Practice Exam Questions
Hi, I've just worked through the Practice Exam 1 provided, and had 2 quick questions that I was hoping to get clarification on.
Problem #2: The question states the drivers age is 25, however when getting the linear predictor term for age, the solution takes the natural log of 75 * the coefficient for age. Is this an error? If so should the u probability be 5.11%?
Problem #8: The way the question is setup, it says "50 It's estimated the portfolio policies will generate this many "large losses" during the next two years". I take this to mean E(# of claims next year) + E(# of claims in 2 years) = 50. However the solution to part a seems to take this as the E(# of claims this year) = 50.
Comments
Thanks, you're correct about the typo in #2, we've fixed the solution to use ln(25) instead of ln(75). You have the correct probability.
For #8a, the intent here is today the actuary has estimated that two years in the future they expect there to be 50 large losses in the book of business. This is before any consideration of inflationary pressure or exposure growth. It could well be this estimate is just the expected number of large losses on the book today, or maybe there was some adjustment made for mix of business shift.
After accounting for inflation this becomes 50*(1+33.8%) large losses. However, there's also an annual 20% exposure growth, so assuming the new business coming on has the same likelihood of a large loss, the expected number of large losses in two years time will grow at the same rate. This gets us to the 50*(1+33.8%)*(1+20%)^2.
Given the intent here, can you suggest a better way of wording the question?
Thank you for the response. This makes it more clear.
I may be the only one that is misinterpreting the statement as maybe I'm just reading too much into the wording, but my suggestion would just be a simplification of how you put clarified it. Something like:
The actuary has estimated that two years in the future they expect there to be 50 large losses in the book of business before any consideration of inflationary pressure or exposure growth.
or
The actuary expect there to be 50 large losses in the book of business for the current year and that over the next 2 years the only affects are inflation and exposure growth.