CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

CS2A
MOCK 1

RISK MODELLING AND SURVIVAL

ANALYSIS
MOCK EXAM FOR 2023
CA PRAVEEN PATWARI 1 JAI SHREE RAM
CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

CS2: MOCK EXAM 1 — PAPER A QUESTIONS

1. Suppose that Yn : n  1, 2,3,... is a sequence of independent and identically distributed random

variables and that the process X n  is defined as follows:

X n  X n 1  Yn , n  1, 2,3,...

X0  0

(i) State the name given to the process X n  . [1]

(ii) Explain whether X n  has:

(a) stationary increments

(b) the Markov property. [2]

Now suppose that:

 1 with probability 0.5

Yn  
 1 with probability 0.5

(iii) Calculate P  X5  3 | X1  1 . [2]

[Total 5]

2. Individual claim amounts from a certain portfolio of policies follow a Weibull distribution with
parameters c and  . A random sample of 50 claims has a lower quartile of 91.9566 and an upper

quartile of 2,135.35.

(i) Estimate the values of c and  using the method of percentiles. [4]

The insurer arranges individual excess of loss reinsurance with a retention limit of 1,000.

(ii) Estimate the proportion of claims in which the reinsurer is involved. [1]

[Total 5]

CA PRAVEEN PATWARI 2 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

3. Happy Life insurance company is assessing a list of 20,000 potential customers provided by a data
analysis company.
Happy Life sent marketing material to a representative sample of 100 people (not on the list) and
recorded whether or not they made a purchase in the month that followed. The company then
produced a file containing information about each individual (such as age, income, etc) as well as
whether or not a successful sale was made.
The marketing department is considering using a decision tree to gauge the prospects of the full list of
20,000 potential customers, based on the data collected for the representative sample. The
department suggests the following tree to predict sales:

The tree is used to predict whether or not a sale was made for each individual in the sample of 100
and the results compared to the actual outcomes. The following results were obtained:

PREDICTION

SALE NO SALE TOTAL

SALE 23 12 35
ACTUAL
NO SALE 8 57 65
OUTCOME
TOTAL 31 69 100

CA PRAVEEN PATWARI 3 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the precision and recall for this model. [1]

An analyst working in a different department constructs an alternative decision tree, which has a
precision of 0.9500 and a recall of 0.5429 (based on the same sample of 100 individuals)

(ii) Construct the confusion matrix for this alternative tree. [2]

Happy Life wants to use one of the two decision trees to determine which individuals to target.
Whichever tree is chosen. Happy Life will market to all individuals for which the tree predicts
SALE.

Happy Life estimates that the cost of marketing to each individual is £1 and that the average sale
generates £10 of revenue. For the purposes of this analysis, the company is ignoring all costs
other than the marketing cost.

Happy life wants to pick the tree that maximises the predicted net income for the entire list of
20,000 potential customers_

(iii) Determine which of the decision trees Happy Life should use by calculating the predicted net
income for the 20,000 potential customers for each tree. [3]

[Total 6]

4. The graph below shows the number of people (in 000s), 𝑥𝑡 claiming unemployment benefit each
month, t, in the UK between May 2013 and April 2018, inclusive.

CA PRAVEEN PATWARI 4 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

An analyst suggests that the data exhibit a downwards linear trend and seasonality with period 12.

To account for these non-stationary traits, the analyst decides first to difference the data to remove
the linear trend and then to take a moving average to remove the seasonality.

(i) Show that the resulting time series, w t constructed by differencing x t and then taking an
appropriate moving average, can be written as:

1
wt   x t  6  x t 6  x t 5  x t 7 
24 [2]

The analyst now decides to instead model the time series as follows:

x t  a  bt   t  y t

where a  bt is a linear trend, 𝜃𝑡 is a periodic function with period 12 and y t is a stationary

time series. The linear trend and the seasonal variation are removed. The resultant stationary
series, 𝑦𝑡 , is modeled as:

y t  1.914y t 1  0.9423y t  2  e t  0.5192e t 1  0.4188e t  2

The last three observed values of y t and calculated residuals are:

February 2018 y58  19.742 ê58  9.7165

March 2018 𝑦59 = 2.5105 ê59  17.102

April 2018 y 60  17.271 ê 60  6.8064

(ii) Calculate the 1 and 2 step ahead estimates yˆ 60 1 and yˆ 60  2  of y61  May 2018 and y62 (June

2018), respectively. [2]

We also have:

â  1,065.9 bˆ  3.8088 ˆ May  3.053 ˆ June  23.474

CA PRAVEEN PATWARI 5 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

(iii) Determine the 1 and 2 step ahead estimates xˆ 60 1 and xˆ 60  2  of x 61  May 2018 and

x 62  June 2018 , respectively, using the original time series data and the estimates from part (ii).

[2]

The actual observed values for May 2018 and June 2018 were 867.6 and 858.2, respectively.

(iv) Give one possible reason as to why there is a difference between the estimated and actual values
for May 2018 and June 2018. [1]

[Total 7]

5. A discrete-time stochastic process with two states, labelled 1 and 2, is being modelled as a time-
homogeneous Markov chain with the following transition diagram:

where 0<p, q<1.

(i) Give the transition matrix for this process. [1]

(ii) Explain whether this Markov chain is irreducible and/or aperiodic. [2]

(iii) Derive an expression in terms of p and q for the stationary distribution of the Markov chain. [3]

The following information has been collected from the process:

Sequence of characters 11 12 21 22

Number of occurrences 62 59 59 69

(iv) Estimate the values of p and q using the data given above, and hence estimate the stationary
distribution. [2]

[Total 8]

CA PRAVEEN PATWARI 6 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

6. An insurance company sells home insurance policies, which it splits down into two categories:
contents insurance and buildings insurance. The individual claim amount in (in £000s) under the
contents insurance part of each policy is assumed to follow the Pa(5,100) distribution, and the
individual claim amount under The buildings Insurance part of each policy is assumed to follow the
Pa(4,300) distribution.

The insurance company is considering taking out reinsurance to cover any individual claim amount
above £40,000 for contents and £200,000 for buildings.

(i) Calculate the probability that a future insurance claim would lead to no claim being made under
the reinsurance policy, assuming the claims under contents insurance and buildings insurance
are independent. [2]

(ii) Explain why:

(a) the incidence of contents claims and the incidence of buildings claims are unlikely to be
independent.

(b) the claim amounts for contents claims and the claim amounts for buildings claims are
unlikely to be independent. [2]

The insurance company has carried out an analysis on the joint distribution of the individual
claim amounts under contents and buildings insurance. It has deduced that the Gurnbel copula
would be a suitable component of its model. The Gumbel copula has the form:

 1 

 
C  u, v   exp    lnu     ln v 


  


 

(iii) Explain, with reference to the tail dependence of the Gumbel copula, why this might be an
appropriate copula to use here. [2]

Now assume that   4 .

(iv) Calculate the probability that a future claim would lead to no claim under the reinsurance policy.
[2]

[Total 8]
CA PRAVEEN PATWARI 7 JAI SHREE RAM
CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

7. The director of the tourist board in a large town is analysing the sales in the gift shops at some of the
historic monuments in the town centre. The director has employed an agency to analyse the time it
takes between an individual tourist or a party of tourists entering the shops and the first person in
that party making a purchase.

The agency has designed a standard form to allow its team members to discreetly monitor the visitors
whilst posing as tourists. Here is the completed form for one of the monuments showing visitors
entering the gift shops between 11am and noon on a particular day.

MONUMENT: The Awful Tower

Time of
Time
purchase
entered Description of party Outcome
or
shop
leaving

11:01 11:23 Romantic couple Bought matching hats

11:25 / Family (they split up, so treat as two Father bought joke book (11:25)
11:06
11:20 groups) Mother left carrying baby (11:20)

11:08 11:26 Rich ladies Bought necklaces

11:12 11:27 Teenager Bought baseball cap

Old ladies (wheelchair) Taken to front of queue to buy

11:25 11:28
souvenir book

11:25 11:30 Old man with stick Left ;looked unwell)

11:27 11:48 Father and son Got bored and left

11:36 11:50 Group of pensioners Bought postcards and stamps

CA PRAVEEN PATWARI 8 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

11:38 11:55 School kids with teacher Bought sweets

11:40 11:45 Couple eating chips Left to go to the hotdog stand

11:50 12:05 Japanese tourists Bought miniature tower models

11:55 12:10 Businessman Left after receiving phone call

11:58 12:00 Lady with dog Asked to leave (no pets allowed)

11:58 12:15 Girls with mobile phones Bought T-shirts

(i) Identify three types of censoring that are present in the data, explaining how each of them arises.
[3]

Let S(t) denote the probability that the first person within a party of visitors to make a purchase
will do so at least t minutes after entering the shop.

(ii) (a) Calculate, for each observation above, the length of time spent in the shop before purchases
were made or people were censored from the data, distinguishing between these two
possibilities.

(b) Determine, for each of the times at which purchases were made, the number of parties
making purchases and the number of parties 'at risk' of making a purchase. [4]

(iii) Estimate S(20) using the Kaplan-Meier model, stating any assumptions that you make. [3]

[Total 10]

8. Consider the time series model:

X t  3  0.5X t 1  Z t  0.4Z t 1

2
where Z t is a white noise process with mean 0 and variance  .

(i) Identify the model as an ARIMA(p, d, q) process. [1]

(ii) Determine whether Xt is an invertible process. [1]

CA PRAVEEN PATWARI 9 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

(iii) Calculate 𝐸(𝑋𝑡 ). [1]

(iv) Calculate the autocorrelation function  k for k= 0,1,2,.... . [7]

(v) Describe the behaviour of  k and the partial autocorrelation function  k as k   . [1]

[Total 11]

9. An insurance company has a portfolio of fixed benefit personal accident policies, The number of
claims on the portfolio over a year is modelled by a negative binomial distribution with k = 5 and p =
0.6. In the event of a claim the payout £X , is given by:

1,000 with probability 0.8

X
 2,000 with probability 0.2

(i) Calculate the mean and standard deviation of the aggregate claim amount, S, paid out over a
year. [3]

The company decides to take out reinsurance. Let S I denote the aggregate claim amount paid by

the company after reinsurance.

(ii) Calculate the mean and standard deviation of S I for each of these alternative reinsurance

arrangements:

(a) individual excess of loss reinsurance with a retention limit of £800.

(b) aggregate excess of loss reinsurance such that:

S if S  3,000
SI  
3,000 of S  3,000 [8]

(iii) Explain, using your answers to part (ii), which type of excess of loss reinsurance you would
recommend to the company and why. [1]

[Total 12]

CA PRAVEEN PATWARI 10 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

10. The data below have been taken from a mortality investigation of a life insurer's male assured lives:

Age x nearest Central exposed to Graduated force of

Observed deaths 
birthday risk, E cx mortality,  x

50 18 14,330 0.00108

51 16 14,908 0.00130

52 14 13,522 0.00183

53 30 12,098 0.00222

54 30 11,975 0.00278

55 5O 12,058 0.00340

56 64 14,925 0.00396

57 67 13,002 0.00475

58 90 11,850 0.00558


where  x , is assumed to be constant over the rate interval for age x nearest birthday. A graph of the
crude mortality rate estimates based on this data is shown below:
Crude mortality rate estimates based on a mortality investigation of

a life insurer’s male assured lives

CA PRAVEEN PATWARI 11 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

(i) Describe two features of the graph that indicate that the crude mortality estimates are not the
true underlying mortality rates of this population. [2]

(ii) Carry out the following three tests on the data, stating your conclusions clearly:

(a) chi-squared goodness-of-fit test

(b) cumulative deviations test

(c) grouping of signs test. [10]

[Total 12]

11. Boats of three sizes, big, medium-sized, and small, travel along a ship canal. Boats are assumed to
arrive at a particular swing bridge over this canal according to a Poisson process, with average arrival
rates (both directions combined) of:

● 20 big boats per year

● 600 medium-sized boats per year
● 46,000 small boats per year.

You should assume that there are 365¼ days in each year.

(i) Comment on the suitability of using a Poisson process to model the arrival times of the three
different types of boat at the swing bridge. [2]

A man walks onto the bridge, at which moment there is no boat passing underneath.

(ii) Calculate how long he expects to wait, in minutes, before the next boat arrives at the bridge. [1]

The swing bridge has to be opened for exactly 30 minutes to let a big boat through, and for
exactly 15 minutes to let a medium-sized boat through. Small boats can pass underneath without
the bridge being opened.

(iii) Calculate the probability that the bridge has to be opened for more than 30 minutes on any
particular day.

(You can assume for this purpose that no time efficiencies occur should a subsequent big or
medium-sized boat arrive while the bridge is already open. For example, two medium sized
boats arriving within the same 15-minute period will require the bridge to remain open for 30
minutes in total.) [5]

CA PRAVEEN PATWARI 12 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

The canal takes boat traffic directly from the open sea to an inland port. The boats travel from the sea
to the port and back again along the same canal, without changing direction except to turn around at
the port itself. Boats can only enter and leave the canal at the one place when it joins the open sea.

At the port, there are three spaces for medium-sized boats to dock at the same time. The time a
medium-sized boat stays in the dock follows an exponential distribution with a mean Of 4 hours. The
number of spaces occupied by medium-sized boats, plus the number of medium-sized boats waiting to
dock, is to be modelled as a Markov jump process.

The transition graph for this process is shown below:

(iv) (a) Calculate the ten transition rates per hour, a to j.

(b) Give the generator matrix of transition rates per hour. [4]

Hint: the arrival rates given at the start of the question are for arrivals at the bridge in either
direction, i.e. both to and from the port.

There are two spaces at the port for big boats to dock at the same time. The number of spaces
occupied by big boats, plus the number of big boats waiting to dock, is to be modelled as a
Markov Jump process with the following transition diagram:

Now suppose that:

pij  t 
● denotes the probability that this process, in State i at a given point in time, is in State j
exactly t hours later, and

CA PRAVEEN PATWARI 13 JAI SHREE RAM

CS2A MOCK 1 ACTUATORS EDUCATIONAL INSTITUTE

● State i means that the total number of big boats in the dock plus those waiting to dock is
equal to i.
(ii) Give the Kolmogorov backward differential equation p13  t  . [2]

At 2pm on a particular day both spaces are occupied by big boats, and no other big boat is
currently waiting to dock.

(iii) Calculate the probability that the docks will empty before any new big boat arrives at the port.
[2]

[Total 16]

CA PRAVEEN PATWARI 14 JAI SHREE RAM