Insurance Models Flashcards
7 cards from real Actuary Certification practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Insurance Models flashcards as text
Which of the following is a key property of the Poisson distribution that makes it useful in claim count modeling?
Answer: Its mean equals its variance
For a Poisson distribution, E[N] = Var[N] = λ, which is the equidispersion property central to many insurance models.
A proportional (quota share) reinsurance arrangement means the reinsurer pays:
Answer: A fixed fraction α of every loss
Under quota share, both losses and premiums are shared in fixed proportion α between cedant and reinsurer.
The loss elimination ratio (LER) at deductible d for a loss random variable X is defined as:
Answer: E[min(X,d)] / E[X]
LER(d) = E[min(X,d)] / E[X], measuring the proportion of expected losses eliminated by the deductible.
Which model assumes that the parameter of an insured's loss distribution itself follows a distribution across the portfolio?
Answer: Credibility model with Bühlmann-Straub
Bühlmann-Straub credibility models a heterogeneous portfolio where each insured has a parameter drawn from a structural (prior) distribution.
A policy with a policy limit u and deductible d pays the insured at most:
Answer: min(X, u + d) − d
The payment is min(X, u+d) − d, capped at u, since the insurer covers the loss above d up to the maximum u.
In experience rating, the credibility-weighted estimate blends the insured's own experience with the class mean. As the volume of own experience increases, the credibility factor Z:
Answer: Increases toward 1
As data volume grows, Z approaches 1, meaning the estimate relies almost entirely on the insured's own observed experience.
Which severity distribution is characterized by a hazard rate that increases then decreases (bathtub shape), making it useful for modeling equipment failure in insurance contexts?
Answer: Weibull
The Weibull distribution has a flexible hazard function; with shape parameter τ 1 increasing, and it can model bathtub shapes with mixtures.