Faculty of Actuaries Institute of Actuaries

EXAMINATIONS

17 April 2000 (pm)

Subject 101 — Statistical Modelling

Time allowed: Three hours

INSTRUCTIONS TO THE CANDIDATE

1. Write your surname in full, the initials of your other names and your
Candidate’s Number on the front of the answer booklet.

2. Mark allocations are shown in brackets.

3. Attempt all 16 questions, beginning your answer to each question on a

separate sheet.

Graph paper is required for this paper.

AT THE END OF THE EXAMINATION

Hand in BOTH your answer booklet and this question paper.

In addition to this paper you should have available graph paper,

Actuarial Tables and an electronic calculator.

 Faculty of Actuaries
101—A2000  Institute of Actuaries
1 Fourteen economists were asked to provide forecasts for the percentage rate
of inflation for the third quarter of 2002. They produced the forecasts given
below.

1.2 1.4 1.5 1.5 1.7 1.8 1.8

1.9 1.9 2.1 2.7 3.2 3.9 5.0

Calculate the median and the upper and lower quartiles of these forecasts. [2]

2 Insurance policies providing car insurance are such that the sizes of claims are
normally distributed with mean £1,870 and standard deviation £610. In one
month 50 claims are made. Assuming that claims are independent, calculate
the probability that the total of the claim sizes is more than £100,000. [3]

3 In an investigation into the proportion (θ) of lapses in the first year of a

certain type of policy, the uncertainty about θ is modelled by taking θ to have a
beta distribution with parameters α = 1 and β = 9, that is, with density

f(θ) = 9(1 − θ)8 : 0 < θ < 1.

Using this distribution, calculate the probability that θ exceeds 0.2. [2]

4 Consider the following three probability statements concerning an F variable

with 6 and 12 degrees of freedom.

(a) P(F6,12 > 0.250) = 0.95

(b) P(F6,12 < 4.821) = 0.99

(c) P(F6,12 < 0.130) = 0.01

State, with reasons, whether each of these statements is true. [3]

5 An insurance company’s records suggest that experienced drivers (those aged

over 21) submit claims at a rate of 0.1 per year, and inexperienced drivers
(those 21 years old or younger) submit claims at a rate of 0.15 per year. A
driver can submit more than one claim a year. The company has 40
experienced and 20
inexperienced drivers insured with it.

The number of claims for each driver can be modelled by a Poisson

distribution, and claims are independent of each other. Calculate the
probability the company will receive three or fewer claims in a year. [3]

101—2
6 The number of claims which arise under a policy of a particular type in a year
is to be modelled as a Poisson(λ) random variable. A random sample of 600
such policies gave rise to a total of 72 claims in 1999.

Determine the approximate probability value of this result in a test of

H 0 : λ = 0.14 v H 1 : λ < 0.14 . [3]

7 Suppose that X and Y are continuous random variables.

∞
Prove that E ( X ) = ∫ E ( X |Y = y ) f ( y )dy .
−∞
Y [3]

8 A device contains an electronic component which has a lifetime modelled by a

distribution with mean 3.6 hours and standard deviation 2.6 hours. On failure
a new component is automatically and instantaneously inserted as a
replacement.

Consider the operation of the device with 100 such components used one after
the other. Determine the approximate probability that the resulting total
lifetime of the device will be greater than 400 hours. [4]

9 The discrete random variable X has the following probability function:

P(X = i) = 0.2 + ai : i = −2, −1, 0, 1, 2.

(i) State the possible values that a can take. [1]

(ii) Given a random sample x 1 , x 2 , ..., x n from this distribution, determine

the method of moments estimate of a and show that this can result in
inadmissible estimates (i.e. estimates outside the range of possible
values of a). [4]
[Total 5]

10 Under a particular model for the evolution of the size of a population over
time, the probability generating function of Xt , the size at time t, GXt (s ) , is
given by

 s + λ t(1 − s) 
GXt ( s ) =   where GXt ( s) = E( s Xt ) and λ > 0 .
 1 + λt (1 − s ) 

If the population dies out, it remains in this extinct state for ever.

(i) Show that the expected size of the population at any time t is 1. [3]

(ii) Show that the probability that the population has become extinct by
time t is given by λt / (1 + λt). [2]

(iii) Comment briefly on the future prospects for the population. [1]
[Total 6]

101—3 PLEASE TURN OVER

11 A charity sent eight hundred of its supporters information packs about its
activities and asked for donations to help it continue its work. Two hundred
were sent a pack about its work in education, two hundred a pack about its
work in health care, and four hundred a pack about its anti-poverty
programmes. Ninety-seven of the eight hundred people responded with
donations; the breakdown is shown in the table below.

Education Health Poverty Total

Donate 26 31 40 97
Don’t donate 174 169 360 703
Total 200 200 400 800

Perform a χ 2 test on this table to investigate whether the proportions who

send donations are affected by the type of pack received. [5]

12 A random sample of 200 pairs of observations (x, y) from a discrete bivariate

distribution (X, Y) is as follows:

the observation (−2, 2) occurs 50 times

the observation (0, 0) occurs 90 times
the observation (2, −1) occurs 60 times.

Calculate the sample correlation coefficient for these data. [4]

13 Suppose that the distribution of a physical coefficient, X, can be modelled

using a uniform distribution on (0, 1). A researcher is interested in the
distribution of Y, an adjusted form of the reciprocal of the coefficient, where Y
= (1 / X) − 1.

(i) Show that the probability density function of Y is given by

fY(y) = 1/(1 + y)2 , y > 0 [3]

(ii) Show that the mean of Y does not exist. [2]

[Total 5]

101—4
14 An insurance company issues house buildings policies for houses of similar
size in four different post-code regions A, B, C and D.

(i) An insurance agent takes independent random samples of 10 house

buildings policies for houses of similar size in regions A and B. The
annual premiums (£) were as follows:

Region A: 229 241 270 256 241 247 261 243 272 219
(Σx = 2,479 ; Σx 2 = 617,163)

Region B: 261 269 284 268 249 255 237 270 269 257
(Σx = 2,619 ; Σx 2 = 687,467)

(a) Perform a two-sample t-test at the 5% level to compare the

premiums for these two regions.

(b) Present the data in a simple diagram and hence comment briefly
on the validity of the assumptions required for the above t-test.

(c) Calculate a 95% confidence interval for the underlying common

standard deviation σ of such premiums. [10]

(ii) The agent takes further independent random samples of 10 such

policies from the other two regions C and D. The annual premiums
were as follows:

Region C: 253 247 244 245 221 229 245 256 232 269
(Σx = 2,441 ; Σx 2 = 597,607)

Region D: 279 268 290 245 281 262 287 257 262 246
(Σx = 2,677 ; Σx 2 = 718,973)

(a) Perform a one-way analysis of variance at the 5% level to

compare the premiums for all four regions.

(b) Present the new data in a simple diagram and hence comment
briefly on the validity of the assumptions required for the
analysis of variance.

(c) Calculate a 95% confidence interval for the underlying common

standard deviation σ of such premiums in the four regions. [10]

(iii) Comment briefly on your two confidence intervals in (i)(c) and (ii)(c)
above. [1]
[Total 21]

101—5 PLEASE TURN OVER

15 An engineer is interested in estimating the probability that a particular
electrical component will last at least 12 hours before failing. In order to do
this, a random sample of n components is tested to destruction and their
failure times, x1 , x2 ,..., xn , are recorded. The engineer models failure times by
assuming that they come from a distribution with distribution function, F, and
probability density function, f, given below.

1 α −1
F(x) = 1 − α −1
, f(x) = , α > 1, x > 0.
(1 + x ) (1 + x )α

(i) Determine α̂ , the maximum likelihood estimator of α, and, assuming n

is large, use asymptotic theory to show that an approximate 95%
αˆ − 1
confidence interval for α is given by αˆ ± 1.96 . [8]
n

(ii) A sample of size n = 80 leads to a maximum likelihood estimate of α of

1.56. Use this figure to

(a) estimate the probability a component will fail before 12 hours,

(b) determine an approximate upper 95% one-sided confidence

interval for α, and

(c) hence determine an approximate 95% one-sided confidence

interval which provides an upper bound for the probability in
part (ii)(a) above. [6]

(iii) Sixty-one of the eighty components tested in part (ii) failed before 12
hours, so a second engineer estimates the failure probability by
61/80 = 0.7625, and constructs an upper 95% confidence interval based
on the binomial distribution.

(a) Construct this interval, and

(b) comment on the advantages and disadvantages of this method

when compared to the method of part (ii). [4]
[Total 18]

101—6
16 The table below contains measurements on the strengths of beams. The width
and height of each beam was fixed but the lengths varied. Data are available
on the length (cm) and strength (Newtons) of each beam.

Length l x = log l Strength y = log p Fitted value Residual

p
7 1.946 11775 9.374 9.379 −0.005
7 1.946 11275 9.330 9.379 −0.049
9 2.197 8400 9.036 9.055 −0.019
9 2.197 8200 9.012 9.055 −0.043
12 2.485 6100 8.716 8.684 0.032
12 2.485 6050 8.708 8.684 0.024
14 2.639 5200 8.556 8.486 0.070
18 2.890 3750 8.230 8.162 0.068
18 2.890 3650 8.202 8.162 0.040
20 2.996 3275 8.094 8.026 0.068
20 2.996 3175 8.063 8.026 0.037
24 3.178 2200 7.696 7.791 −0.095
24 3.178 2125 7.662 7.791 −0.129

Σx = 34.023, Σx 2 = 91.3978, Σy = 110.679, Σxy = 286.6299

It is thought that P and L satisfy the law P = k/L where k is a constant, so

log P = log k − log L, i.e. Y = log k − X.

A graph of log P against log L is included.

The simple linear regression model y = α + βx has been fitted to the data, and
the fitted values and residuals are recorded in the table above.

(i) Use the data summaries above to calculate the least squares estimates
α$ of α and β̂ of β . [3]

(ii) Assuming the usual normal linear regression model

(a) estimate the error variance σ2,

(b) calculate a 95% confidence interval for β, and

(c) discuss briefly whether the data are consistent with the
relationship P = k L . [7]

101—7 PLEASE TURN OVER

 (iii) Plot the residuals of the model against X and comment on the
information contained in the plot. [3]
[Total 13]

9.5

9.3

9.1

8.9

8.7
y = log p

8.5

8.3

8.1

7.9

7.7

7.5
1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3
x = log l

101—8