Tag Archives: Mixture Distribution

Exam C Practice Problem 18 – Estimating Claim Frequency

Problem 18-A

A portfolio of independent risks is divided into five distinct classes that are equal in size.

The annual claim count distribution for any risk in this portfolio is assumed to be a binomial distribution. The following table shows more information about these five classes.

      \displaystyle \begin{bmatrix} \text{Class}&\text{ }&\text{ }&\text{Mean} &\text{ }&\text{ }&\text{Variance} \\\text{ }&\text{ }&\text{ }&\text{Of Claim Count} &\text{ }&\text{ }&\text{Of Claim Count} \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 1&\text{ }&\text{ }&\displaystyle \frac{1}{2} &\text{ }&\text{ }&\displaystyle \frac{1}{4} \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 2&\text{ }&\text{ }&\displaystyle 1&\text{ }&\text{ }&\displaystyle \frac{1}{2} \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 3&\text{ }&\text{ }&\displaystyle \frac{3}{2}&\text{ }&\text{ }&\displaystyle \frac{3}{4} \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 4&\text{ }&\text{ }&\displaystyle 2&\text{ }&\text{ }&\displaystyle 1 \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 5&\text{ }&\text{ }&\displaystyle \frac{5}{2}&\text{ }&\text{ }&\displaystyle \frac{5}{4}    \end{bmatrix}

A risk is randomly selected from this portfolio and is observed to have one claim in the last year.

What is the probability that the mean number of claims in a year for this risk is greater than 1.5?

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      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.209

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.228

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.600

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.761

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.781

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Problem 18-B

A portfolio of independent risks is divided into five distinct classes that are equal in size.

The annual claim count distribution for any risk in this portfolio is assumed to be a geometric distribution. The following table shows more information about these five classes.

      \displaystyle \begin{bmatrix} \text{Class}&\text{ }&\text{ }&\text{Mean} &\text{ }&\text{ }&\text{Variance} \\\text{ }&\text{ }&\text{ }&\text{Of Claim Count} &\text{ }&\text{ }&\text{Of Claim Count} \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 1&\text{ }&\text{ }&\displaystyle 1 &\text{ }&\text{ }&\displaystyle 2 \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 2&\text{ }&\text{ }&\displaystyle 2&\text{ }&\text{ }&\displaystyle 6 \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 3&\text{ }&\text{ }&\displaystyle 3&\text{ }&\text{ }&\displaystyle 12 \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 4&\text{ }&\text{ }&\displaystyle 4&\text{ }&\text{ }&\displaystyle 20 \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 5&\text{ }&\text{ }&\displaystyle 5&\text{ }&\text{ }&\displaystyle 30    \end{bmatrix}

A risk is randomly selected from this portfolio and is observed to have one claim in the last year.

What is the probability that the mean number of claims in a year for this risk is greater than 2.5?

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      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.49

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.51

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.55

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.57

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.60

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

Exam C Practice Problem 10 – Examples of Claim Frequency Models

Problem 10-A

A portfolio consists of independent risks. For each risk, the number of claims in a year has a Poisson distribution with mean \lambda. The parameter \lambda is a mixture of a Gamma distribution with mean 1.6 and variance 1.28 (80% weight) and a Gamma distribution with mean 2.5 and variance 3.125 (20% weight).

A risk is randomly selected from this portfolio and observed for 3 years and is found to have incurred 4 claims. What is the probability that this risk will incur exactly 1 claim in the upcoming year?

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      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.267

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.285

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.303

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.319

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.357

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Problem 10-B

A portfolio consists of independent risks. For each risk, the number of claims in a year has a Poisson distribution with mean \lambda. The parameter \lambda is a mixture of a Gamma distribution with mean 2.4 and variance \displaystyle \frac{48}{25} (60% weight) and a Gamma distribution with mean 3.75 and variance \displaystyle \frac{75}{16} (40% weight).

A risk is randomly selected from this portfolio and observed for 2 years and is found to have incurred 3 claims.

If this risk incurs exactly 2 claims in the upcoming year, what is the probability that the given risk is from Class 2?

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      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.205

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.214

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.263

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.275

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.300

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Revised: May 1, 2016.
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\copyright \ 2013-2016 \ \ \text{Dan Ma}

Exam C Practice Problem 9 – Examples of Claim Frequency Models

Problem 9-A

A portfolio consists of independent risks divided into two classes. Eighty percent of the risks are in Class 1 and twenty percent are in Class 2.

The following provides more information about these risks:

  • For each risk in Class 1, the number of claims in a year has a Poisson distribution with mean \theta such that \theta follows a Gamma distribution with mean 1.6 and variance 1.28.
  • For each risk in Class 2, the number of claims in a year has a Poisson distribution with mean \delta such that \delta follows a Gamma distribution with mean 2.5 and variance 3.125.

An actuary is hired to examine the claim experience of the risks in this portfolio. What proportion of the risks can be expected to incur exactly 1 claim in one year?

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      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.24

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.25

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.26

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.27

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.28

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Problem 9-B

A portfolio consists of independent risks divided into two classes. Sixty percent of the risks are in Class 1 and fourty percent are in Class 2.

The following provides more information about the two classes of risks:

  • For each risk in Class 1, the number of claims in a year has a Poisson distribution with mean \theta such that \theta follows a Gamma distribution with mean 2.4 and variance \displaystyle \frac{48}{25}.
  • For each risk in Class 2, the number of claims in a year has a Poisson distribution with mean \delta such that \delta follows a Gamma distribution with mean 3.75 and variance \displaystyle \frac{75}{16}.

An actuary is hired to examine the claim experience of the risks in this portfolio. Of the risks that incur exactly 2 claims in a year, what proportion of the risks can be expected to come from Class 2?

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      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.34

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.35

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.36

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.37

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.38

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

Exam C Practice Problem 1 – Working with Mixture Distributions

Problem 1-A

You are given:

    • The claim size X for a policyholder randomly chosen from a large group of insureds is a mixture of a Burr distribution with \alpha=1, \theta=\sqrt{8000} and \gamma=2 and a Pareto distribution with \alpha=1 and \theta=8000.
    • The mixture distribution of X has equal mixing weights.

Calculate the median of X.

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      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 400

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 405

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 450

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 475

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 4045

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Problem 1-B

You are given:

    • The claim size X in the current year for a policyholder randomly chosen from a large group of insureds is a mixture of a Burr distribution with \alpha=2, \theta=\sqrt{1000} and \gamma=2 and a Pareto distribution with \alpha=2 and \theta=1000.
    • The mixture distribution of X has mixing weights 90% (for the Burr distribution) and 10% (for the Pareto distribution).
    • Suppose that the claim size for the chosen policyholder in the next year will increase 20% due to inflation.

What is the probability that the claim size in the next year will exceed 50?

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      \displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.16

      \displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.18

      \displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.21

      \displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.23

      \displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.29

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