## Exam C Practice Problem 24 – Bayesian Credibility Example

Both Problems 24-A and 24-B use the following information.

You are given the following information:

• The claim size of an insured has an exponential distribution with mean $\displaystyle \frac{1}{\theta}$.
• The parameter $\theta$ has a Gamma distribution with mean 6 and variance 12.

A randomly selected insured has one claim of size 10.

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Problem 24-A

What is the Bayesian estimate of the expected amount of the next claim for this insured?

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.25$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 1.5$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 2.2$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 3.1$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 3.5$

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Problem 24-B

What is the posterior probability that the size of the next claim for this insured will be greater than 5?

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.12$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.15$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.19$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.21$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.25$

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

## 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 17 – Estimating Claim Frequency

Both Problems 17-A and 17-B use the following information.

An insurance portfolio consists of independent risks.

For each risk in this portfolio, the number of claims in a year has a Poisson distribution with mean $\theta$. The parameter $\theta$ follows a Gamma distribution.

A risk is randomly selected from this portfolio. Prior to obtaining any claim experience, the number of claims in a year for this risk has a distribution with mean 0.6 and variance 0.72.

After observing this risk for one year, insurance company records indicate that there are 2 claims for this risk.

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Problem 17-A

After knowing the insurance company records, what is the expected number of claims per year for this risk?

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.60$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.83$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.91$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 1.25$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 2.00$

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Problem 17-B

After knowing the insurance company records, what is the variance of the number of claims per year for this risk?

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{26}{36}$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{32}{36}$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{35}{36}$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{42}{36}$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{45}{36}$

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

## Exam C Practice Problem 8 – Bayesian Estimates of Claim Frequency

Problem 8-A

A portfolio consists of ten independent risks divided into two classes. Class 1 contains 6 risks and Class 2 contains 4 risks.

The risks in each class are assumed to follow identical annual claim frequency distribution. The following table shows the distributions of the number of claims in a calendar year.

$\displaystyle \begin{bmatrix} \text{ }&\text{ }&\text{Class 1} &\text{ }&\text{Class 2} \\X=x&\text{ }&P(X=x) &\text{ }&P(X=x) \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 0&\text{ }&0.50 &\text{ }&0.20 \\ 1&\text{ }&0.25&\text{ }&0.25 \\ 2&\text{ }&0.12&\text{ }&0.30 \\ 3&\text{ }&0.08&\text{ }&0.15 \\ 4&\text{ }&0.05&\text{ }&0.10 \end{bmatrix}$

The risks in the portfolio are observed for one calendar year. The following table shows the observed results.

$\displaystyle \begin{bmatrix} \text{Number of Claims}&\text{ }&\text{Number of Risks} \\\text{ }&\text{ }&\text{ } &\text{ } \\ 0&\text{ }&4 \\ 1&\text{ }&2 \\ 2&\text{ }&2 \\ 3&\text{ }&1 \\ 4&\text{ }&1 \end{bmatrix}$

Determine the Bayesian expected number of claims per risk in the next year.

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 1.10$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 1.15$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 1.22$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 1.29$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 1.315$

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Problem 8-B

A portfolio consists of ten independent risks divided into two classes. Both classes contain the same number of risks.

The risks in each class are assumed to follow identical annual claim frequency distribution. The following table shows the distributions of the number of claims in a calendar year.

$\displaystyle \begin{bmatrix} \text{ }&\text{ }&\text{Class 1} &\text{ }&\text{Class 2} \\X=x&\text{ }&P(X=x) &\text{ }&P(X=x) \\\text{ }&\text{ }&\text{ } &\text{ }&\text{ } \\ 0&\text{ }&0.5 &\text{ }&0.1 \\ 1&\text{ }&0.3&\text{ }&0.4 \\ 2&\text{ }&0.1&\text{ }&0.3 \\ 3&\text{ }&0.05&\text{ }&0.1 \\ 4&\text{ }&0.05&\text{ }&0.1 \end{bmatrix}$

The risks in the portfolio are observed for one calendar year. The following table shows the observed results.

$\displaystyle \begin{bmatrix} \text{Number of Claims}&\text{ }&\text{Number of Risks} \\\text{ }&\text{ }&\text{ } &\text{ } \\ 0&\text{ }&2 \\ 1&\text{ }&2 \\ 2&\text{ }&3 \\ 3&\text{ }&1 \\ 4&\text{ }&2 \end{bmatrix}$

What is the probability that a randomly selected risk in this portfolio will incur exactly 2 claims in the next year?

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.26$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.27$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.28$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.29$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.30$

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

## Exam c Practice Problem 7 – Working with Buhlmann Credibility

Problem 7-A

You are given the following information:

• The number of claims in a calendar year for a given risk follows a Poisson distribution with mean $\theta$.
• The risk parameter $\theta$ follows a Gamma distribution whose coefficient of variation is 0.5.
• After observing the given risk for 5 calendar years, twelve claims are observed.
• Based on the observed data, the posterior distribution of $\theta$ is a continuous distribution whose mean is 2.0.

What is the Buhlmann credibility used in estimating the expected claim frequency for the given risk in the next period?

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.500$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.600$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.625$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.650$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 0.667$

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Problem 7-B

You are given the following information:

• The number of claims in a calendar year for a given risk follows a Poisson distribution with mean $\theta$.
• The risk parameter $\theta$ follows a Gamma distribution with mean 1.5.
• The value of Buhlmann’s k is 8.
• After observing the given risk for 4 calendar years, the posterior distribution of $\theta$ is a continuous distribution whose mean is 1.75

What is the number of claims observed in the observation period?

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 7$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 8$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 9$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 10$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ 11$

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

## Exam C Practice Problem 6 – Working with Posterior Distributions

Problem 6-A

You are given the following:

• The number of claims in a calendar year for a given risk follows a Poisson distribution with mean $\theta$.
• The prior distribution of $\theta$ has the Gamma distribution with mean 2 and variance 1.

After observing this risk for five calendar years, a total of 12 claims are observed.

Which of the following is the moment generating function of the posterior distribution of $\theta$?

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ M(t)=\biggl(\frac{2}{2-t}\biggr)^{16} \ \ \ \ \ \ \ \ t<2$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ M(t)=\biggl(\frac{7}{7-t}\biggr)^{15} \ \ \ \ \ \ \ \ t<7$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ M(t)=\biggl(\frac{14}{14-t}\biggr)^{9} \ \ \ \ \ \ \ \ t<14$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ M(t)=\biggl(\frac{7}{7-t}\biggr)^{15} \ \ \ \ \ \ \ \ t<2$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ M(t)=\biggl(\frac{7}{7-t}\biggr)^{16} \ \ \ \ \ \ \ \ t<7$

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Problem 6-B

You are given the following:

• The number of claims in a calendar year for a given risk follows a Poisson distribution with mean $\theta$.
• The prior distribution of $\theta$ has the Gamma distribution with mean 4 and variance $\frac{1}{2}$.

After observing this risk for eight calendar years, a total of 32 claims are observed.

Determine the coefficient of variation of the posterior distribution of $\theta$.

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$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{1}{64}$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{1}{32}$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{1}{16}$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{1}{8}$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \frac{1}{4}$

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