex qxs s
x=21 qx qx
P28
s
x=21 Ex qx
P28 Ex (qxs )2 .
x=21
qx

Ex (qxs )2
qx

0.006399
0.006058
0.007001
0.004951
0.010592
0.009972
0.008491
0.004959
0.0058422

2.2127
= 37.874619.
0.0058422

(e) Statistic is
P28
o
(dx Ex q x )
Z = qPx=21
.
o
o
28
x=21 Ex q x (1 q x )
5.194641
=
81.99749
= 0.573661.
Under null, Z N (0, 1). Clearly, there is insufficient evidence to reject null with 90% confidence.
Hence the the graduation is suitable. This indicate that the graduated rates are not biased and the
actual variance is not higher than that predicted by the assumed model.
12

Solutions - Question 6
(a) A simple extreme example is
Age Group Population 1 Deaths Population 2 Deaths
Even though the mortality rate in popA
1
1
99
50
B
99
1
1
0
ulation 1 is clearly higher than that in population 2, the total mortality in population 1 is lower than
that in population 2. This is a paradox as a result of the adverse selection effects.
(b) The paradox may be resolved by comparing the directly standardised mortality rate:
Ps c
E mx,t
P sx,t c
DSM Rpop1 =
Ex,t
1
1
= 0.5 + 0.5
1
99
= 0.50505.
Ps c
E mx,t
P sx,t c
DSM Rpop2 =
Ex,t
50
0
= 0.5
+ 0.5
99
1
= 0.25253.
The paradox is then resolved because the standardised rates reflect a higher mortality rate for population 1.

13