PG student name: ____________________________

CO-op Student no. : ___________________

The University of New South Wales

20 august 2007

ACTl 5106

insurance risk models

q u i z o n e

1. Time allowed50 minutes

2. total number of questions4
3. Marks total 100
4. Answer all questions
5. aLL QUESTIONS ARE NOT OF EQUAL VALUE
6. complete identification details above and circle your
student group
7. CANDIDATES MAY BRING THEIR OWN CALCULATORS OR HAND HELD
COMPUTERS
8. CANDIDATES MAY BRING THE text formul and tables for
actuarial examinations into the examination. it must be
wholly unannotated.
9. Candidates must cease writing immediately when instructed to
do so by the supervisor at the end of the examination. failure
to do so will result in a mark of zero.

ALL ANSWERS MUST BE WRITTEN IN INK. EXCEPT WHERE THEY ARE

EXPRESSLY REQUIRED, PENCILS MAY BE USED ONLY FOR DRAWING,
SKETCHING OR GRAPHICAL WORK.
Question 1 [20 marks]
A decision maker has a utility function u(w) = ew and is faced with a
random loss that has a chi-square distribution with n degrees of freedom.

a. [12 marks] If 0 < < 1/2, determine an expression for P + , the maxi-
mum insurance premium the decision maker will pay.

b. [8 marks] Prove that P + , as calculated above, satises the following

inequality: P + > n.

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Question 2 [28 marks]
A point is picked at random between 1 and 2. If the number selected is
negative, it is rounded o to 0; if it is greater than 1, it is rounded o to 1;
if it is between 0 and 1, it is not changed.

a. [12 marks] Show that the distribution function of the nal number
selected, X is
0 if x < 0,




1+x
F X (x) = if 0 x < 1,

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1 if x 1.

b. [3 marks] Calculate E[X ].

c. [3 marks] Calculate var[X ].

d. [3 marks] Calculate m X (t).

e. [7 marks] Represent F X (x) as a mixture of a discrete cdf and a con-
tinuous cdf.

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Question 3 [24 marks]
Let S have a compound Poisson distribution with parameter = 1. The

individual claim amount distribution is:
x Pr(X = x)
1 0.2
2 0.2
3 0.2
4 0.4

Determine f S (s) for s = 0, 1, 2, 3 and 4 using the direct convolution approach.

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Question 4 [28 marks]
The following describes a model for certain types of chain reactions, or cas-
cade processes.
When a single primary electron, having been accelerated in an electrical
eld, hits a plate, several secondary electrons are produced. In a multistage
multiplying tube, each of these secondary electrons hits another plate and
thereby produces a number of tertiary electrons. The process can continue
through several stages in this manner.
Woodward (1948)1 considered models of this type in which the number of
electrons produced by the impact of a single electron on the plate is random
and, in particular, in which the number of secondary electrons follows a
Poisson distribution. The number of electrons produced at the third stage
is described by a random sum of the type just described, where N is the

number of secondary electrons and X i is the number of electrons produced
by the i th secondary electron.
Suppose that the X i are independent Poisson random variables with pa-
rameter and that N is a Poisson random variable with parameter .

a. [6 marks] Carefully explain why you would expect the random variable
S , representating the total number of particles, to have a compound

Poisson distribution.

b. [6 marks] Determine the moment generating function of S , the total

number of particles.

c. [16 marks] Find E[(S S )3 ].

End of paper

1
Woodward, P. (1948), A statistical theory of cascade multiplication, Proc. Camb.
Phil. Soc., 44, pp. 404412.

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 ADDITIONAL PAGE
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use for rough working.

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 ADDITIONAL PAGE
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 ADDITIONAL PAGE
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 ADDITIONAL PAGE
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use for rough working.

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