DEPARTMENT OF STATISTICS

HSTS431
BSc Honours Degree in Statistics Part IV RM

RISK THEORY 1 ASSIGNMENT 2

5 January 2021
Time : 2 hours

Candidates should attempt ALL questions. Marks will be allocated as indicated.

A1. (a) What do you understand by the term ”reinsurance”? [4]

(b) Explain why an insurance company might purchase reinsurance. [4]
(c) Describe two types of reinsurance. [4]

A2. (a) Suppose that S has a compound Poisson distribution with λ = 2 and
p(x) = 0.1x, x = 1, 2, 3, 4. Find the probabilities that aggregate claims equal
0,1,2,3 and 4. [8]
(b) A transport company covers its 220 fleet of vehicles against accident up to an
amount stated in the contract. The number of contracts at the different contract
amounts are as follows:

Contract Amount Number of Contracts

12 000 18
25 000 22
42 000 43
78 000 72
120 000 46
150 000 16
200 000 3

Assume that, for each of the vehicles, the probability of one claim within a year is
0.02 and the probability of more than one claim is 0. Assume that accidents
for vehicles are mutually independent events. Furthermore, assume that the
conditional distribution of the claim that has occured is uniformly distributed
over the interval 0 to the contract amount. Let N be the number of claims and
let S be the amount of claims in a one year period.
(i) Find the mean and variance of N . [5,6]
(ii) Find the mean and variance of S. [5,6]

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(iii) What relative security loading θ, should be used so that the insurance company
involved can collect an amount equal to the 99th percentile of the distribution
of total claims? [8]

END OF ASSIGNMENT: GOOD LUCK

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