IAI Actuarial Core Principles · Economic Modelling · Ruin theory
Under the Lundberg inequality psi(u) <= exp(-R u), an insurer with adjustment coefficient R=0.02 per Rs lakh holds initial surplus u=Rs 150 lakh. Which upper bound on the ruin probability is correct? (e^-3=0.0498)
The upper bound is 0.0498. Multiply the adjustment coefficient 0.02 by the surplus 150 to get 3, then compute e to the power minus 3. The option 0.9502 is the complement, which is not the ruin bound.
- A0.0498Correct
- B0.3000
- C0.0200
- D0.9502
- 0.1353
Explanation
Ru = 0.02*150 = 3, so the bound is e^-3 = 0.0498. The 0.9502 option is 1 minus the bound, and 0.1353 would be e^-2 from a wrong product.
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