INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

12 April 2024 (am)

Subject CS1 – Actuarial Statistics

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 A2024 © Institute and Faculty of Actuaries

1 An insurance company wants to study the association between the number of years
their clients spent in education and their claim amounts.

Data from 25 randomly selected claims are contained in the file

AmountYears.RData in the following two variables:

ClaimAmount – this is the claim amount (in £).

EducationYears – this is the number of years the client spent in education.

(i) Plot the claim amounts against the years of education. [3]

A statistician suggests fitting a simple linear model to the data.

(ii) (a) Fit a linear model to the data. [2]

(b) Plot the regression line by adding it to the graph in part (i). [2]

Another statistician looks at the plot in part (i) and suggests a non-linear relationship.

(iii) (a) Fit a model with a quadratic term added to the model fitted in part (ii).
[3]

(b) State the equation of the fitted model. [1]

(iv) Comment on the suitability of the quadratic model in part (iii), compared to
the model in part (ii), based on the output from part (iii). [3]
[Total 14]

CS1B A2024–2
2 A financial consultancy working with large firms wishes to model the relationship
between a firm’s assets and the number of senior management positions in the firm.
The data file firms.Rdata contains the variables:

assets – this is the value of assets (in millions of £).

sn_positions – this is the number of senior managements positions.

You can load the file into R using load("firms.Rdata").

(i) Plot the number of senior management positions as a function of assets. [3]

(ii) Plot the number of senior management positions as a function of log10_assets

where log10_assets is the assets at log10 scale. [4]

(iii) Comment on your plots in parts (i) and (ii). [2]

An analyst wishes to check if the number of senior management positions follows a

Poisson distribution.

(iv) Calculate the mean of the number of senior management positions. [1]

Use the command set.seed(222) to initialise the random number generator.

(v) Generate a sample of size equal to the number of firms from a Poisson
distribution with parameter equal to the mean calculated in part (iv). [2]

(vi) Plot a histogram of the sample simulated in part (v) and a histogram of
sn_positions on two separate graphs but on the same scale specifying
appropriate axis limits and labels. [6]

(vii) Comment on your plots in part (vi). [3]

[Total 21]

CS1B A2024–3
3 A Multiple-Choice (MC) test with 20 questions requires a minimum of 16 correct
answers for students to pass the test. A student prepares for the test using a mobile
phone application that generates random practice tests with 20 questions per test.

Load the file MCtestResults.Rdata into R. This creates two variables:

CorrectOutOf20Questions – this contains the number of correct answers the

student has achieved with the mobile phone application in each of 50 generated
practice MC tests.

TrialNumber – this contains the corresponding test number from 1 to 50.

The student assumes that the test score, 𝑋, which is the number of correctly answered
questions per test, has a binomial distribution, 𝑋 ∼ Bin 𝑛, 𝑝 with 𝑛 20.

(i) Estimate the parameter 𝑝 using the test scores in MCtestResults.Rdata,

assuming that the test scores are independent of each other and identically
distributed. [2]

(ii) Calculate the probability that the student will pass a test based on your
estimate of 𝑝 in part (i). [2]

(iii) Calculate the proportion of practice tests that the student has passed. [1]

(iv) Comment on the probability that the student will pass a test, based on your
answers to parts (i), (ii) and (iii). [4]

(v) Plot the number of correct answers in each of the practice tests against the test
number on the horizontal axis. [3]

(vi) Comment on the plot in part (v). [2]

A linear model is fitted to the data, which predicts that the number of correct answers
in the next test (test number 51) will be 18.085.

(vii) Calculate the probability for the student to pass the next test (test number 51).
[4]
[Total 18]

CS1B A2024–4
4 Consider a random variable, 𝑋, following a modified exponential distribution with
Cumulative Distribution Function (CDF):

0, 𝑥 0
𝐹 𝑥
1 exp 𝜆𝑥 , 𝑥 0

(i) Plot the CDF 𝐹 𝑥 as a function of 𝑥 for 𝑥 0, 0.1, 0.2, … ,9.9, 10 when
λ 0.2. [4]

(ii) Plot the density function 𝑓 𝑥 of 𝑋 as a function of 𝑥 for

𝑥 0, 0.1, 0.2, … ,9.9, 10 when λ 0.2. [5]

A random sample of 100 values of X is provided in randomSample.Rdata.

Loading the sample data into R will generate a vector x with 100 values representing
the sample.

(iii) Calculate the value of the log likelihood function for the parameter λ at the
point λ 0.2 based on this random sample. [3]

(iv) Plot the values of the log likelihood function for the parameter λ based on the
sample in randomSample.Rdata. Your plot of the log likelihood function
must be for values of λ 0.01, 0.02, … , 0.99, 1. [7]

The maximum likelihood estimator for the parameter λ based on a random sample
𝑋 , … , 𝑋 is given by:

𝑁
λ
∑ 𝑋

(v) Estimate the value of λ using the maximum likelihood estimator given above
and the sample in randomSample.Rdata. [3]

(vi) Comment on the plot in part (iv) and the estimate in part (v). [2]
[Total 24]

CS1B A2024–5
5 An insurance company, which currently only sells home insurance, is interested in
entering the car insurance market. An underwriting manager at the company believes
that the age and gender of the policyholder will be the most important factors in
estimating the number of claims made under a car insurance policy.

The underwriting manager has commissioned a survey of its current home insurance
customers who also have car insurance, choosing a male customer and a female
customer for every age from 18 to 65, asking them how many car insurance
claims they have made in the past 3 years. This dataset is saved in the file
ClaimsData.Rdata. After loading this data into R, using the command
load("ClaimsData.Rdata"), the data frame ClaimsData will be available,
which contains the following three variables:

age – this is the age (in years) of the policyholder.

gender – this is either ‘M’ for male or ‘F’ for female.

claim_count – this is the number of car insurance claims reported by the

policyholder over the past 3 years.

(i) Fit a normal linear regression model to the data using claim_count as the
response variable and age as the explanatory variable. Your answer should
include the estimated intercept and slope of the regression line. [3]

A colleague suggests that the response variable would be better modelled as having a
Poisson distribution.

(ii) Fit a Generalised Linear Model (GLM) to the data using claim_count as
the response variable and age as the explanatory variable, assuming a Poisson
distribution for the response variable. Your answer should include the
estimated coefficients and the Akaike’s Information Criterion (AIC) of the
fitted model. [4]

The underwriting manager wishes to compare the fit of the GLM in part (ii) against
that of the normal linear regression model in part (i).

(iii) Explain why scaled deviances cannot be used to compare the fit of the models
in parts (i) and (ii). [3]

(iv) Fit, by choosing a suitable argument for family in the glm command, a
GLM to the data that is equivalent to the model fitted in part (i). Your answer
should include the estimated coefficients and the AIC of this fitted model. [4]

(v) Compare the fit of the models fitted in parts (ii) and (iv). [2]

CS1B A2024–6
 The underwriting manager believes the Poisson GLM would be improved by adding
the explanatory variable gender as well as its interaction with age.

(vi) (a) Fit a Poisson GLM to the data of the form age*gender. Your
answer should include the estimated coefficients and the AIC of this
fitted model.

(b) Compare, using scaled deviances, the fit of this model to that in
part (ii).
[7]
[Total 23]

END OF PAPER

CS1B A2024–7