THE UNIVERSITY OF MELBOURNE

CENTRE FOR ACTUARIAL STUDIES

DEPARTMENT OF ECONOMICS
ACTL 90006 Life Insurance Models 1
Practice Exam Paper
June, 2022

• Writing time: 2 hours.

• Reading time: 15 minutes.

• After the writing time, there will be one hour for scanning, saving
and submitting.

• This exam contributes 70% to the assessment in this subject.

Instructions to candidates:

• You must do the practice exam yourself.

• Attempt ALL questions.

• The number of marks allocated is shown at the end of each question.

• The total number of marks is 70

• Only one calculator is permitted to use

1
Question 1: True/False questions [4=4x1 Marks]
4 questions will be drawn from a question bank of 10 questions. The 10
questions are set for practice purpose

1.1 Under UDD assumption, K 30.5 and R30.5 are independent.

◦
1.2 If µ x is increasing in x , then ex is decreasing in x.

1.3 In the two-state Markov mortality model, Cov(D i , Vi ) < 0.

R x+1
1.4 Let µ̄x = x µy dy be the average force of mortality over (x, x + 1).
Then µ̄x > qx is only true for an integer age x.

1.5 Let D be the number of deaths occurred over age interval (x, x + 1)
and let N = l x − D be the number of survivors to age x + 1, out of
lx lives aged exactly age x. Then Cov(D, N) = −l xpx qx.

1.6 Let T 0 ∼ U(0, 110). Then the mean and the median are the same for
T50.

1.7 In the two-state Markov mortality model, P(D i = 0, Vi = vi ) =

P(Tx+ai = vi ).

1.8 Toss a fair die repeatedly and let X i be the outcome in the i-th toss.
Define Y n = min{X1 , X2 , . . . , Xn }. Then {Yn }∞
n=1 is a discrete-time
homogeneous MC.

1.9 Let T xA and TxB be the future

R ∞lifetimes of two independent lives A
A B B A A
and B. Then P(T x ≤ Tx ) = 0 t px t px µx+t dt.

1.10 Let T 0 ∼ Exp(µ). Then K10 and R10 are independent.

Answers: 1.1: False, 1.2: True, 1.3: True, 1.4: False, 1.5: True, 1.6:
True, 1.7: False, 1.8: True, 1.9: True, 1.10: True

In real exam, only four T/F questions and you need to write down True
or False for each question without any justification.
Question 2: Multiple choice questions [8=4x2 Marks]
4 questions will be drawn from a question bank of 11 questions.

2.1 Which of the following does NOT represent the probability that a life
aged 30 dies between 50 and 60?

(1) S30(20) − S30(30)

(2) F 30(30) − F30(20)
(3) P(20 ≤ T0 < 30|T0 > 20)
(4) 20|10 q30

A 1 only
B 2 only
C 3 only
D 4 only

2.2 Which of the following statements are true?

(1) l x is a decreasing function of x

(2) k| qx = dx+k /lx
(3) dx is an increasing function of x
Pn
(4) t=1 dx+t = lx − lx+n

A 1 and 2 only
B 1 and 3 only
C 2 and 4 only
D 3 and 4 only

2.3 Which of the following statements are true?

(1) To estimate q x under the binomial model the data we need for
the ith life are a i , bi and di .
(2) To estimate q x under the Poisson model the data we need are
d and Ex .
P
(3) The
P central exposed to risk is calculated as i:di =0 (bi − ai ) +
i:di =1 (1 − a i )
 (4) If d = 4 and the actuarial estimate of q x is 0.04, then E xc = 98.

A 1 and 3 only
B 1 and 4 only
C 2 and 3 only
D 2 and 4 only

2.4 Let l x = 100 and dx = 10. Under UDD which of the following state-
ments are true?

(1) l x+0.6 = 96
(2) 0.4 px+0.3 = 93/97
(3) µx+0.5 = 2/19
(4) mx = 2/19

A 1 and 3 only
B 2 and 3 only
C 3 and 4 only
D 2, 3 and 4 only

2.5 Let l x = 100, lx+1 = 90 and lx+2 = 75. Under the constant force of
mortality assumption (px = e−µx ), which of the following statements
∗

are true?

(1) 0.5 qx = 0.90.5

(2) mx = µ∗x
(3) 0.5 px+0.75 = 0.750.25
5 0.6


(4) 0.3 |0.7 qx+0.6 = 0.90.3 − 0.90.4 6

A 1 and 2 only
B 2 and 3 only
C 2, 3 and 4 only
D 3 and 4 only
2.6 Smith is subject to Gompertz law with parameters B and c.
Jones is subject to Makeham's law with parameters A > 0, B and
c.
Brown is subject to Gompertz law with parameters αB and c where
α > 0.
All three lives are aged x.
Which of the following statements are true?

(1) n px is greater for Jones than for Smith

(2) n px is greater for Smith than for Jones
(3) n px is greater for Smith than for Brown if α > 1
(4) n px is greater for Brown than for Smith if α > 1

A 1 and 3 only
B 1 and 4 only
C 2 and 3 only
D 2 and 4 only

2.7 Consider Kaplan-Meier estimation with censoring. The death times

are distinct and no multiple deaths occured at the same time, n 0 = 16
and the following values were observed.

j 1 2 3 4 5 6
nj 16 14 12 11 9 8

Which of the following statements are true?

(1) There is one censored life time before t 1

(2) There are 2 censored lifetimes by time t 4
(3) λ̂3 = 1/11
(4) Ŝ(t3 ) = 0.798

A 1 and 3 only
B 2 and 3 only
C 2 and 4 only
D 2, 3 and 4 only
 2.8 Consider the permanent disability model. Which of the following
statements are true?
11
(1) t px = t p11
x
00
(2) t px > t p00
x

(3) If µ 01 02
x = µx = µ for all x, then the expected time to exit from
state 0 is 0.5/µ.
R t 01 01
(4) t p02 12
x = 0 r px µx+r t−r px+r dr

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 2 and 4 only

2.9 Assume that T 0 ∼ U(0, 100). Which of statements 1{4 are true?

(1) P(T0 > 60) = 0.6

(2) 20 q40 = 0.2
(3) 10 p20 = 0.875
(4) P(15 ≤ T80 ≤ 20) = 0.25

A 1 and 2 only
B 1 and 3 only
C 2 and 4 only
D 3 and 4 only

2.10 Which of the following statements are true?

(1) e x ≈ e̊x + 0.5

E[Kx ] = ∞
P
(2) k=1 P(Kx > k)
R ω−x
(3) e̊ x = 0 t tpx µx+t dt
(4) If T 0 ∼ U(0, 6), then e 2 = 1.5

A 1 and 2 only
B 1 and 3 only
C 2 and 4 only
 D 3 and 4 only

2.11 Which of the following statements are true regarding to a discrete-

time MC?

(1) If state i is transient, then the MC will visit state i only a finite
number of times.
(2) Any MC must have at least one recurrent state.
(3) If there is only one absorbing state, then MC will be eventually
absorbed into this state regardless which state the MC starts
from.
(4) If state i is recurrent, then the total time spent in state i by the
MC is infinity.

A 1 and 2 only
B 1 and 4 only
C 2 and 4 only
D 3 and 4 only

Answer: 2.1 (C), 2.2 (A), 2.3 (B), 2.4(D), 2.5(C), 2.6(C), 2.7(C), 2.8(B),
2.9 (D), 2.10 (D), 2.11 (B)

In real final exam, four MCQ questions are set for each student. Please
write down the correct answer for each question on the answer sheet.
Questions 3-9: Short answer and long answer questions
3. In a certain life table q 75 = .05, q76 = .06, q77 = .10, q78 = .15, q79 =
0.18.

(a) Compute µ 75.6 to 4 decimal places, if the Balducci assumption

applies over each year of age.
(b) Compute 1.6|1.2q75.4 to 4 decimal places, if the constant force
mortality assumption applies over each year of age.
(c) Let T x be the future lifetime of a life aged x, let K x = [Tx ] be
the integer part of T x and let Rx = Tx − Kx be the fractional part
of T x. Calculate
P(K75 = 2, R75 ≤ 0.5)
to four decimal places, under the UDD assumption. [6 marks]

|||||||||||||||||||||||||||||||

4. Let q x and mx denote the (initial) mortality rate and central mortality
rate, respectively, at age x.
(a) Which of q x and mx is larger? Justify your answer.
(b) Give an interpretation of the function L x in the case when l x is
an integer.
(c) Starting from an integral expression for L x , show that
Rx
Lx = L0 e− 0 my dy
.

[5 marks]
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5. A Cox proportional hazards model was estimated to assess the ef-

fect on survival of a person's sex and his/her self esteem (measured
as a three-point scale as low',medium', or `high'). The baseline cat-
egory was males with low self-esteem.
Write down the equation of the model, using algebraic symbols to
represent variables and parameters and defining all the symbols that
you use.
[3 marks]
6. A mortality study of eight individuals aged 60 resulted in the following
lifetimes (in years)
6, 10, 18, 25.
There were four censored observations: 3, 10, 12, 20.

(a) Find the Kaplan-Meier estimate of S(16), where S(t) is the sur-
vival function of T 60.
(b) Find the maximized value for the likelihood function in (a).
(c) It is assumed that T 0 ∼ Exp(θ) where θ is a unknown param-
eter. Write down the likelihood function and find the equation
satisfied by the MLE of θ.

[6 marks]
|||||||||||||||||||||||||||||{

7. In a mortality study, N independent lives are observed between the

ages of x and x + 1. For the ith life, observation starts at age x + a i
and ends at age x+b i, or earlier if the life dies, where 0 ≤ a i < bi ≤ 1.
In the following, assume the binomial model of mortailty.

(a) State the UDD assumption and derive a formula for t qx+s ,
where 0 ≤ s < s + t < 1.
(b) Suppose that a i ≡ 0 and bi < 1 for all i. Find the method of
moments estimate of q x, if the UDD assumption applies.
(c) Write down the likelihood function if the UDD assumption ap-
plies.
i. Find the equation satisfied by the maximum likelihood esti-
mate of q x.
ii. Find the maximum likelihood estimate of q x, if a i = 0, bi = b,
for all i, where 0 < b < 1.
(d) State the rationale of the Poisson approximation to the two-state
model of mortality.
(e) State the two disadvantages of Poisson model of mortality.

[10 marks]
8. A continuous-time Markov process {Y t ; t ≥ 0} has two states|state
1 and state 2. Suppose
12
dt px = µ12
x dt + o(dt),
21
dt px = µ21
x dt + o(dt),

where µ12 21
x ≥ 0, µx ≥ 0, and o(dt) is such that lim dt→0 o(dt)/dt = 0.

(a) Show that tp22

x satisfies the following ODE:

d 22 12 21 22 12
t px + (µx+t + µx+t ) t px = µx+t .
dt

(b) Simplify the following formula:

Z t
22 21 11
s px µx+s t−s px+s ds.
0

22
(c) State the condition(s) under which t px = t p22
x .

(d) Assume that µ 12 21

x+t = 0.01 and µx+t = 0.02, for t > 0. Define
τ = min{t ≥ 0 : Yx+t = 1|Yx = 2} to be the first time that the
process exits from state 2.
i. Find E[τ ].

ii. Find P(only one state change over (x, x + 1] Yx = 2).

iii. Find P(two or more state changes over (x, x + 1] Yx = 2).
(e) Assume that µ 12
x = µ
12
and µ21 21
x = µ . How would you estimate
12 21
µ and µ ?
(f) Assume that µ 12x = µ
12
= 0.01 and µ21
x = µ
21
= 0.02. Simulate
the time until the second state change from Y 0 = 1 using two
random numbers u 1 = 0.4 and u2 = 0.8 generated from U(0, 1).

[13 marks]

9. Define a Markov chain (MC) by a sequence of numbers determined

in the following way:

• X0 = 6;
• Xn+1 is randomly chosen with equal probabilities from the digits
of Xn3 . For example, X03 = 63 = 216 has three digits 2, 1, and 6,
so that X1 takes three values 1, 2, and 6 with equal probability.
(a) Write down the state space of this Markov chain and specify
the absorbing state(s).
(b) Write down the transition probability matrix P.
(c) Using the first step analysis, calculate the probability that the
sequence of numbers under this MC contains at least one 5.
(d) Let T 1 = min{t ≥ 0 : Xt = 1} be the time until hitting state 1 and
define m i,1 = E[T1|X0 = i]. Write down the equations satisfied
by mi,1 , for i ∈ S, using the first step analysis. You do not need
to solve these equations.
(e) For each state in the state space, specify whether it is a recur-
rent state or a transient state.
(f) Using the random number u 1 = 0.4 generated from U(0, 1),
simulate a value for X 1 .

[13 marks]

END OF EXAMINATION