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An insurer uses the exponential distribution with mean mu as the model for the total annual claim occurring from a particular insurance policy in the current one year period. The insurer assumes an Inflation factor of 10% for the one year period following the current one year period. Using the insurer?s assumption, find the coefficient of variation for the annual claim paid on the policy for the one year period following the current one year period.

A) 1.21
B)1.1
C)1
D) 1/1.1
E) 1/1.21

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Answer:

The answer is option (c) 1

Explanation:

Solution

Given that:

The insurer assumes a 10% Inflation factor Ā for the one year period

exponential distribution is Ī» = 0.1

The mean will be = 1/ Ī» = 1/0.1 =10

Thus,

the standard deviation Ā = 1/0.1 =10

so,

The current one year period =10/10 = 1

The he exponential distribution of one year period is always 1 just as the mean = 1/Ī» and standard deviation = 1/Ī»

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