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# Solutions to the exercises of

## Modern Actuarial Risk Theory, 1st and 2nd edition

R. Kaas, M.J. Goovaerts, J. Dhaene, M. Denuit, 06/01/2003.
1.2.1 Prove Jensens inequality: if v(x) is convex, then E[v(X)] v(E[X]).
Use the following definition of convexity: a function v(x) is convex if,
and only if, for every x
0
a line l
0
(x) = a
0
x+b
0
exists, such that l
0
(x
0
) =
v(x
0
) and moreover l
0
(x) v(x) for all x [usually, l
0
( ) is a tangent line
of v( )]. Pay special attention to the case v(x) = x
2
.
Take x
0
= E[X], then from v(x) l
0
(x) x, we have
E[v(X)] E[l
0
(X)] = E[a
0
X+b
0
] = a
0
E[X]+b
0
= l
0
(E[X]) = v(E[X]).
The tangent line in x
0
satisfies l
0
(x
0
) = v(x
0
) and l
0
(x
0
) = v(x
0
). If v(x)
= x
2
, then l
0
(x) = x
0
2
+2x
0
(xx
0
) must hold.
We have v(x)l
0
(x) = (xx
0
)
2
0, so E[X
2
] = E[v(X)] E[l
0
(X)] =
2
.
But also: E[X
2
] = Var[X] + (E[X])
2
(E[X])
2
.
(1)
2.4.15 Show that the skewness of Z = X+2Y is zero if X ~ binomial(8,p)
and Y ~ Bernoulli(1p). For which p is Z symmetric?
In Exer. 2.4.11 we proved that the 3rd cumulant of Z is the sum of
those of X and of 2Y, hence 8p(1p)(12p) + 2
3
(1p)p(12(1p)). This
equals 0 for all p.
Necessary for symmetry is Pr[Z = 0] = Pr[Z = 10]. We have Pr[Z = 0]
= Pr[X = 0,Y = 0] = (1p)
8
p and Pr[Z = 10] = p
8
(1p). They are equal
only if p {0,,1}; for all these values, Z is symmetrical.
2.4.16 For which values of does XY have skewness 0 if X ~
gamma(2,1) and Y ~ exponential(1), XY?
The 3rd central moment of XY equals
2/
3
=2,=1
+ ()
3
2/
3
=1,=1
= 4 2
3
,
which is zero only if = .
3
2
(32)
3.5.4 In case of a compound Poisson distribution for which the claims have
mass points 1,2,...,m, determine how many multiplications are needed to
calculate the probability F(t) using Panjers recursion. Distinguish the
cases m < t and m t.
Write f(s) =

s

s
1
h p(h) f(sh).
Compute h p(h) beforehand for all h, which takes 2min{m,t}
multiplications. For m t, we need t(t+1) more, for m < t we need
m(m+1)+m(tm) more. So the number of operations increases linearly
with t if the maximal possible claim is finite, quadratically otherwise.
3.5.5 Prove that E[N] = (a+b)/(1a) if q
n
= Pr[N=n] satisfies (3.26).
E[N] = =

n 1
nq
n
=
(3.26)

n 1
n

a
b
n
q
n 1
= aE[N]+a+b E[N] = . a

n 1
(n 1)q
n 1
a b
a b
1 a
(62)
3.9.10 In Sections 3.9 and 3.10, the retention is written as +k, so it is
expressed in terms of a number of standard deviations above the
expected loss. In practice, the retention is always expressed as a
percentage of the expected loss. Consider two companies for which the
risk of absence due to illness is to be covered by stop-loss insurance.
This risk is compound Poisson distributed with parameter
i
and
exponentially distributed individual losses X with E[X]=1000. Company
1 is small:
1
=3; company 2 is large:
2
=300. What are the net
stop-loss premiums for both companies in case the retention d equals
80%, 100% and 120% of the expected loss respectively? Express these
amounts as a percentage of the expected loss and use the CLT.
Write S
i
for the risks covered, then S
i
~ cP(
i
,X), so
i
= 1000
i
,

i
2
= (1000 2)
2

i
, since E[X
2
] = Var[X] + E[X]
2
.
0.8 = +z holds for z = 0.2/ = 0.1 (2
i
); 1.2 = +z for z =
0.2/ = +0.1 (2
i
).
(92)
4.8.11 The ruin processes of company 1 and 2 are both compound Poisson with
intensities
1
= 1 and
2
= 8, claims ~ exponential(3) and exponential(6), and
1
= 1 and
2
= . The claims processes of both companies are
independent. These companies decide to merge, without changing their premiums.
Determine the intensity, claims db and loading factor of the ruin process for the
merged company. Assume that both companies have an initial capital equal to 0,
then so does the merged company. Compare the probabilities of the following events
(continuous infinite ruin probabilities): "both companies never go bankrupt" with
"the merged company never goes bankrupt". Argue that, regardless of the values of
the initial capitals u
1
and u
2
for the separate companies, and consequently of u
1
+u
2
for the merged company, the following holds: the event "both companies never go
bankrupt" has a smaller probability than "the merged company never goes bankrupt".
c = c
1
+c
2
, =
1
+
2
= 9, p(x) =
1
9p
1
(x) +
8
9p
2
(x).
Finish this exercise by yourself.
(123)
7.3.1 Derive the formula Cov[X,Y] = E[Cov[X,Y Z]] + Cov[E[X Z],E[Y Z]]
for the decomposition of covariances into conditional covariances.
Use E[W] = E[E[W Z]]:
E[Cov[X, Y Z]] = E[E[XY Z]] E[E[X Z] E[Y Z]]
= E[XY] E[X] E[Y] + E[X] E[Y] E[E[X Z] E[Y Z]]
= Cov[X, Y] {E[E[X Z] E[Y Z]] E[E[X Z]] E[E[Y Z]]}
= Cov[X, Y] Cov[E[X Z], E[Y Z]].
Note: X Y reduces to Var[X] = E[Var[X Z]] + Var[E[X Z]].
(153)
8.6.2 Check the validity of the entries in Table E for all distributions listed.
Verify the reparametrizations, the canonical link, the cumulant function,
the mean as a function of and the variance function. Also determine
the function c(y;).
In general: . f
Y
(y; ,) = exp{
y b()

c(y,)}
Normal: f
Y
(y;,) = .
1
2
e
(y)
2
/
2
Equating corresponding terms in the log-densities leads to =
2
, =
; b() =
2
; this leaves
c(y,) =
1
2

+ log(2)
() = , so () = ; [also, () = b() checks out]
V() = b(()) = 1
(183)
10.3.6 As the previous exercise, but now for the case that the probability
mass of F on (a,b) has been concentrated on an appropriate d, i.e., such
that G(x) is constant both on [a,d) and [d,b). Also consider that case
that all mass on the closed interval [a,b] is concentrated.
Now we have F G on (,d), F G on (d,), so F is thicker-tailed
than G, and G
SL
F. Concentration gives smaller stop-loss premiums.
10.3.7 Show that the cdf F with the following differential is indirectly more
dangerous than the uniform(0,3) cdf:
dx/3 for x (0,1) (2,3)
dF(x) =
1
12 for x {1,2}
1
6 for x = 1.
If H is the uniform(0,3) cdf, look at G with G = F on (,1), G = H
on [1,). F is thicker-tailed than G, which in turn has only one sign
change with H. But F and H have 3 changes of sign in their difference.
(213)
10.6.4 Consider n married couples with one-year life insurances, all having
probability of death 1% for her and 2% for him. The amounts insured
are unity for both sexes. Assume that the mortality between different
couples is independent. Determine the distribution of the individual
model for the total claims, as well as for the collective model
approximating this, a) assuming that the mortality risks are also
independent within each couple, and b) that they are comonotonic.
In case a) we have S ~ B
1
+B
2
with B
j
~ bin(n,j0.01) independent, so S
has a cdf which is the convolution of two binomial dbs.
Just as in Example 10.6.7 for the comonotonic db one may derive that
Pr[X
1
=X
2
=0] = 0.98, Pr[X
1
=0,X
2
=1] = 0.01 = Pr[X
1
=1,X
2
=1]. So in case
b) we have S ~ C
i
with the Cs independent and Pr[C=0] = 0.98,
Pr[C=1] = Pr[C=2] = 0.01,
hence S ~ compound binomial(n, 0.02) with p(1) = p(2) = .
The collective model for case a) is N
3
~ Poisson(0.03n).
(243)