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Tutorial 5

The document is a tutorial for a course on Risk Theory, covering key concepts like ruin, insolvency, net premium, adjustment coefficient, and loading factor. It includes questions on Lundberg's inequality, the relationship between probability of ruin and various factors, and calculations related to compound Poisson processes and insurance claims. The tutorial also explores the implications of premium loading and reinsurance arrangements on the probability of ruin.

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7 views2 pages

Tutorial 5

The document is a tutorial for a course on Risk Theory, covering key concepts like ruin, insolvency, net premium, adjustment coefficient, and loading factor. It includes questions on Lundberg's inequality, the relationship between probability of ruin and various factors, and calculations related to compound Poisson processes and insurance claims. The tutorial also explores the implications of premium loading and reinsurance arrangements on the probability of ruin.

Uploaded by

Gabriel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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DEPARTMENT OF STATISTICS

HSTS418: RISK THEORY 2


TUTORIAL 5

1. Define each of the terms:


(a) Ruin,
(b) Insolvency,
(c) Net premium,
(d) Adjustment coefficient, and
(e) Loading factor.

2. (a) State the Lundberg’s inequality.


(b) Give the importance of the Lundberg’s inequality in Ruin Theory.

3. Explain the relationship between probability of ruin ψ (U ) and


(a) Initial surplus U,
(b) Loading factor, and
(c) Time, (t).

4. S(t ) is a compound Poisson process with parameter 40 and claim size distribution
which is log N(5, 4).
(a) Find E [ S ( 10 ) ] and Var [ S (10 ) ] .
(b) The initial surplus is 400000 and the rate of premium income is 41000 per unit
time. Assuming that U (t ) can be approximated by a normal distribution, find the
probability of ruin.

5. Aggregate annual claims on portfolio of insurance policies have a compound Poisson


distribution with variance λ . Individual claim amounts have an exponential distribution
with mean 1. The insurer calculates premiums using a loading of α and has an initial
surplus ofU .
(a) Show that if the first claim occurs at time t, the probability that this claim causes
ruin is e−U e−(1+∝ ) λt .
−U
e
(b) Show that the probability of ruin on the first claim is .
(2+∝)
(c) Show that if the insurer wishes to set ∝ such that the probability of ruin at the first
claim is less than 1%, then must choose∝>100 e−U −2.

6. Claims arrive as a Poisson process with rate λ . Individual claim sizes are
exponentially distributed with mean 100. The insurer uses a premium loading of 0.2.
A proportional reinsurance arrangement has been proposed, with a retained
proportion of∝. The reinsurer uses a security loading of 0.4.
(a) State the range of possible values of ∝ such that the probability of ruin is less
than 1.
2 ∝−1
(b) (i) Show that the adjustment coefficient, R , is given by R= ∙
100 ∝(7 ∝−1)
(ii) Hence find the value of ∝ that maximises R .
(iii) Determine the expected profit per unit time and calculate the upper bound for
the probability of ultimate ruin for the value of ∝ calculated in part (b) (ii).

END OF TUTORIAL

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