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for the 2012 Examinations

1 June 2011

Institute and Faculty of Actuaries

n|q[x]+r . Subject ST2 – Life Insurance Specialist Technical: uses the principles and techniques in this subject to help in the solution of life insurance problems. Links to other subjects Subjects CT1 – Financial Mathematics. where appropriate. survival. Obtain expressions in the form of integrals for the mean and variance of the present value of benefit payments under each contract above. CT3 – Probability and Mathematical Statistics and CT4 – Models: introduce techniques that will be drawn upon and used in the development of this subject.Subject CT5 – Contingencies Core Technical Aim The aim of the Contingencies subject is to provide a grounding in the mathematical techniques which can be used to model and value cashflows dependent on death. Define the following probabilities: n|mqx . 2. and. assuming constant deterministic interest. Define the following terms: • • • • • • • • • whole life assurance term assurance pure endowment endowment assurance critical illness assurance whole life level annuity temporary level annuity premium benefit including assurance and annuity contracts where the benefits are deferred. in terms of the random future 3. assuming that death benefits are payable at the end of the year of death and that annuities are paid annually in advance or in arrear. 1. Obtain expressions in the form of sums for the mean and variance of the present value of benefit payments under each contract above. and develop formulae for the means and variances of the present values of the payments under these contracts. Objectives On completion of this subject the candidate will be able to: (i) Define simple assurance and annuity contracts. 4. or other uncertain risks. n|qx and their select equivalents n|mq[x]+r . in terms of the curtate random future lifetime. Page 2 © Institute and Faculty of Actuaries . simplify these expressions into a form suitable for evaluation by table look-up or other means.

5. Express the following life table probabilities in terms of the functions in 1. a x:n m and a x:n their select and continuous equivalents. and 6. 8. and 5. in terms of those in objective (i) 3. 1. Evaluate the expected accumulations in objective (i) 9. in terms of the functions in 1. deferred and whole life annuities.. a x:n . 2. by table look-up. ax . 4. x:n . . and obtain expressions for them corresponding to the expected present values in 3. Ax:n = 1 − da Derive the relations Ax = 1 − da equivalents. a . Extend the annuity factors to allow for the possibility that payments are more frequent than annual but less frequent than continuous. and their select and continuous x . n|mq[x]+r .. 7. and 8. 3. 7. Derive approximations for.. nqx . Ax1 :n . where appropriate. Describe the life table functions lx and dx and their select equivalents l[x]+r and d[x]+r . and. (note: expected values only). a m ⏐ x:n x . above to deal with the possibility that premiums are payable more frequently than annually and that benefits may be payable annually or more frequently than annually.. n|m qx and their select equivalents n p[x]+r . 4. Ax:n .Subject CT5 – Contingencies Core Technical lifetime. (ii) Describe practical methods of evaluating expected values and variances of the simple contracts defined in objective (i). Ax:n . and 2. and 4. 5. Define the expected accumulation of the benefits in 1. Evaluate the expected values and variances in objective (i) 3.. Define the symbols Ax . 5. nq[x]+r . assuming that death benefits are payable at the moment of death and that annuities are paid continuously. 6. simplify these expressions into a form suitable for evaluation by table look-up or other means. and hence evaluate. and between temporary. Derive relations between annuities payable in advance and in arrear. Express the expected values and variances in objective (i) 3. including the use of the relationships in objectives (i) 7. Extend the techniques of 3. Describe practical alternatives to the life table which can be used to obtain the evaluations in 4. 1 6.: n px . the expected values and variances in objective (i) 4. where appropriate. © Institute and Faculty of Actuaries Page 3 . 9.

Understand Thiele’s differential equation. using ultimate or select mortality. using ultimate or select mortality. ) x . more frequently than annually. with premiums as in (iii) 2. Calculate the expected present value of an annuity. premium. 4. Define the net random future loss under an insurance contract. immediately on death. Define and calculate net premiums for the insurance contract benefits in objective (i) 1. net premiums and net premium reserves of simple insurance contracts. premium or benefit payable on death. or continuously. for a single policy or a portfolio of policies (as appropriate): • • • • death strain at risk expected death strain actual death strain mortality profit 2. 3. Show that prospective and retrospective reserves are equal when calculated on the same basis. for contracts with death benefits paid at the end of the year of death. 9. which increases or decreases by a constant monetary amount. Extend the techniques of (ii) to calculate the expected present value of an annuity. (iv) Describe the calculation. Define and evaluate prospective and retrospective net premium reserves in respect of the contracts in objective (i) 1. Derive recursive relationships between net premium reserves at annual intervals.. annually. and (Ia)x and their select equivalents. satisfied by net premium reserves for contracts with death benefits paid at the moment of death. 1. Define and calculate. 6. ( Ia 2. Premiums and annuities may be payable annually. Define the symbols (IA)x . 8. and annual premiums. and premiums payable continuously. 3. Calculate net premiums and net premium reserves for contracts with premiums and benefits which vary as described. Benefits may be payable at the end of the year of death.Subject CT5 – Contingencies Core Technical (iii) Describe and calculate. more frequently than annually. which increases or decreases by a constant compound rate. or benefit payable on death. State why an insurance company will set up reserves. 7. 1. 5. and state the principle of equivalence. or continuously. Calculate net Page 4 © Institute and Faculty of Actuaries . of net premiums and net premium reserves for increasing and decreasing benefits and annuities. Describe prospective and retrospective reserves.

4. Calculate gross premium prospective reserves using the future loss random variable. under the appropriate conditions. Premiums and annuities may be payable annually. with allowance for expenses. 3. Describe the influence of inflation on the expenses listed in 1. Extend the techniques of objectives (i)–(v) to deal with cashflows dependent upon the death or survival of either or both of two lives. Derive a recursive relation between successive annual reserves for an annual premium contract. Calculate gross premiums using the future loss random variable and the equivalence principle. Benefits may be payable at the end of the year of death. State the conditions under which. (v) Define with profits contract. Calculate gross premiums using simple criteria other than the equivalence principle. 9. Extend the techniques of 1. 6. 10. for standard fixed benefit contracts. with or without allowance for expenses. © Institute and Faculty of Actuaries Page 5 . the prospective reserve is equal to the retrospective reserve. 1. to deal with functions dependent upon a fixed term as well as age. 4. List the types of bonus that may be given to with profits contracts.Subject CT5 – Contingencies Core Technical premiums and net premium reserves for contracts with premiums and benefits which vary as described. more frequently than annually. 5. (vi) Define and use straightforward functions involving two lives. 8. List the types of expenses incurred in writing a life insurance contract. 2. 5. or continuously. 2. Define and calculate the gross premium retrospective reserve. more frequently than annually. immediately on death. 1. in general. for all standard fixed benefit and increasing/decreasing benefit contracts. 7. Describe the calculation of gross premiums and reserves of assurance and annuity contracts. Define the gross future loss random variable for the benefits and annuities listed in (i) 1. or continuously. Calculate net premiums and net premium reserves for with profits contracts. and (iv). annually. Prove that. 6. the prospective reserve is equal to the retrospective reserve allowing for expenses.

and 7. Derive dependent probabilities from given transition intensities. 6. Extend the techniques of 3. the net present value. Profit test simple annual premium contracts of the types listed in 2. using the Kolmogorov equations introduced in Objective (vii) of the Models Subject. Use multiple decrement tables to evaluate expected cashflows dependent upon more than one decrement. for use in pricing. endowment and term assurances. Describe the construction and use of multiple decrement tables. 4. and assessing profitability. and the profit margin. 2. 1. (viii) Describe the technique of discounted emerging costs. Describe practical alternatives to the multiple decrement table which can be used to obtain the evaluations in 7. Show how the profit test may be used to price a product. 5.. 3. 2. 7. pension benefits other salary related benefits health and care insurance 3. 9. to evaluate expected cashflows contingent upon risks other than human life. including the relationships with associated single decrement tables. 6. Explain how the value of a cashflow. and determine the profit vector. contingent upon more than one risk. the profit signature. annuities.. Evaluate expected cashflows for whole life.Subject CT5 – Contingencies Core Technical (vii) Describe methods which can be used to model cashflows contingent upon competing risks. 1. reserving. Show how the profit test may be used to determine reserves. including: • • • 8. Derive transition intensities from given dependent probabilities. Page 6 © Institute and Faculty of Actuaries . may be valued using a multiple-state Markov Model. Define unit-linked contract. and unit-linked contracts.

1. Explain how decrements can have a selective effect. END OF SYLLABUS © Institute and Faculty of Actuaries Page 7 . State the principal factors which contribute to the variation in mortality and morbidity by region and according to the social and economic environment. standardised mortality ratio. and illustrate their use. 5.Subject CT5 – Contingencies Core Technical (ix) Describe the principal forms of heterogeneity within a population and the ways in which selection can occur. Define the terms crude mortality rate. 8. Explain the theoretical basis of the use of risk classification in life insurance. 4. directly standardised and indirectly standardised mortality rate. occupation nutrition housing climate/geography education genetics Define and give examples of the main forms of selection: • • • • • temporary initial selection class selection time selection spurious selection adverse selection 3. Explain how selection can be expected to occur amongst individuals taking out each of the main types of life insurance contracts. 7. or amongst members of large pension schemes. specifically: • • • • • • 2. Explain the concept of a single figure index and its advantages and disadvantages for summarising and comparing actual experience. Explain why it is necessary to have different mortality tables for different classes of lives. 9. Explain the impact of the availability of genetic information on risk classification in life insurance. 6.

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