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    Stat3037/6043 Life Contingencies Questions Week Seven Solutions

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    Ramjet2222
    This document contains solutions to questions from a life contingencies exam. 1. The first question involves calculating reserves, expected reserves, and the probability of profit for a life annuity. It is found that the expected reserves are $108,081 and the probability of profit is 4.20%. 2. The second question asks to calculate the annual premium, expected present value of benefits and expenses, and policy value after 5 years for a whole life insurance policy paying $60,000 at age 70 and $120,000 otherwise. The annual premium is found to be $3,071.39 and the policy value after 5 years is $12,215. 3. Various calculations are shown using concepts of

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    Stat3037/6043 Life Contingencies Questions Week Seven Solutions

    Uploaded by

    Ramjet2222
    84 views4 pages
    This document contains solutions to questions from a life contingencies exam. 1. The first question involves calculating reserves, expected reserves, and the probability of profit for a life annuity. It is found that the expected reserves are $108,081 and the probability of profit is 4.20%. 2. The second question asks to calculate the annual premium, expected present value of benefits and expenses, and policy value after 5 years for a whole life insurance policy paying $60,000 at age 70 and $120,000 otherwise. The annual premium is found to be $3,071.39 and the policy value after 5 years is $12,215. 3. Various calculations are shown using concepts of

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    Tutorial W7 Solns

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    Tutorial W7 Solns

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    This document contains solutions to questions from a life contingencies exam. 1. The first question involves calculating reserves, expected reserves, and the probability of profit for a life annuity. It is found that the expected reserves are $108,081 and the probability of profit is 4.20%. 2. The second question asks to calculate the annual premium, expected present value of benefits and expenses, and policy value after 5 years for a whole life insurance policy paying $60,000 at age 70 and $120,000 otherwise. The annual premium is found to be $3,071.39 and the policy value after 5 years is $12,215. 3. Various calculations are shown using concepts of

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    84 views4 pages

    Stat3037/6043 Life Contingencies Questions Week Seven Solutions

    Uploaded by

    Ramjet2222
    This document contains solutions to questions from a life contingencies exam. 1. The first question involves calculating reserves, expected reserves, and the probability of profit for a life annuity. It is found that the expected reserves are $108,081 and the probability of profit is 4.20%. 2. The second question asks to calculate the annual premium, expected present value of benefits and expenses, and policy value after 5 years for a whole life insurance policy paying $60,000 at age 70 and $120,000 otherwise. The annual premium is found to be $3,071.39 and the policy value after 5 years is $12,215. 3. Various calculations are shown using concepts of

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    STAT3037/6043 LIFE CONTINGENCIES

    QUESTIONS WEEK SEVEN SOLUTIONS


    Question 1
    (a) Reserve = 1000a 70 = 1000(10.375 1) = 1000(9.375) = 9,375
    (b) Per policy in force in three years time the reserve is:
    = 100v 2 2 p 63 a&&65
    = 100(1.04 2 )

    8821.2612
    (12.276)
    9037.3973

    = 1107.84
    Now the expected number in force is 100

    l 63
    9037.3973
    = 100
    = 97.56
    l[60 ]
    9263.1422

    Hence the expected reserves required to be held are $108,081.


    (c) To determine the probability that the office will make a profit first determine the
    break-even premium for the annuity.
    l
    l
    l
    Premium = 100 v [65]+1 + v 2 67 + v3 68
    l[65]
    l[65]
    l[65]

    1 8686.2016
    1 8557.0118
    1 8404.4916
    = 100
    +
    +
    = 270.56
    2
    3
    1.04 8772.7359 (1.04) 8772.7359 (1.04) 8772.7359
    Note, this is the same as:
    100 l68
    100 d[65]+1 100 100 d 67 100 100
    +
    +
    +
    +
    +
    = 270.56

    2
    2
    3
    1.04 l[65] 1.04 1.04 l[65] 1.04 1.04 1.04 l[65]
    (ie. $100 paid if death occurs between ages 66 and 67, $200 paid if death occurs between
    ages 67 and 68, and $300 paid if survival to at least age 68).
    Now the office only makes a profit if the annuitant dies before age 68 since only then
    the present value of the payments actually made will be less than the premium of $270.56
    paid for the contract.
    P ( profit )= 3 q[65] = 1

    l 68
    8404.4916
    = 1
    = 4.20%
    l[ 65]
    8772.7359

    Page 1

    (d) (i) Approximate probability implies (in this course!) using the normal approximation.
    Since the normal approximation means we are assuming a symmetrical distribution of the
    payout and hence profit when there is no loading for profit in the premium charged this
    will lead to a 50 % approximate probability of profit.
    (ii) Under the assumption of normality the profit, Pf, will be distributed normally:
    To determine the standard deviation above use the fact that
    Var(Payout) = E[(Payout)2] [E(Payout)]2
    Now E[(Payout)2] is given by:
    2
    2
    2
    100 l68
    100 d[65]+1 100 100 d 67 100 100
    +
    +
    +
    +
    +

    2
    2
    3
    1.04 l[65] 1.04 1.04 l[65] 1.04 1.04 1.04 l[65]

    74543
    Therefore the variance of the payout is 1340.29 on a single policy. (ie 74543-270.562)
    Hence on 50 policies the variance is 50*1340.29 = 67014. The standard deviation on 50
    policies is 67014 = 258.9.
    Pf ~ N(100,253.6) ie normal with mean 100 (50 policies x $2 profit per policy) and
    standard deviation 258.9.
    So the probability that the profit will exceed zero is given by:
    Profit-E(Pf) 0 100
    100
    Pr(Profit > 0) = Pr
    >
    ) = Pr( Z > 0.386) = 0.65 .
    = Pr( Z >
    258.9
    258.9
    sd ( Pf )
    Alternatively, we could have solved this question by writing:
    Pr(Profit > 0) = Pr(50(P+2) > 50C) where P is the risk premium and C is the claim per
    policy.
    50P + 100 50 C 50C 50 C
    = Pr ( 50P + 100 > 50C ) = Pr
    >

    50

    50 C
    C

    100

    = Pr
    >Z
    258.9

    = 0.65

    Question 2
    (a) Let the annual premium be P.

    Page 2

    D
    48.61

    EPV(Prems) = Pa&&[65]:25| = P a&&[65 ] 90 a&&90 = P12.337


    4.109 = P (12.0456 )

    D[65 ]
    685.44

    EPV(Bfts)

    = 60000A1[65]:25| + 120000

    D90
    D
    D
    2D90
    = 60000A[65]:25| + 60000 90 = 60000 A[65] 90 A90 +

    D[65]
    D[65]
    D[65]
    D[65]

    48.61
    2(48.61)

    = 60000 0.52550
    0.84196 +
    685.44
    685.44

    = 36457.46
    EPV(Exps)
    = 0.01Pa&&[65 ]:25| + (200 0.01P )
    = 0.120456 P + 200 0.01P
    = 0.110456 P + 200
    Hence,
    12.0456P = 36457.46 + 0.110456P + 200
    P = $3071.39

    (b) At time 5, just before the premium paid, and just after the death benefit paid:

    EPV(Bfts)
    = 60000A 70:20| + 60000

    D90
    D
    2D90
    48.61
    2 * 48.61

    = 60000 A 70 90 A 90 +
    0.84196 +
    = 60000 0.60097

    D 70
    D70
    D 70
    517.23
    517.23

    = 42588.02

    EPV(Prems)

    D
    48.61

    = Pa&&70:20| = P a&&70 90 a&&90 = P10.375


    4.109 = P(9.98883)
    D70
    517.23

    = 3071.39(9.98883)
    = 30,680
    EPV(Exps) = (0.01)30680 = 306.80

    Page 3

    Therefore the policy value is


    42588.02 30680 + 306.80
    = $12,215.

    Page 4

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