Exam C Practice Problem 13 – Working with Aggregate Claims

Both Problems 13-A and 13-B use the following information.

A portfolio if independent risks is divided into two classes. Sixty five percent of the risks are in Class 1 and thirty five percent are in Class 2.

The risks in each class are assumed to follow identical annual aggregate claim distribution. The following shows the aggregate claim distributions for the two classes.

      \displaystyle \begin{bmatrix} X=x&\text{ }&P(X=x \lvert \text{Class 1}) &\text{ }&P(X=x \lvert \text{Class 2}) \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 0&\text{ }&\displaystyle \frac{24}{40} &\text{ }&\displaystyle \frac{4}{12} \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 5&\text{ }&\displaystyle \frac{6}{40}&\text{ }&\displaystyle \frac{2}{12} \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 10&\text{ }&\displaystyle \frac{7}{40}&\text{ }&\displaystyle \frac{3}{12} \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 15&\text{ }&\displaystyle \frac{2}{40}&\text{ }&\displaystyle \frac{2}{12} \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 20&\text{ }&\displaystyle \frac{1}{40}&\text{ }&\displaystyle \frac{1}{12}    \end{bmatrix}

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Problem 13-A

A risk is randomly selected from this portfolio and is observed to have 15 in aggregate claims in the first year.

What is the probability that the chosen risk will have 15 in aggregate claims in the second year?

\text{ }

      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.09

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.10

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.11

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.12

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.13

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Problem 13-B

A risk is randomly selected from this portfolio and is observed to have 15 in aggregate claims in the first year and 10 in aggregate claims in the second year.

What is the probability that the chosen risk will have 15 in aggregate claims in the third year?

\text{ }

      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.09

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.10

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.11

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.12

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.13

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\copyright \ 2013 \ \ \text{Dan Ma}

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