INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

16 September 2022 (am)

Subject CS1 – Actuarial Practice

Core Principles
Paper B
Time allowed: One hour and fifty minutes

In addition to this paper you should have available the 2002 edition of
the Formulae and Tables and your own electronic calculator.

If you encounter any issues during the examination please contact the Assessment Team on
T. 0044 (0) 1865 268 873.

CS1B S2022 © Institute and Faculty of Actuaries

1 A Systems Actuary is developing an automated application to replace a
time-consuming manual process. It is assumed that the number of errors, X, under this
automated application process follows a Poisson distribution with mean 6. The
Actuary wants to perform an analysis on the error rate for the automated process,
using the sample mean X.

Use the command set.seed(2022) to initialise the random number generator.

(i) Determine an estimate for the mean and variance of the sample mean X by
implementing 5,000 Monte Carlo repetitions, each involving a sample of size
150 from the assumed Poisson distribution. You should save the Monte Carlo
X values for later use. [7]

The Actuary recalls that a Normal approximation can be used, by referring to the
central limit theorem.

(ii) Write down the approximate distribution of X, by using the central limit
theorem. [1]

(iii) Compare the approximation in part (ii) with your answer to part (i). [1]

The Actuary wants to justify using the Normal approximation by comparing all the
quantiles in one go of X and the Normal distribution, using a QQ plot.

(iv) Construct a QQ plot for X and the Normal distribution, using the Monte Carlo
X values produced in part (i). [3]

(v) Comment on the plot from part (iv). [4]

[Total 16]

CS1B S2022–2
2 An insurance company designed a new product and wanted to assess its clients’
responses to the product. A survey was carried out giving an opportunity to each
participating client to give a positive or negative response to the product,
independently of other clients. Let X be the random variable representing the positive
responses to the new product.

(i) Identify the distribution of X and its parameters. [1]

Out of 160 clients who responded independently to the survey, 101 gave a positive
response for the new product.

The probability of obtaining a positive response for the product is denoted by θ and a
Beta prior distribution with parameters α, β is assumed for θ. The posterior
distribution of θ is proportional to:

f θ|x ∝ θx + α –1 1 – θ n–x+β–1
,

where x is the number of positive responses obtained out of n clients surveyed.

(ii) Specify the posterior distribution of θ with its parameters. [2]

(iii) Comment on the prior distribution of θ in relation to the posterior distribution.

[1]

(iv) State the parameter values for which the prior is a Uniform(0, 1) distribution.
[1]

(v) (a) Plot the prior density of θ with the parameters obtained in part (iv). Set
the maximum limit of the y axis to 12. [2]

(b) Plot the posterior distribution of θ on the same graph as above. [2]

[Hint: you may find the lines function useful.]

An Analyst consulted by the company suggests that based on previous experience, a

Beta prior with parameters 40, 24 is more appropriate.

(vi) Plot the new prior and posterior distributions of θ on the same graph from
part (v). [3]

(vii) Comment on the plots obtained in parts (v) and (vi). [2]

The company will put the new product on the market only if there is a high
probability that θ is higher than 60%.

(viii) (a) Calculate the probability P θ > 0.6 | X in the case of both priors; that
is, Uniform(0, 1) and Beta with parameters (40, 24). [4]

(b) Comment on your answer to part (viii)(a). [2]

[Total 20]

CS1B S2022–3
3 A male athlete ran 1 mile in 254.4 seconds on 31 May 1913. This was a world record
at the time. The data file mile_records.Rdata contains the dates measured in
days since 31 May 1913 and the times (in seconds) of all new world records for males
over the 1-mile distance. The data set mile_records.Rdata contains 32 records.
The variables are called record.date and record.time in the Rdata file. You
can load the file with load("mile_records.Rdata").

(i) Plot record.time as a function of record.date. [2]

(ii) Calculate the Pearson’s correlation coefficient between the two data sets. [2]

(iii) Fit a linear regression model to the data using record.time as the response
variable and record.date as the only explanatory variable. State the
estimated intercept and slope of the regression line. [3]

(iv) Plot the regression line by adding it to the plot from part (i). [2]

(v) Perform a statistical test in order to test the null hypothesis that the slope of
the regression line in part (iv) is zero, against a suitable alternative using the
output of the fitted model from part (iii). [4]

(vi) Comment on the relationship between the two variables. [4]

For simplicity, you can assume that 1 year has 365 days.

(vii) Estimate the expected time in seconds of the world record 100 years after the
most recent record in this data set. [4]

(viii) Calculate the number of years (from the most recent record) in which you
expect the world record to be 2 minutes, based on your fitted model from
part (iii). [4]

(ix) Comment on the suitability of the linear regression model for modelling
record.time as a function of record.date. [2]
[Total 27]

CS1B S2022–4
4 An Analyst is asked to produce a report on the existing imbalance in salary in jobs
related to Science, Technology, Engineering and Maths (STEM). The Analyst
considers a sample of 100 employees in STEM-related jobs. For each of these
employees, information is provided on starting and current salary (in units of £5,000),
gender, type of job and job location, the employee’s age and their relevant experience.
The data is given in the file named employee.RData. After loading the data into R,
the data frame data_employee, with its variables listed below, will be available.

Variable Variable definition

salary.current Current yearly salary
salary.start Starting yearly salary
gender Male = 0, female = 1
job.type 1 = geneticist, 2 = civil engineer, 3 = statistician,
4 = biophysicist, 5 = pathologist
job.location Big city = 0, small city = 1
age Age in years
experience Relevant job experience in years

(i) Write down the categorical and the numerical variables in the data. [2]

(ii) Plot a scatter graph between each pair of the numerical variables using your
answer to part (i). [3]

(iii) Comment on the relationship between the current salary and the remaining
numerical variables. [2]

(iv) (a) Calculate the lower quartile, median, upper quartile and the mean for
the current yearly salary. [3]

(b) Test whether the proportion of male employees with current salary
below 9.86 is significantly different from the proportion of female
employees with current salary below 9.86. [11]

[Hint: salary.current[gender==0] gives a vector of current salary for

males.]

(v) Determine the median, mean and variance of the current yearly salary for each
of the job types in job.type. [6]

[Hint: salary.current[job.type==1] gives a vector of current

salary for geneticists.]

(vi) (a) Test at the 5% level whether the mean starting salary and the mean
current salary are significantly different.

(b) Test at the 5% level whether the mean current salary for big-city
employees is greater than the mean current salary for small-city
employees.
[10]
[Total 37]

END OF PAPER

CS1B S2022–5