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# Faculty of Actuaries

Institute of Actuaries

EXAMINATION
26 April 2010 (am)

## Subject CT5 Contingencies

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1.

Enter all the candidate and examination details as requested on the front of your answer
booklet.

2.

You must not start writing your answers in the booklet until instructed to do so by the
supervisor.

3.

## Mark allocations are shown in brackets.

4.

Attempt all 14 questions, beginning your answer to each question on a separate sheet.

5.

## AT THE END OF THE EXAMINATION

question paper.

In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

CT5 A2010

Faculty of Actuaries
Institute of Actuaries

(a)

l[ x ]+ r

(b)

n|m q x

(c)

dx
[3]

## Define spurious selection, giving two distinct examples.

Calculate the standardised mortality ratio for the population of Urbania using the
following data:

Age
60
61
62

Standard Population
Population
Deaths
2,500,000
26,170
2,400,000
29,531
2,200,000
32,542

[3]

Urbania
Population
Deaths
10,000
130
12,000
145
11,000
173
[3]

A life insurance company offers an increasing term assurance that provides a benefit
payable at the end of the year of death of 10,000 in the first year, increasing by 100 on
each policy anniversary.
Calculate the single premium for a five year policy issued to a life aged 50 exact.
Basis:
Rate of interest
Mortality
Expenses

4% per annum
AM92 Select
Nil
[4]

## A population is subject to the force of mortality x = e0.0002x1.

Calculate the probability that a life now aged 20 exact:
(i)

(ii)

## dies between ages 60 exact and 70 exact

CT5 A20102

[2]
[3]
[Total 5]

You are provided with the following extract from a life table:

x
50
51
52

lx
99,813
97,702
95,046

## Calculate 0.75p50.5 using two different methods.

[5]

A company is about to establish a pension scheme that will provide an age retirement
benefit of n/60ths of final pensionable salary where n is total number of years of
service. Final pensionable salary is the average salary in the three years before
retirement.
An employee who will become a member of the pension scheme is currently aged 55
exact has and will be granted exactly 20 years of past service. The employees salary
in the year before the valuation date was 40,000.
(i)
(ii)

Calculate the present value of benefits for this member (including future
service).

[3]

## Calculate the contribution required to fund this benefit as a percentage of

future salaries.

[3]

Basis:
Pension Scheme from the Formulae and Tables for Actuarial Examinations
[Total 6]

100 graduates aged 21 exact decide to place the sum of 1 per week into a fund to be
shared on their retirement at age 66 exact.
(i)

Show that each surviving member can expect to receive on retirement a fund
of approximately 7,240.
[4]

Basis:
Rate of interest
Mortality

4% per annum
AM92 Ultimate

One of the survivors uses the accumulated fund to buy a weekly annuity payable for
10 years certain. After 10 years the annuity is payable at two-thirds of the initial level
for the rest of life.
(ii)

Calculate the weekly amount of the annuity on the basis used in part (i).
[2]
[Total 6]

CT5 A20103

A life insurance company models the experience of its pension scheme contracts
using the following three-state model:
Active(A)
x

10

x

Retired (R)
x

(i)

Derive the dependent probability of a life currently Active and aged x retiring
in the year of age x to (x + 1) in terms of the transition intensities.
[2]

(ii)

Derive a formula for the independent probability of a life currently Active and
aged x retiring in the year of age x to (x + 1) using the dependent probabilities.
[4]
[Total 6]

The decrement table extract below is based on the historical experience of a very large
multinational companys workforce.

Age (x)

Number of employees
(al ) x

40
41
42

10,000
9,855
9,684

Deaths
25
27

Withdrawals
120
144

Recent changes in working conditions have resulted in an estimate that the annual
independent rate of withdrawal is now 75% of that previously used.
Calculate a revised table assuming no changes to the independent death rates, stating
your results to one decimal place.
[7]

11

Thieles differential equation for the policy value at duration t (t > 0), tVx , of an
immediate life annuity payable continuously at a rate of 1 per annum from age x is:

t V x = x +t t V x 1 + t V x
t
(i)

Derive this result algebraically showing all the steps in your working.

(ii)

## Explain this result by general reasoning.

CT5 A20104

[5]
[3]
[Total 8]

12

On 1 January 2005, a life insurance company issued 1,000 10-year term assurance
policies to lives aged 55 exact. For each policy, the sum assured is 50,000 for the
first five years and 25,000 thereafter. The sum assured is payable immediately on
death and level annual premiums are payable in advance throughout the term of this
policy or until earlier death.
The company uses the following basis for calculating premiums and reserves:
Mortality
Interest
Expenses

AM92 Select
4% per annum
Nil

(i)

2009.
[6]

(ii)

(a)

(b)

this policy.

(c)

## Give examples of how the terms of the policy could be altered so as to

[3]

There were, in total, 20 deaths during the years 2005 to 2008 inclusive and a further 8
deaths in 2009.
(iii)

CT5 A20105

Calculate the total mortality profit or loss to the company during 2009.
[3]
[Total 12]

13

## A life insurance company issues a 3-year unit-linked endowment assurance policy to a

male life aged 45 exact.
Level premiums of 4,000 per annum are payable yearly in advance throughout the
term of the policy or until earlier death. 95% of the premium is allocated to units in
the first policy year, 100% in the second and 105% in the third. A policy fee of 50 is
deducted from the bid value of units at the start of each year. The units are subject to
a bid-offer spread of 5% on purchase. An annual management charge of 1.75% of the
bid value of units is deducted at the end of each policy year.
Management charges are deducted from the unit fund before death, surrender and
maturity benefits are paid.
If the policyholder dies during the term of the policy, the death benefit of 125% of the
bid value of the units is payable at the end of the policy year of death. On maturity,
100% of the bid value of the units is payable.
The policyholder may surrender the policy only at the end of the first and second
policy years. On surrender, the bid value of the units less a surrender penalty is
payable at the end of the policy year of exit. The surrender penalty is 1,000 at the
end of the first policy year and 500 at the end of the second policy year.
The company uses the following assumptions in carrying out profit tests of this
contract:
Rate of growth on assets in the unit fund

## 5.5% per annum in year 1

5.25% per annum in year 2
5.0% per annum in year 3
Rate of interest on non-unit fund cash flows 4.0% per annum
Mortality
AM92 Select
Initial expenses
200
Renewal expenses
50 per annum on the second and third
Initial commission
Renewal commission
2.0% of the second and third years
Rate of expense inflation
2.0% per annum
Risk discount rate
7.0% per annum
For renewal expenses, the amount quoted is at outset and the increases due to inflation
start immediately. In addition, you should assume that at the end of the first and
second policy years, 12% and 6% respectively of all policies still in force then
surrender immediately.
(i)

## Calculate the profit margin for the policy.

(ii)

Calculate the expected present value of profit for the policy if the company
assumed that there were no surrenders at the end of each of the first and
second policy years.
[3]
[Total 16]

CT5 A20106

[13]

14

A life insurance company issues a 30-year with profits endowment assurance policy
to a life aged 35 exact. The sum assured of 100,000 plus declared reversionary
bonuses are payable on survival to the end of the term or immediately on death if
earlier.
(i)

Show that the quarterly premium payable in advance throughout the term of
the policy or until earlier death is approximately 616.

Pricing basis:
Mortality:
Interest:
Initial commission:
Initial expenses:
Renewal commission:

AM92 Select
6% per annum
100% of the first quarterly premium
250 paid at policy commencement date
2.5% of each quarterly premium from the start of the
second policy year
Renewal expenses:
45 at the start of the second and subsequent policy
years
Claim expense:
500 on death; 250 on maturity
Future reversionary bonus: 1.92308% of the sum assured, compounded and vesting
at the end of each policy year (i.e. the death benefit does
not include any bonus relating to the policy year of
death)
[10]

At the end of the 25th policy year, the actual past bonus additions to the policy have
been 145,000.
(ii)

Calculate the gross prospective policy reserve at the end of that policy year
immediately before the premium then due.

## Policy reserving basis:

Mortality:
Interest:
Renewal commission:
Renewal expenses:
Claim expense:

AM92 Ultimate
4% per annum
4% of the sum assured and attaching bonuses,
compounded and vesting at the end of each policy year
90 at the start of each policy year
1,000 on death; 500 on maturity
[6]
[Total 16]

END OF PAPER

CT5 A20107

Faculty of Actuaries

Institute of Actuaries

EXAMINERS REPORT
April 2010 Examinations

## Subject CT5 Contingencies

Core Technical

Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
R D Muckart
Chairman of the Board of Examiners
July 2010

These are given in italics at the end of each question.

Faculty of Actuaries
Institute of Actuaries

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report

(i)

The number of lives still alive at age x + r out of lx lives alive at age x subject
to select mortality.

(ii)

The probability that a life age x will die between age x + n and x + n + m.

(iii)

The number of lives that die between x and (x + 1) out of l x lives alive at x.

Spurious selection occurs when mortality differences ascribed to groups are formed
by factors which are not the true causes of these differences.
For example mortality differences by region may be put down to the actual class
structure of the region itself whereas a differing varying mix of occupations region by
region could be having a major effect. So Region is spurious and being confounded
with occupation.
Another example might be in a company pension scheme which might be showing a
significant change in mortality experience which could be viewed as change over
time. However withdrawers from the scheme may be having an effect as their
mortality could be different. To that degree Time Selection may be spurious.

Question generally answered well. Credit was given for a wide range of valid examples.

The Standardised mortality ratio is the ratio of actual deaths in the population divided
by the expected number of deaths in the population if the population experienced
standard mortality.
Actual number of deaths for Urbania = 130+145+173 = 448
Mortality rates in standard population are:
Age 60: 26,170 / 2,500,000 = 0.0104680
Age 61: 29,531 / 2,400,000 = 0.0123046
Age 62: 32,542 / 2,200,000 = 0.0147918
Expected number of deaths for Urbania
= 0.010468 10,000 + 0.0123046 12,000 + 0.0147918 11,000 = 415
SMR = 448/415 = 107.95%

Page 2

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report

1
EPV = (10, 000 100) A[50]:5
+ 100( IA)1[50]:5

## = 9,900( A[50] v5 5 p[50] A55 ) + 100(( IA)[50] v5 5 p[50] (5 A55 + ( IA)55 ))

= 9,900(0.32868 v5

9557.8179
*0.38950)
9706.0977

9557.8179

+100* 8.5639 v5
(5*0.38950 + 8.57976)
9706.0977

= 132.96 + 4.34

= 137.30

Many students answered the question well. The most common error was the use of 10,000 as
the multiplier before the temporary assurance function rather then 9,900.

px = exp(
x +t

x +t
x

s ds )

= exp(

= exp(

x +t 0.0002 S
x +t
e
ds +
ds )
x
x

(e0.0002 S 1)ds )

e0.0002( x +t ) e0.0002 x
+t
= exp

0.0002

(i)

Probability =
e0.0002 x 70 e0.0002 x 20

= exp
+ 50

0.0002

= 0.6362

Page 3

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report

(ii)
Probability =

This is the probability that the life survives to 60 and then dies between 60 and
70
40 p20 (1 10 p60 )

e0.0002 x 60 e0.0002 x 20

e0.0002 x 70 e0.0002 x 60

= exp
+ (60 20) . 1 exp
+ (70 60)

0.0002
0.0002

## = 0.725 x(1 0.8773)

= 0.0889

This question was answered poorly overall. It was an unusual representation of the x
function but other than that was a straight forward probability and integration question.

## p50 = 97,702 / 99,813 = 0.978850

p51 = 95,046 / 97,702 = 0.972815
Uniform distribution of deaths
p50 0.25 p51 p50 (1 0.25(1 p51 )) 0.978850 * (1 0.25* (1 0.972815))
=
=
= 0.982588
(1 0.5(1 p50 ))
(1 0.5* (1 0.978850))
0.5 p50

## Constant force of mortality

t = ln(pt)
50 = ln(0.978850) = 0.021377
51= ln(0.972815) = 0.027561
0.5 p50 * 0.25 p51

=e

0.5*0.021377

## * e 0.25*0.027561 = 0.989368* 0.993133 = 0.982574

Generally answered well. A limited number of students used the Balducci Assumption as one
of their answers. This is not in the CT5 Course whilst the above 2 methods clearly are. This
method was however credited solution not published as not in CT5

(i)

## Age retirement benefit

z

ra

ra
(20 z M 55
+ R55 )
1
40, 000
60
s54 D55

Page 4

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
=

1
(20 *128,026 + 963,869)
40,000
60
9.745*1,389

= 173,584
(ii)

Contributions
s

K 40, 000.

N 55
s54 D55

= K .40,000 x

88,615
9.745*1,389

= 261,868K

## Therefore K = 173,584 / 261,868 i.e. 66.3%

Most students answered reasonably well. Most common error was the wrong sx function.
Also some students included early retirement calculations which were not asked for.
Also students often did not include the past service benefits in the final contribution rate
believing the final result would have been too high (the question however was quite specific
on providing past benefits).

(i)

Fund = 52*

1.04(6621) a21:45
45 p21

1
1
8695.6199
a21:45 = a21:45 *(1 v 45 * l66 / l21 ) = a21:45 * 1 0.17120*

2
2
9976.3909
= a21:45 0.42539

## a21:45 = a21:44 + v 44 * l65 / l21 = 21.045 + .17805*

8821.2612
= 21.202
9976.3909

a21:45 = 20.777

therefore fund =

52*1.0445 (20.777)
= 7, 240
8695.6199
9976.3909

Page 5

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
(ii)

## Let annuity be P per week. Then EPV of annuity at 66 is

52 P ( a10 + 2 * v10 10 p66 .a76 )
3
(1 v10 )

6589.9258
(8.169 0.5)
= 52 P
+ 2 * 0.675564 *
3
8695.6199
ln(1.04)

= 52 P [8.272 + 2.618]]
= 566.26P

## Therefore pension is given by

7, 240 = 566.26P
P = 12.79

Many students struggled with this question and indeed a large number did not attempt it. As
will be seen from the solution above the actuarial mathematics involved are relatively
straightforward.
Note that 52.18 (i.e. 365.25/7) would have been an acceptable alternative to 52 as the

(i)

## We are looking to derive (aq) rx in terms of x and x

Use the Kolmogorov equations (assuming the transition intensities are
constant across a year age):

r
( + )t
t ( aq ) x = e
t

(aq) rx =
(1 e( + ) )
( + )

(ii)

Similarly
(aq) dx =

(1 e (+ ) )
( + )

Note that:
1 ((aq) rx + (aq) dx ) = e (+ )
+ = log(1 ((aq) rx + (aq) dx ))
Page 6

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
So
(aq ) rx =

( log(1 ((aq ) rx

+ (aq ) dx )))

((aq ) rx + (aq ) dx )

=

(aq ) rx
(aq ) rx

## log(1 ((aq ) rx + (aq ) dx ))

+ (aq ) dx

Given that:
qxr = 1 e ,
then
qxr

= 1 1 ((aq) rx

+ (aq) dx )

( aq ) rx

(( aq )rx + ( aq )dx )

In general this was poorly answered with most students making a limited inroad to the
question.
However, the question did not specify that constant forces must be assumed. So, a valid
alternative to part (i) is:
t

= t (ap ) x x +t dt = exp ( x + r + x + r ) dr x +t dt
0
0
0

(aq ) rx

This makes no assumptions and provides an answer in the form asked for in the question, and
so would merit full marks. If constant forces are assumed, the above expression will turn into
the answer in the above solution.
For part (ii) a solution is only possible if some assumption is made. The following
alternatives could be valid:
(1)

Assume dependent decrements are uniformly distributed over the year of age

qxr

(al ) x

(aq) rx
1 12 (aq) dx

## (This is covered by the Core Reading in Unit 8 Section 10.1.3.)

(2)

Assume independent decrements are uniformly distributed over the year of age

Page 7

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
This leads to two simultaneous equations:
q xd =

(aq ) dx

and

1 q xr

q xr =

(aq ) rx
1 q xd

which results in a quadratic equation in qxr . (This is covered by the Core Reading Unit 8
Section 10.1.6.)
Whilst a full description has been given above to assist students, in reality those who
successfully attempted this question did assume constant forces.

10

Age (x)

40
41
42

Number of
employees
(al ) x
10,000
9,855
9,684

(aq) dx

(aq ) wx

.00250
.00274

.01200
.01461

## From this table and relationship

1
1
qxd = (aq) dx / (1 *(aq) wx ) and qxw = (aq ) wx / (1 *(aq ) dx )
2
2
d
w
Calculate qx and qx
d
d
q40
=.00250/(1.006) = .00252 and q41
= .00274/(1.00731) = .00276
w
w
q40
=.01200/(1.00125) = .01201 and q41
= .01461/(1.00137) = .01463

1 3

2 4

1 3

## (aq ) d41 = .00276* 1 * *.01463 = .00274

2 4

3 1

w
(aq ) 40
= .01201* * 1 *.00252 = .00900
4 2

3 1

w
(aq ) 41
= .01463* * 1 *.00276 = .01096
4 2

Page 8

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
Using the above data the Table can now be reconstructed
Age (x)

Number of
employees
(al ) x

40
41
42

10,000
9,884.9
9749.5

Deaths

Withdrawals

(10000*.00251)=25.1 10000*.00900=90.0
(9,884.9*.00274)=27.1 9,884.9*.01096=108.3

It should be noted that if more decimal places are used in the aq factors then the deaths at 40
become 25.0 so full credit was given for this answer also.
Because of the limited effect on the answer from the original table students were asked to
show the result to 1 decimal place. Many failed to do so and were penalised accordingly.

11

(i)

## Policy value at duration t of an immediate annuity payable continuously at a

rate of 1 per annum and secured by a single premium at age x is given by:

tVx

= ax +t = e s s px +t ds
0

tVx = ax +t = es s px +t ds = e s s px +t ds
t
t
t
t
1

s px +t = ln( s px +t ) = (ln l x +t + s ln l x +t ) = x +t + s + x +t
t
t
s p x +t t

s p x +t = s p x +t ( x +t + s + x +t )
t

tVx = e s s px +t ( x +t x +t + s )ds
t
0

= x +t ax +t e s s px +t x +t + s ds
0

= x +t ax +t e s s px +t es s px +t ds

= x +t ax +t 1 + ax +t

Page 9

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
= x +t t Vx 1 + t Vx
(ii)

## Consider a short time interval (t, t + dt) then equation implies:

t + dtV

tV = x +t t Vx dt 1 dt + t Vx dt + o(dt )

where

## x +t t Vx dt = reserve released as a result of deaths in time interval

(t, t + dt)
1 dt = annuity payments made in time interval (t, t + dt)

## t Vx dt = interest earned on reserve over time interval (t, t + dt)

In general very poorly answered on what was a standard bookwork question.

12

(i)

## Annual premium P for the term assurance policy is given by:

P =

1
1
25, 000 A[55]:10
+ 25, 000 A[55]:5

a[55]:10

where
1
1
25, 000 A[55]:10
+ 25, 000 A[55]:5

8821.2612

## (0.38879 0.67556 9545.9929 0.52786)

= 25,000 1.019804

9545.9929

## = 25, 495.10 ( (0.38879 0.32953) + (0.38879 0.36496) ) = 2118.39

Therefore

P =

2118.39
= 257.46
8.228

Page 10

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
Net Premium Retrospective Reserves at the end of the fifth policy year is
given by:
(1 + i )5

= 1.21665

l[55]
l60

## Pa[55]:5 50, 000 A[55]:5

9545.9929
[257.46 4.59 50,000 1.019804 (0.38879 0.36496)]
9287.2164

= 41.71

(ii)

Explanation more cover provided in the first 5 years than is paid for by the
premiums in those years. Hence policyholder in debt at time 5, with size of
debt equal to negative reserve.
Disadvantage if policy lapsed during the first 5 years (and possibly longer),
the company will suffer a loss which is not possible to recover from the
policyholder.
Possible alterations to policy structure

## Collect premiums more quickly by shortening premium payment term or make

premiums larger in earlier years, smaller in later years
Change the pattern of benefits to reduce benefits in first 5 years and increase
them in last 5 years.
(iii)

## Mortality Profit = EDS ADS

Death strain at risk = 50,000 (42) = 50,042

## EDS = (1000 20) q59 50, 042

= 980 0.00714 50, 042 = 350,154
ADS = 8 50, 042 = 400,336
Total Mortality Profit = 350,154 400,336 = -50,182 (i.e. a mortality loss)

## Quite reasonably answered by the well prepared student.

In (i) it should be noted that in this case the retrospective and prospective reserves are equal.
If the student recognised this, explicitly stated so and then did the easier prospective
calculation full marks were given. No credit was given for a prospective calculation without
explanation.

Page 11

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report

13
Risk discount rate
Interest on investments (1st yr)
Interest on investments (2nd yr)
Interest on investments (3rd yr)

4000.00
7.0%
5.5%
5.25%
5.0%

4.0%
Interest on non-unit funds
Death benefit (% of bid value of units) 125%

Initial expense
Renewal expense
Expense inflation
(i)

200
50
2.0%

## Allocation % (1st yr)

Allocation % (2nd yr)
Allocation % (3rd yr)
Management charge

95.0%
100.0%
105.0%
5.0%
1.75%

## Surrender penalty (1st yr)

Surrender penalty (2nd yr)

1000
500

Policy Fee

50

% prem
15.0%
2.0%

x
45
46
47

q xd
0.001201
0.001557
0.001802

qxs
0.12
0.06
0.00

x
45
46
47

(aq) dx
0.001201
0.001557
0.001802

(aq) sx
0.11986
0.05991
0.00000

(ap)
0.878943
0.938536
0.998198

t 1 ( ap )

1.000000
0.878943
0.824920

## Unit fund (per policy at start of year)

value of units at start of year
Alloc
B/O
policy fee
Interest
management charge
value of units at year end

yr 1
0.000
3800.000
190.000
50.000
195.800
65.727
3690.074

yr 2
3690.074
4000.000
200.000
50.000
390.604
137.037
7693.641

yr 3
7693.641
4200.000
210.000
50.000
581.682
213.768
12001.554

Page 12

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
Cash flows (per policy at start of year)
expenses
Interest
man charge
extra death benefit
surrender penalty
end of year cashflow

yr 1
250.000
190.000
800.000
14.400
65.727
1.108
119.856
189.926

probability in force
discount factor

1
0.934579

0.878943
0.873439

yr 3
150.000
210.000
132.020
2.881
213.768
5.407
0.000
133.461
0.824920
0.816298

133.280

4000.000

profit
Margin
(ii)

yr 2
50.000
200.000
131.000
4.760
137.037
2.995
29.953
287.755

3285.769

2882.069

10167.837
1.31%

## Revised profit vector (309.781, 257.802, 133.461)

Revised profit signature (309.781, 257.492, 133.093)
Revised PVFNP = 289.515 + 224.904+ 108.643 = 44.032

Again most well prepared students made a good attempt at this question. The most common
error was to ignore dependent decrements.
Substantial credit was given to students who showed how they would tackle this question even
if they did not complete all the arithmetical calculations involved.

14
(i)

## Let P be the quarterly premium. Then:

4 Pa(4)

[35]:30

@ 6% = 56.1408 P

where
(4)
a[35]:30
= a[35]:30

3
1 30 p[35]v 30
8

)
Page 13

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
3 8821.2612

= 14.352 1
0.17411
8 9892.9151

= 14.0352

EPV of benefits:
100, 000(q[35]v 0.5 + q[35] (1 + b)v1.5 + ... +
1

29

q[35] (1 + b) 29 v 29.5 )

## +100, 000 (1 + b)30 v30 30 p[35]

where b = 0.0192308
=

## q[35] (1 + b)v + q[35] (1 + b) 2 v 2 + ... + q[35] (1 + b)30 v 30

1
29
(1 + b)0.5 (1 + b)0.5

## +100, 000(1 + b)30 v 30 30 p[35]

100, 000
1
@ i + 100, 000v30 30 p[35] @ i
(1.06)0.5 A[35]:30
(1 + b)

8821.2612
0.32187 0.30832

(1 + b)
9892.9151

8821.2612
9892.9151

where

i =

1.06
1 = 0.04
1+ b

## EPV of expenses (at 6%)

(4)
(4)
= P + 250 + 0.025 4 Pa[35]:30
0.025 4 Pa[35]:1
+ 45 a[35]:30 1

1
+500 A[35]:30
+ 250v30 30 p[35]

## = P + 250 + 0.025 56.1408 P 0.025 4 P 0.97857 + 45 13.352

Page 14

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
8821.2612
8821.2612

## +500 1.060.5 0.18763 0.17411

+ 250 0.17411
9892.9151
9892.9151

= 2.30566 P + 906.322

where

a(4)

[35]:1

= a[35]:1

3
1 p[35]v
8

3 9887.2069

= 1 1
0.9434 = 0.97857
8 9892.9151

P=
(ii)

33,141.028
= 615.60
53.8351

## Gross prospective policy value (calculated at 4%) is given by:

V prospective =

245,000
(1 + i )1/2 A 1 @ i + 245,000 v 5 5 p60 @ i + 0.025 4 Pa(4) + 90a60:5 4 Pa(4)
60:5
60:5
(1 + b)
60:5
+1000 A160:5 + 500v5 5 p60

245, 000
(1.04)

0.5

1
A60:5
@ i + 245, 000 v5

l65
@ i + 90a60:5 0.975 4 Pa(4)
60:5
l60

l
l
+1000 1.040.5 A60:5 v5 65 + 500v5 65
l60
l60

l
3
3
8821.2612
where a(4) = a60:5 1 v5 65 = 4.55 1 0.82193
= 4.4678
60:5
8
l60
8
9287.2164
4

1.04
1 = 0
and i =
1.04
=

245, 000
(1.04)0.5

A160:5

@ i =

d60+t
0

l60

465.9551
= 0.05017
9287.2164

## +1000 1.040.5 ( 0.82499 0.78069 ) + 500 0.78069

Page 15

Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
= 12, 052.954 + 232, 708.35 + 409.5 10, 726.473 + 45.177 + 390.345 = 234,880

## END OF EXAMINERS REPORT

Page 16

Faculty of Actuaries

Institute of Actuaries

EXAMINATION
6 October 2010 (am)

## Subject CT5 Contingencies

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1.

Enter all the candidate and examination details as requested on the front of your answer
booklet.

2.

You must not start writing your answers in the booklet until instructed to do so by the
supervisor.

3.

## Mark allocations are shown in brackets.

4.

Attempt all 14 questions, beginning your answer to each question on a separate sheet.

5.

## AT THE END OF THE EXAMINATION

question paper.

In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

CT5 S2010

Faculty of Actuaries
Institute of Actuaries

Calculate:
(a)

20|10 q[45]

(b)

30 p[45]:[50]

[3]

## Calculate 0.5p45.75 using the Uniform Distribution of Deaths assumption.

Basis: AM92 Ultimate
[3]

## Calculate the single premium payable for a temporary reversionary annuity of

12,000 per annum payable monthly in arrear to a female life currently aged 55 exact
on the death of a male life currently aged 50 exact. No payment is made after 20
years from the date of purchase.
Basis:
Rate of interest
Mortality of male life
Mortality of female life
Expenses

4% per annum
PMA92C20
PFA92C20
Nil
[4]

A gymnasium offers membership for a three-year period at a fixed fee of 240 per
annum payable monthly in advance. The contract may only be cancelled at a renewal
anniversary. Monthly premiums cease immediately on the death of the member.
Calculate the expected present value of membership fees if the gymnasium sells 120
memberships:
Basis:
Rate of interest
Rate of mortality
Probability of renewal
Expenses

6% per annum
1% per annum
80% at each anniversary
Nil
[5]

CT5 S20102

## A pension scheme provides an age retirement benefit of n/80ths of final pensionable

salary where n is total number of years of service. Final pensionable salary is the
average salary in the three years before retirement. Normal retirement age is 65 and
age retirement is only permitted between ages 60 and 65 exact.
A member of the pension scheme currently aged 45 exact has 12 years of service and
their salary in the year before the valuation date was 25,000.
Give a formula for the expected cashflows between the 66th and 67th birthdays as a
result of entitlement from this past service.
[5]

Calculate:
(a)

A30:40

(b)

a30:40:20

Basis:

## = 0.01 throughout for the life aged 30 now

= 0.02 throughout for the life aged 40 now
= 4% per annum
[6]

A life insurance company issues a 10-year term assurance policy to a life aged 55
exact. The sum assured which is payable immediately on death is given by the
formula:
50, 000 (1 + 0.1t )

t = 0,1, 2........,9

where t denotes the curtate duration in years since the inception of the policy.
Level premiums are payable monthly in advance throughout the term of the policy or
until earlier death.
Calculate the monthly premium for this policy using the following basis:
Mortality
Interest
Expenses

AM92 Select
4% per annum
Nil
[6]

Describe the causal factors that explain observed differences in mortality and
morbidity.

CT5 S20103

[6]

The actuary advising a pension scheme has decided that the independent mortality in
the standard table for pension schemes (PEN) from page 142 of the Formulae and
Tables for Actuarial Examinations is no longer appropriate for that pension scheme.
Calculate the revised row of the service table for age 61, assuming that the revised
independent mortality rate at that age is 80% of the previous independent mortality
rate.
[7]

10

Define the following terms, giving formulae and defining all notation used:
(a)
(b)

## Crude mortality rate

Indirectly standardised mortality rate
[7]

11

A life insurance company issues a four-year unit-linked policy to a male life. The
following non-unit cash flows, NUCFt (t = 1,2,3,4), are obtained at the end of each
year t per policy in force at the start of the year t:
Year t

NUCFt

50.2

43.1

32.1

145.5

Assume that the annual mortality rate for the male life is constant at 1% at all ages.
(i)

## Show that the annual internal rate of return is 6%.

[3]

The company sets up reserves in order to zeroise future negative cash flows. The rate
of interest earned on non-unit reserves is 2.5% per annum.
(ii)

(iii)

Calculate the net present value of the profits after zeroisation using a risk
discount rate of 6% per annum.
Comment on the results obtained in (i) and (ii) above.

CT5 S20104

[3]

[1]
[Total 7]

12

A life insurance company issued a with profits whole life policy to a life aged 40
exact on 1 January 2000. Under the policy, the basic sum assured of 50,000 and
attaching bonuses are payable immediately on death. Level premiums are payable
annually in advance under the policy until age 65 or earlier death.
The company declares simple reversionary bonuses at the start of each year including
the first year and the bonus entitlement on the policy is earned immediately the bonus
is declared.
(i)

Give an expression for the gross future loss random variable under the policy
at the outset, defining symbols where necessary.
[4]

(ii)

## Calculate the annual premium using the following assumptions:

Mortality
Interest
Initial expenses
Renewal expenses
Claim expenses

AM92 Select
6% per annum
2.5% per annum simple
300
25 at the start of the second and subsequent policy
years while the policy is in force
250
[4]

On 31 December 2009, the policy is still in force. Bonuses declared to date total
13,750.
(iii)

## Calculate the gross premium prospective reserve for the policy as at

31 December 2009 using the following assumptions:
Mortality
Interest
Renewal expenses
Claim expenses

CT5 S20105

AM92 Ultimate
4% per annum
3% per annum simple
35 at the start of each policy year while the policy is in
force
250
[4]
[Total 12]

13

On 1 January 2009, a life insurance company issued 10,000 joint life whole life
assurance policies to couples. Each couple comprised one male life aged 60 exact and
one female life aged 55 exact when the policy commenced. Under each policy, a sum
assured of 100,000 is payable immediately on the death of the second of the lives to
die.
Premiums under each policy are payable annually in advance while at least one of the
lives is alive.
The life insurance company uses the following basis for calculating premiums and net
Mortality
Interest
Expenses
(i)

## PMA92C20 for the male

PFA92C20 for the female
4% per annum
Nil

## Calculate the annual premium payable under each policy.

[4]

During the calendar year 2009, there was one claim for death benefit, in respect of a
policy where both the male and the female life died during the year. In addition, there
were 20 males and 10 females who died during the year.
(ii)

Calculate the mortality profit or loss for the group of 10,000 policies for the
calendar year 2009.
[10]
[Total 14]

CT5 S20106

14

## A life insurance company issues four-year without profits endowment assurance

policies to male lives aged 56 exact. The sum assured is 21,500 payable on maturity
or at the end of the year of death if earlier. Premiums of 5,000 are payable annually
in advance throughout the term of the policy.
The company holds net premium reserves for these policies, calculated using AM92
Ultimate mortality and interest of 4% per annum.
Surrenders occur only at the end of a year immediately before a premium is paid. The
surrender value is 70% of the net premium reserve calculated at the time the surrender
value is payable.
The company uses the following assumptions in carrying out profit tests of this
contract:
Rate of interest on cash flows 4% per annum
Mortality
AM92 Select
Surrenders
10% of all policies still in force at the end of each of
the first, second and third policy years
Initial expenses
600
Renewal expenses
45 per annum on the second and subsequent
Risk discount rate
6% per annum
Calculate the expected profit margin for this contract.

END OF PAPER

CT5 S20107

[15]

## INSTITUTE AND FACULTY OF ACTUARIES

EXAMINERS REPORT
September 2010 examinations

## Subject CT5 Contingencies

Core Technical

Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.

T J Birse
Chairman of the Board of Examiners
December 2010

20|10 q[45]

(a)

(b)

## = (8,821.2612 6,879.1673) / 9, 798.0837 = 0.198212

30 p[45]:[50]

l75 l80
6,879.1673 5, 266.4604
=
= 0.380951
l[45] l[50] 9, 798.0837 9, 706.0977

.5 p45.75

## = .25* q45 / (1 .75* q45 ) = .25*.001465 / (1 .75*.001465)

= .000367 by UDD
= .25* q46 = .25*.001622 = .000406

.25 q45.75
.25 q46

Hence

.5 p45.75

## = (1 .000367) *(1 .000406) = .999227

In general question done well. However many students did not appreciate the split in line 1
above and attempted to apply formula directly.

## Value of Single Premium is:

(
)
= 12,000 ( ( 13 ) v
p ( 13 ) (
13 ) v
24
24
24

8784.955

10.933 13 )
= 12,000 (18.210 13 ) v
(
24
24
9917.623

## 12 1,000 a (12) a (12)

55:20

50:55:20

20

55

20 55

75

50:55

20

20 p50:55

70:75

13

20

8784.955 9238.134

8.792 13
16.909 13
v 20
24
24
9917.623 9941.923

## = 12,000((17.668 4.201) (16.367 3.099))

= 2,388
Many students struggled with how to break down the monthly annuity functions into those
which could then utilise the Tables. However question generally done well by well prepared
students.

Page 2

))

24

## The value of 1 per annum payable monthly for 1 year is

(12) = x(12) v. px x(12)
+1 = x:1 11/ 24(1 v. p x )
x:1

Where x:1 = 1
Therefore

x:1

## The probability of reaching the beginning of each year is :

Year 1 = 1
Year 2 = 0.99*0.8 = 0.792
Year 3 = 0.792 * 0.792 = 0.6273
The value is therefore

## 120 240 0.96973 (1 + 0.792 / 1.06 + 0.6273 / (1.06)2 )

= 64,388
This question was overall done very poorly with few students realising that the key
element to the calculation involved a one year annuity due payable monthly.

## 19 12 z45+ t + 0.5 r45+ t ( rl )66+ t

12 z65 r65 ( rl )66
25000
+ 25000

## l45 ( rl )45+ t + 0.5

80 s44 l45 ( rl )65
t =15 80 s44
Question done very poorly. Many students attempted to use annuity functions
whereas the question sought was a pure cash flow one.

Page 3

(a)

0

30:40

0

0

## .01 .05t .02 .06t .03 .07t

*e
*e
=
*e

.06
.07
.05
0
= (1/ 5 + 1/ 3 3 / 7) = .10476

a30:40:20 =

(b)

20 .04t
e
0

* e.01t * e .02t dt

20 .07t
e
dt
0
20

1 .07t
=
e

.07
0

## = (1/ .07) e 1.4 / .07) = 10.763

Question generally done well.

Let P be the monthly premium. Then equating expected present value of premiums
and benefits gives:
12 Pa(12)

[55]:10

1
= 45000 A[55]:10
+ 5000( IA)1[55]:10

where

a(12)

[55]:10

= a[55]:10

11
8821.2612

## 1 v10 10 p[55] = 8.228 0.458 1 .67556

= 8.056
24
9545.9929

1
A[55]:10
= 1.040.5 A[55]:10 v10 10 p[55] = 1.040.5 ( 0.68354 0.62427 ) = 0.06044

( IA)1[55]:10 = 1.040.5

(( IA)

[55]

## = 1.040.5 (8.58908 0.62427 7.89442 10 0.62427 0.52786) = 0.3728

45000 0.06044 + 5000 0.3728
12 P =
= 568.99
8.056
P = 47.42
In general question done well by well prepared students.

Page 4

## Occupation either because of environmental or lifestyle factors mortality may be

directly affected. Occupations may also have health barriers to entry, e.g. airline
pilots
Nutrition poor quality nutrition increases morbidity and hence mortality
Housing standard of housing (reflecting poverty) increases morbidity
Climate climate can influence morbidity and may also be linked to natural disaster
Education linked to occupation but better education can reduce morbidity, e.g. by
reducing smoking
Genetics there is genetic evidence of a predisposition to contracting certain
illnesses, even if this has no predictive capability

A straightforward bookwork question generally done well although not all students captured
the full range. All valid examples not shown above were credited.
Students who misunderstood the question and tried to answer using Class, Time, Temporary
Initial Selection were given no credit.

q x =

(aq )x

(1 0.5((aq )
x ))

## to derive the independent probabilities:

q xd

q ix

q xr

(aq ) dx

(1 0.5((aq ) x d ))

(50 / 6548)
= 0.00809
(1 0.5*((219 + 516) / 6548))

(aq )ix

(219 / 6548)
= 0.03496
(1 0.5*((50 + 516) / 6548))

(aq ) rx

(516 / 6548)
= 0.080455
(1 0.5*((50 + 219) / 6548))

(1 0.5((aq )x i ))

(1 0.5((aq ) x r ))

## Then the revised qxd = 80% *0.00809 = 0.006472

then use the formula

1
1
(aq)x = qx (1 (qx + ...) + (qx .qx + ...) ...)
2
3

Page 5

## Subject CT5 (Contingencies Core Technical) September 2010 Examiners Report

to derive dependent probabilities:

1
1
(aq)dx = qxd (1 (qix + qxr ) + (qix .qxr )) = 0.0061046
2
3
1
1
(aq)ix = qix (1 (qxd + qxr ) + (qxd .qxr )) = 0.0334465
2
3
1
1
(aq) rx = qxr (1 ( qxd + qix ) + ( qxd .qix )) = 0.0787948
2
3
The resulting service table is:
lx

dx

ix

rx

6,548

40

219

516

This question was done poorly. Many students appeared not to remember the derivation
process for multiple decrements etc. Some students wrote down the final table without
showing intermediate working. This gained only a proportion of the marks.

10

(a)

Exc,t mx,t
x

Exc,t
x

where

## Exc,t is central exposed to risk in population between age x and x+t

mx,t is central rate of mortality in population between age x and x+t

(b)

s Exc,t s mx,t
x

s Exc,t
x

Exc,t s mx,t
x

Exc,t mx,t
x

Page 6

s c
Ex,t
s

## is central exposed to risk in standard population between age x and x+t

mx,t is central rate of mortality in standard population between age x and x+t

This question generally done well. Other symbol notation was accepted provided it was
consistent and properly defined.

11
Year t

qx

px

t 1 p x

NUCFt

Profit Signature

1
2
3
4

0.01
0.01
0.01
0.01

0.99
0.99
0.99
0.99

1
0.99
0.9801
0.9703

50.2
43.1
32.1
145.5

50.2
42.7
31.5
141.2

(i)

PV of profit @ 6%
= 50.2v 42.7v 2 31.5v3 + 141.2v 4
= 47.4 38.0 26.4 + 111.8
= 0.0 IRR = 6%

(ii)

2V

1V

32.1
= 31.3
1.025

## revised cash flow in year 1 = 50.2 px 1V = 50.2 71.6 = 121.8

and NPV of profit = 121.8/1.06 + 111.8 = -3.1
(iii)

## As expected, the NPV after zeroisation is smaller because the emergence of

the non- unit cash flow losses have been accelerated and the risk discount rate
is greater than the accumulation rate.

Parts (i) and (iii) done well generally. In Part (ii) many students failed to develop the
formulae properly although they realised the effect in (iii).

Page 7

12

(i)

## 50, 000 1 + b ( K 40 + 1) vT40 + ( I e) + eaK

40 +1

+ fvT40 Pamin( K

40 +1,25)

where b
I
e

## is the annual rate of bonus

is the initial expense
is the annual renewal expense payable in the 2nd and
subsequent years
f
is the claim expense
P
K40(T40) is the curtate (complete) random future lifetime of a life
currently aged 40

(ii)

## The annual premium P is given by

Pa[40]:25 = 50, 250 A[ 40] + 1, 250 ( IA )
+ 300 + 25(a[40] 1)
[ 40]
P 13.29 = 50, 250 1.060.5 0.12296 + 1, 250 1.060.5 3.85489
+300 + 25(15.494 1)
13.29 P = 6361.402 + 4961.065 + 300 + 362.35
P = 901.79

(iii)

## The required reserve is

64, 000 A50 + 1,500 ( IA )

50

## = 64, 000 1.040.5 0.32907 + 1,500 1.040.5 8.55929

+35 17.444 901.79 11.253

## = 21, 477.560 + 13, 093.196 + 610.54 10,147.84

= 25, 033.32
In general question done well by well prepared students. In (i) credit also given if the
formulae included a limited term on the expense element although in reality this is unlikely.

Page 8

13

(i)

Pa

60m :55 f

where a

60m :55 f

= 100000 A

60m :55 f

## = a60m + a55 f a60m:55 f = 15.632 + 18.210 14.756 = 19.086

60m :55 f

= 1.040.5 A

60m :55 f

= 1.040.5 (1 d a

60m :55 f

## = 1.040.5 (1 0.038462 19.086) = 0.2711804

P 19.086 = 100000 * 0.2711804

P = 1, 420.83 .
(ii)

## Where both lives are alive:

a m f
100000 1.040.5 1 61 :56
a m f
60 :55

## 15.254 + 17.917 14.356

= 100000 1.040.5 1
= 1448.01
15.632 + 18.210 14.756

## Where the male life is alive only:

100000 A61m Pa61m
0.04

100000 1.040.5 1
15.254 1420.83 15.254 = 20475.94
1.04

## Where the female life is alive only:

100000 A56 f Pa56 f
0.04

100000 1.040.5 1
17.917 1420.83 17.917 = 6247.12
1.04

Page 9

## Subject CT5 (Contingencies Core Technical) September 2010 Examiners Report

Mortality Profit = Expected Death Strain Actual Death Strain
(a)

Mortality Profit

) (

## = (10, 000 0.002451 0.001046 1) (100532.38 ) = 97954.99

(b)

Males only die during 2009 = 20 actual deaths (and therefore we need
to change reserve from joint life to female only surviving).
Mortality Profit

## = 10, 000 p55 f q60m 20 ( 6247.12 1448.01)

= (10, 000 0.998954 0.002451 20 ) ( 4799.11) = 21520.95
(c)

## Females only die during 2009 = 10 actual deaths (and therefore we

need to change reserve from joint life to male only surviving).
Mortality Profit

## = 10, 000 p60m q55 f 10 ( 20475.94 1448.01)

= (10, 000 0.997549 0.001046 10 ) (19027.93) = 8265.02

## = 97954.99 + 21520.95 + 8265.02 = 68,169.01

i.e. a mortality loss
Part (i) generally done well. Part (ii) was challenging and few students realised the full
implications of reserve change on 1st death. Only limited partial credit was given if
students used only joint life situations.

Page 10

14

0V56:4

= 1

a56:4

1V56:4

= 1

a57:3

2V56:4

= 1

3V56:4

= 1

a56:4
a56:4
a58:2
a56:4
a59:1
a56:4

=0
= 1

2.870
= 0.23364
3.745

= 1

1.955
= 0.47797
3.745

= 1

1.0
= 0.73298
3.745

## Multiple decrement table:

T

d
q[56]
+ t 1

1
2
3
4

0.003742
0.005507
0.006352
0.007140

s
q[56]
+ t 1

(aq) d[56]+t 1

(aq) s[56]+t 1

(ap)[56]+t 1

t 1 ( ap )[56]

0.1
0.1
0.1
0.0

0.003742
0.005507
0.006352
0.007140

0.09963
0.09945
0.09936
0.0

0.896632
0.895044
0.894283
0.992860

1.000000
0.896632
0.802525
0.717685

d
s
Probability in force (ap)[56]+t 1 = (1 q[56]
+t 1 ) (1 q[56]+t 1 )

The calculations of the profit vector, profit signature and NPV are set out in the table
below:
Policy
1
2
3
4

5000
5000
5000
5000

Expenses

Interest

Death
claim

Maturity
claim

Surrender
claim

In force
cash flow

600.00
45.00
45.00
45.00

176.00
198.20
198.20
198.20

80.45
118.40
136.57
153.51

0.00
0.00
0.00
21346.49

350.31
715.38
1096.1613
0.00

4145.23
4319.42
3920.475
16346.80

Policy
year

Increase in
reserves

Interest on
reserves

Profit vector

Cum probability
of survival

Discount
factor

NPV
profit

1
2
3
4

4504.02
4174.53
3816.72
15759.07

0.00
200.93
411.05
630.36

358.78
345.82
514.84
42.63

1.00000
0.89663
0.80253
0.71768

0.943396
0.890000
0.839619
0.792094

338.47
275.96
346.91
24.24

Total NPV =

308.63

Page 11

## Subject CT5 (Contingencies Core Technical) September 2010 Examiners Report

The calculations of the premium signature and profit margin are set out in the table
below:
Policy year
probability in force
discount factor

1
5000.00
1.00000
1.00000

5000.000
=> expected p.v. of premiums 15813.53
profit margin =
2.0%

5000.00
5000.00
5000.00
0.89663
0.80253
0.71768
0.943396
0.890000
0.839619
4229.40

3571.22

3012.91

Many well prepared students were able to outline the process required without being totally
accurate on the calculation. Significant credit was awarded in such situation.
Many students failed to appreciate the multiple decrement element.

Page 12

## INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION
26 April 2011 (am)

## Subject CT5 Contingencies

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1.

Enter all the candidate and examination details as requested on the front of your answer
booklet.

2.

You must not start writing your answers in the booklet until instructed to do so by the
supervisor.

3.

## Mark allocations are shown in brackets.

4.

Attempt all 13 questions, beginning your answer to each question on a separate sheet.

5.

## AT THE END OF THE EXAMINATION

question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

CT5 A2011

## Institute and Faculty of Actuaries

Give a different example of selection shown by each of the following mortality tables:
(a)
(b)
(c)

ELT15
PMA92
AM92
[3]

Calculate:
(a)
(b)

10|5 q60

(c)

s65:10

23 p65

Basis:
Mortality
Rate of interest

PMA92C20
4% per annum

[4]

Calculate ( Ia ) x
Basis: x = 0.02 for all x
= 4% per annum
[4]

Outline the benefits that are usually provided by a pension scheme on retirement due
to ill health.
[5]

A pension scheme uses the following model to calculate probabilities, where the
transition intensities are = 0.05 and = 0.08.

Active

Retired

Calculate:
(a)
(b)

## the dependent probability of retirement

the independent probability of death from active service

CT5 A20112

[5]

(i)

[2]

(ii)

[4]

Basis:
Mortality

ELT15(Males)

[Total 6]

## Explain how education influences morbidity.

[6]

A life insurance company issues a with profits whole life assurance policy to a life
aged 40 exact. The sum assured of 100,000 plus declared reversionary bonuses are
payable immediately on death. Level premiums are payable annually in advance to
age 65 or until earlier death.
A simple bonus, expressed as a percentage of the sum assured, is added to the policy
at the start of each year (i.e. the death benefit includes the bonus relating to the policy
year of death).
The following basis is used to price this policy:
Mortality

AM92 Select

Rate of Interest

4% per annum

Initial expenses

## 300 plus 50% of the first annual premium, incurred at the

policy commencement date

Renewal commission

year

Claim expense

## 350 at termination of the contract

Using the principle of equivalence, calculate the level simple bonus rate that can be
supported each year on this policy if the annual premium is 3,212.
[6]

CT5 A20113

A male life aged 52 exact and a female life aged 50 exact take out a whole life
assurance policy. The policy pays a sum assured of 100,000 immediately on first
death. Premiums are payable for a period of five years, monthly in advance.
Basis:
Mortality
PMA92C20 (male life), PFA92C20 (female life)
Rate of interest 4% per annum
Expenses
Nil

10

Calculate the expected present value and variance of the present value of an
endowment assurance of 1 payable at the end of the year of death for a life aged 40
exact, with a term of 15 years.
Basis:
Mortality
Rate of interest
Expenses

11

[7]

AM92 Select
4% per annum
Nil

[8]

A life insurance company issues a 4-year unit-linked endowment policy to a life aged
61 exact under which level premiums of 2,500 are payable yearly in advance
throughout the term of the policy or until earlier death. In the first policy year 40% of
the premium is allocated to units, while in the second and subsequent policy years
110% of the premium is allocated to units. The unit prices are subject to a bid-offer
If the policyholder dies during the term of the policy, the death benefit of 10,000 or
the bid value of the units, whichever is higher, is payable at the end of the policy year
of death.
The policyholder may surrender the policy, in which case a value equal to a fixed
percentage of the total premiums paid on the policy is payable at the end of the policy
year of surrender. The percentage is based on the policy year of surrender as follows:

Policy year

## % of total premiums payable

as a surrender value

1
2
3
4

0
25
50
75

## On maturity, 105% of the bid value of units is payable.

An annual management charge of 0.5% of the bid value of units is deducted at the end
of each policy year before death, surrender and maturity benefits are paid.

CT5 A20114

The company uses the following assumptions in carrying out profit tests of this
contract:
Rate of growth on assets in the unit fund

AM92 Select

6% per annum

Initial expenses

325

Renewal expenses

## 74 per annum on the second

Initial commission

Renewal commission

## 5.5% per annum

(i)

Construct a multiple decrement table for this policy assuming that there is a
uniform distribution of both decrements over each year of age in the single
decrement table.
[3]

(ii)

Construct tables showing the growth of the unit fund and the non-unit fund.
Include all commissions in the non-unit fund.
[7]

(iii)

Calculate the profit margin for this policy on the assumption that the company
does not zeroise future expected negative cashflows.
[3]
[Total 13]

CT5 A20115

12

On 1 April 1988, a life insurance company issued a 25-year term assurance policy to a
life then aged 40 exact. The initial sum assured was 75,000 which increased by 4%
per annum compound at the beginning of the second and each subsequent policy year.
The sum assured is payable immediately on death and level monthly premiums are
payable in advance throughout the term of the policy or until earlier death.
The company uses the following basis for calculating premiums and reserves:
Mortality

AM92 Select

Rate of interest

4% per annum

Initial commission

Initial expenses

## 400 paid at the policy commencement date

Renewal commission

year

Renewal expenses

## 75 per annum, inflating at 4% per annum compound, at the

start of the second and subsequent policy years (the renewal
expense quoted is as at the start of the policy and the
increases due to inflation start immediately)

Claim expense

## 300 on termination (the claim expense is fixed over the

duration of the policy)

(i)

Show that the monthly premium for the policy is approximately 56.

(ii)

## Calculate the gross premium prospective reserve as at 31 March 2011.

[6]
[Total 16]

CT5 A20116

[10]

13

(i)

Explain, including formulae, the following expressions assuming that the sum
assured is payable at the end of the year of death:

(ii)

## death strain at risk

expected death strain
actual death strain

[6]

## 25-year term assurances with a sum assured of 200,000

25-year endowment assurances with a sum assured of 100,000

The death benefit under each type of policy is payable at the end of year of
death.
On 1 January 2000, the company sold 10,000 term assurance policies to male
lives then aged 40 exact and 20,000 endowment assurance policies to male
lives then aged 35 exact. For each type of policy, premiums are payable
During the first ten years, there were 145 actual deaths from the term
assurance policies written and 232 actual deaths from the endowment
assurance policies written.
(a)

Calculate the death strain at risk for each type of policy during 2010.

During 2010, there were 22 actual deaths from the term assurance policies and
36 actual deaths from the endowment assurance policies.
Assume that there were no lapses/withdrawals on each type of policy during
the first eleven years.
(b)

Calculate the total mortality profit or loss to the office in the year 2010.

(c)

## Comment on the results obtained in (b) above.

Basis:
Mortality
AM92 Ultimate
Rate of interest 4% per annum
Expenses
Nil
[11]
[Total 17]

END OF PAPER

CT5 A20117

## INSTITUTE AND FACULTY OF ACTUARIES

EXAMINERS REPORT
April 2011 examinations

## Subject CT5 Contingencies

Core Technical

Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.

T J Birse
Chairman of the Board of Examiners
July 2011

(a)
(b)
(c)

## Time selection because it is based on a period of three calendar years

Class selection applies only to male pensioners
Temporary initial selection as there are select rates

This question was generally done well. However some students did not supply different
selection types for each part and this was penalised.

l88 3534.054
=
= 0.366307
l65 9647.797
(l l ) (9238.134 8405.160)
= 70 75 =
= 0.084771
l60
9826.131

(a)

23 p65

(b)

10|5 q60

(c)
s65:10 =

(1 + i )10 a65:10
10 p65

10 p65

9, 647.797

) 9.456)

## = 1.48024 (13.666 0.67556 0.87120 9.456) / 0.87120

= 13.764
This question was generally done well for parts (a) and (b) but students struggled more with
part (c).

3
1

( Ia ) x = v t t p x dt + 2 v t t p x dt + 3 v t t p x dt + .......
0

Now vp x = e

.04

*e

1
.02

=e

.06

throughout.

Hence
( Ia ) x = (1 + 2e 0.06 + 3( e .06 )2 + 4( e .06 )3 + .........)a 1 at force of interest 6%
= (1/(1 e .06 ))2 ((1 e .06 ) / .06)
= 294.8662 0.970591
= 286.19
This question was not done well. The majority of students failed to realise that the increasing
function I was not continuous, although the payment is continuous. Instead most attempted

0

Page 2

## Schemes usually allow members to retire on grounds of ill-health and receive a

pension benefit after a minimum length of scheme service.
Benefits are usually related to salary at the date of ill-health retirement in similar ways
to age retirement benefits.
However, pensionable service is usually more generous than under age retirement
with years beyond those served in the scheme being credited to the member e.g. actual
pensionable service subject to a minimum of 20 years, or pensionable service that
would have been completed by normal retirement age.
A lump sum may be payable on retirement and a spouse pension on death after
retirement.

Other valid points were credited. Generally this bookwork question was done well.

## The Kolmogorov equations in this case are:

r
(+)t
t (aq ) x = e
t

d
(+)t
t (aq ) x = e
t
For the case where t = 1 the solution for the dependent probability of retirement is:
( aq) rx =

(1 e (+ ) )
+

## Hence the dependent probability of retirement is

0.08
(1 e (0.05+0.08) )
0.08 + 0.05
= 0.07502

(aq) rx =

## The formula for the independent probability of death is

qxd = 1 e
Hence the independent probability of death is:
qxd = 1 e 0.05 = 0.04877
Generally this question was completed satisfactorily by well prepared students.

Page 3

(i)

## The definition of the uniform distribution of deaths (UDD) is s qx = s.qx

(alternatively t px x +t is constant).

(ii)

We have
1.25 p65.5

## = (1 0.5 q65.5 ) = (1 (0.5q65 / (1 0.5q65 ))) by UDD

= (1 ((0.5 0.02447) / (1 0.5 0.02447)))
= 0.98761
0.5 p65.5

0.75 p66

= 0.97967

Hence
1.25 p65.5

= 0.03247

## Education influences the awareness of a healthy lifestyle, which reduces morbidity.

Education includes formal and informal processes, such as public health awareness
campaigns.
Shows in:

Increased income
Better diet
Increased exercise
Better health care
Reduced alcohol and tobacco consumption
Lower levels of illicit drug use
Safer sexual practices

Some effects are direct (e.g. drug use); some are indirect (e.g. exercise)

Students generally scored on a range of points but in most cases did not write enough of them
to gain all the marks.
Students who mentioned over indulgence risks for the better educated were given credit.

Page 4

## Subject CT5 (Contingencies Core Technical) Examiners Report, April 2011

Let b be the simple bonus rate (expressed as a percentage of the sum assured). Then
the equation of value at 4% p.a. interest is (where P = 3,212):

P(.975a[40]:25 + 0.025) = (100, 000 + 350) A[40] + 1, 000b( IA)[40] + 300 + 0.5 P
P(.975 15.887 + 0.025) =
(100, 000 + 350) (1.04 )

0.5

0.5

## 49,833.6179 = 23,579.5423 + 8,115.9564b + 1,906

24,348.0756
= 3.00
b=
8,115.9564
i.e. a simple bonus rate of 3% per annum

Generally done well although some students treated b as not vesting in the first year.

## Value of benefits using premium conversion

100,000 A52:50 = 100,000 (1.04)1/2 A52:50
= 100,000 (1.04)1/2 (1 (0.04 / 1.04) a52:50 )
= 101,980.4 (1 0.0384615 17.295)
= 34,143.89
Value of monthly premium of P
12 P (12)

52:50:5

(12) 5 l57:55
(12)
= 12 P 52:50
v
l52:50 57:55

(12)
52:50
= 52:50 11/ 24 = 17.295 0.458 = 16.837
(12)
57:55
= 57:55 11/ 24 = 15.558 0.458 = 15.100

v5 l57:55
= (0.82193 9,880.196 9,917.623) / (9,930.244 9,952.697)

l
52:50

= 0.81491
Hence 12 P (12)

52:50:5

## = 12 P(16.837 0.81491 15.100) = 54.3823P

Therefore:
P = 34,143.89 / 54.3823 = 627.85
There was an anomaly in this question in that it was not fully clear that the premium paying
period ceased on 1st death within the 5 year period. Even though the vast majority of students
who completed this question used the above solution a small minority used 12Pa5(12) i.e.
ignoring the joint life contingency. This was credited.

Page 5

## Subject CT5 (Contingencies Core Technical) Examiners Report, April 2011

None the less many students struggled with this question

10

## Expected present value is A [40]:15 where

1
A [40]:15 = A[40]:15
+ A[40]:115

## = A[40] v15 15 p [40] A55 + v15 15 p [40]

9,557.8179
9,557.8179

= 0.23041 0.55526
0.38950 + 0.55526
9,854.3036
9,854.3036

## = 0.23041 0.20977 + 0.53855

= 0.55919

Variance
= 2 A [40]:15 ( A [40]:15 )2
2

1
A [40]:15 = 2 A[40]:15
+ 2 A[40]:115

## = 2 A[40] (v 2 )15 15 p [40] 2 A55 + (v 2 )15 15 p [40]

9,557.8179
9,557.8179

= 0.06775 0.30832
0.17785 + 0.30832
9,854.3036
9,854.3036

= 0.31361

## So variance = 0.31361 0.559192 = 0.000917

Note answers are sensitive to number of decimal places used.
Question done well by well prepared students. Many students failed to realise that the
endowment function needed to be split into the term and pure endowment portions.

Page 6

## Subject CT5 (Contingencies Core Technical) Examiners Report, April 2011

11

Summary of assumptions:
Risk discount rate
Interest on investments
Interest on sterling provisions
Minimum death benefit

2,500.00
5.5%
4.25%
3.5%
10,000.00

325
74

Initial expense
Renewal expense
(i)

(ii)

## Allocation % (1st yr)

Allocation % (2nd yr +)
Man charge

40%
110%
0.5%
5.0%

Maturity benefit

105%

% prm
10.0%
2.5%

Total
575
136.5

x

qxd

qxs

61
62
63
64

0.006433
0.009696
0.011344
0.012716

0.06
0.06
0.06
0.06

(aq) dx

(aq) sx

(ap)

t 1 ( ap )

61
62
63
64

0.006240
0.009405
0.011004
0.012335

0.05981
0.05971
0.05966
0.05962

0.933953
0.930886
0.929337
0.928047

1.000000
0.933953
0.869404
0.807969

## value of units at start of year

alloc
B/O
interest
management charge
value of units at year end

yr 1

yr 2

yr 3

yr 4

0.00
1,000.00
50.00
40.37
4.95
985.42

985.42
2,750.00
137.50
152.91
18.75
3,732.08

3,732.08
2,750.00
137.50
269.65
33.07
6,581.15

6,581.15
2,750.00
137.50
390.73
47.92
9,536.46

Page 7

## Subject CT5 (Contingencies Core Technical) Examiners Report, April 2011

Non-unit fund (per policy at start of year)

yr 1

yr 2

yr 3

yr 4

expenses/commission
interest
man charge
extra death benefit
extra surrender benefit
extra maturity benefit
end of year cashflow

1,500.00
50.00
575.00
34.12
4.95
56.25
58.94
0.00
1,016.76

250.00
137.50
136.50
8.72
18.75
58.95
148.20
0.00
149.71

250.00
137.50
136.50
8.72
33.07
37.62
168.91
0.00
93.36

250.00
137.50
136.50
8.72
47.92
5.72
121.41
442.51
536.62

probability in force
discount factor

1
0.947867

0.933953
0.898452

0.869404
0.851614

0.807969
0.807217

2,213.16

1,952.79

1,720.19

(iii)

## expected p.v. of profit

419.03

expected p.v. of
profit
margin

2,500.00
8,386.15
5.00%

Credit was given to students who showed good understanding of the processes involved even
if the calculations were not correct. Generally well prepared students did this question quite
well.

12

(i)

12 Pa(12)

[40]:25

@ 4% = 186.996 P

where
(12)
a[40]:25
= a[40]:25

= 15.887
= 15.583

Page 8

11
1 25 p[40]v 25
24

11 8821.2612

0.37512
1
24 9854.3036

## Subject CT5 (Contingencies Core Technical) Examiners Report, April 2011

EPV of benefits:
75, 000(q[40]v 0.5 + q[40] (1 + b)v1.5 + ... +
1

24

q[40] (1 + b) 24 v 24.5 )

where b = 0.04
=

## 75, 000 (1 + i )0.5

75, 000 (1 + i )0.5
1
A[40] 25 p [40] v 25 A65 @ i /
A[40]:25
@ i/ =
(1 + b)
(1 + b)

## 75, 000 8821.2612

1
1 1
0.5
(1.04)
9854.3036

= 7709.6880

where
i/ =

1.04
1 = 0.00 i.e. i / = 0%
1+ b

## EPV of expenses (at 4% unless otherwise stated

(12)
(12)
@0%
= 0.5 12 P + 400 + 0.025 12 Pa[40]:25
0.025 12 Pa[40]:1
+ 75 a[40]:25
1

1
+300 A[40]:25

## = 6 P + 400 + 0.025 12 P 15.583 0.025 12 P 0.982025 + 75 23.27542

+300 0.05422
= 6 P + 400 + 4.6749 P 0.2946 P + 1745.6558 + 16.266
= 10.3803P + 2161.9218
where

11
1 p[40]v
[40]:1
24
11 9846.5384

= 1 1
0.96154 = 0.982025
24 9854.3036

a(12) = a[40]:1

@0%
1 =
a[40]:25

= 39.071

1
l[40]

(l

[40]+1

## + .... + l64 ) = e[40]

l64
e64
l[40]

8934.8771
17.421 = 23.27541
9854.3036

Page 9

## Subject CT5 (Contingencies Core Technical) Examiners Report, April 2011

l
1
1
= 1.040.5 A[40]:25
= 1.040.5 A[40]:25 v 25 65
A[40]:25
l[40]

8821.2612

= 0.05422
9854.3036

## Equation of value gives:

186.996 P = 7709.6880 + 10.3803P + 2161.9218
9871.6098
P=
= 55.89
176.6157
Gross prospective policy value at t = 23 (calculated at 4%) is given by:

(ii)

V prospective = 75, 000 (1.04) 23 v 0.5 [ q63 + (1.04) p63q64 v ] + 300v 0.5 [ q63 + p63q64v ] + 0.025 12 Pa(12)
63:2

+75 (1.04)

23

[1 + (1.04) p63v ]

12 Pa(12)
63:2

## = 184,853.66 0.98058 [ 0.011344 + (1.04) 0.988656 0.012716 0.96154]

+300 0.98058 [ 0.011344 + 0.988656 0.012716 0.96154] + 0.025 12 55.89 1.90629
+184.854 [1 + (1.04) 0.988656 0.96154] 12 55.89 1.90629

## where a(12) = a63:2

63:2

11
11
8821.2612
2 l65
1 v = 1.951 1 0.92456
= 1.90629
24
24
9037.3973
l63

## = 4,335.0628 + 6.8932 + 31.9628 + 367.6104 1, 278.5106

= 3, 463.02

This question was generally not done well especially part (ii). In part (i) although it was
commonly recognised that a resultant rate of interest of 0% emerged students did not often
seem to know how to progress from there.

13

(i)

The death strain at risk for a policy for year t + 1 (t = 0, 1, 2) is the excess of
the sum assured (i.e. the present value at time t + 1 of all benefits payable on
death during the year t + 1) over the end of year provision.
i.e. DSAR for year t + 1 = S t +1V
The expected death strain for year t + 1 (t = 0, 1, 2) is the amount that the
life insurance company expects to pay extra to the end of year provision for
the policy.
i.e. EDS for year t + 1 = q ( S t +1V )

Page 10

## Subject CT5 (Contingencies Core Technical) Examiners Report, April 2011

The actual death strain for year t + 1 (t = 0, 1, 2) is the observed value at
t+1 of the death strain random variable
i.e. ADS for year t + 1 = ( S t +1V ) if the life died in the year t to t+1
= 0 if the life survived to t + 1
Note: Full credit given if definition of death strain is given for a block of
policies rather than for a single policy as per above.
(ii)

(a)

## Annual premium for endowment assurance with 100,000 sum assured

given by:
P EA =

100, 000
100, 000
A35:25 =
0.38359 = 2,393.40
a35:25
16.027

Annual premium for term assurance with 200,000 sum assured given
by:
P

TA

1
200,000 A40:25

a40:25

1
where A40:25
= A40:25 v 25 25 p40

= 0.38907 0.37512
PTA =

8,821.2612
= 0.38907 0.33573 = 0.05334
9,856.2863

200,000 0.05334
= 671.62
15.884

## Reserves at the end of the 11th year:

for endowment assurance with 100,000 sum assured given by:
11V

EA

## = 100,000 0.58393 2,393.40 10.818

= 58,393.0 25,891.8 = 32,501.2
for term assurance with 200,000 sum assured given by:

Page 11

## Subject CT5 (Contingencies Core Technical) Examiners Report, April 2011

11V

TA

1
= 200, 000 A51:14
PTA a51:14

1
where A51:14
= A51:14 v14 14 p51

= 0.58884 0.57748

11V

TA

8,821.2612
= 0.58884 0.52583 = 0.06301
9, 687.7149

## Therefore, sums at risk are:

Endowment assurance: DSAR = 100,000 32,501.2 = 67,498.8
Term assurance:
(b)

## Mortality profit = EDS ADS

For endowment assurance

EDS = 19768 q45 67, 498.8 = 19768 0.001465 67, 498.8 = 1,954, 773.3
ADS = 36 67, 498.8 = 2, 429,956.8

## mortality profit = 475,183.5 (i.e. a loss)

For term assurance

## EDS = 9,855 q50 194,577.6 = 9,855 .002508 194,577.6 = 4,809, 246.1

ADS = 22 194,577.6 = 4, 280,707.2
mortality profit = 528,538.9
Hence, total mortality profit = 528,538.9 475,183.5 = 53,355.4
(c)

## Although there is an overall mortality profit in 2010, the actual number

of deaths for the endowment assurances is approximately 25% higher
than expected, which is a concern. Further investigation would be
required to determine reasons for poor mortality experience for the
endowment assurances, e.g. there may have been limited underwriting
requirements applied to this type of contract when they were written.

Generally (a) was done well. The most common error in (b) was to assume reserves at 10
years rather than 11. On the whole well prepared students coped with (b) well. Many
students did not attempt (c) or at best gave a somewhat sketchy answer.

Page 12

## INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION
4 October 2011 (am)

## Subject CT5 Contingencies

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1.

Enter all the candidate and examination details as requested on the front of your answer
booklet.

2.

You must not start writing your answers in the booklet until instructed to do so by the
supervisor.

3.

## Mark allocations are shown in brackets.

4.

Attempt all 14 questions, beginning your answer to each question on a separate sheet.

5.

## AT THE END OF THE EXAMINATION

question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

CT5 S2011

Calculate:
(a)

10|1 q[50]

(b)

10 p[60]+1
a(12)
[40]:20

(c)

Basis:
Mortality
Rate of interest

Calculate

0.5 q75.25

Basis:
Mortality

AM92
6% per annum

## using the assumption of a constant force of mortality.

AM92

[3]

In a special mortality table with a select period of one year, the following
relationships are true for all ages:
0.5 q[ x ]

= 0.25qx

0.5 q[ x ]+ 0.5

= 0.45qx

[3]

[3]

## A term assurance contract with a term of 20 years pays a sum assured of 1

immediately on death to a life now aged 30 exact.
Calculate the expected value and variance of this contract.
Basis:
Mortality
Rate of interest

AM92 Ultimate
4% per annum

(a)

(b)

[4]

## x = 0.02 for all x

y = 0.03 for all y
= 4% per annum

CT5 S20112

[5]

Explain why it is necessary to have different mortality tables for different classes of
lives.
[6]

A special joint life last survivor annuity of 10,000 per annum is payable
continuously in respect of a male and female life each aged 60 exact. Payments
commence on the first death and continue for 5 years after the second death.
Calculate the expected present value of this annuity.
Basis:
Mortality
PMA92C20 (male life), PFA92C20 (female life)
Rate of interest 4% per annum
Expenses
Nil

## The following data is extracted from a population census:

Age
2029
3039
4049
5064

[6]

All Professions
Population Deaths
120,000
178,000
156,000
123,000

256
458
502
600

Profession A
Population Deaths
12,500
15,000
16,000
14,000

30
40
50
60

(a)

Calculate the area comparability factor for Profession A using the data for All
Professions as the standard population.

(b)

Hence or otherwise derive the standardised mortality ratio and the indirectly
standardised mortality rate.
[6]

(a)

ELT15(Males)

(b)

## Ill-health retirement - with an independent decrement rate of 0.01 at age 50

exact increasing by 0.005 for each additional year of age (so the ill-health
independent decrement at age 53 exact is 0.025)

(c)

Age retirement - with an independent decrement rate of 0.2 at each age from
60 to 64 all exact.

Age retirements are assumed to take place on the attainment of the exact age, whilst
other decrements act uniformly across the year of age.
Calculate the probability that a member currently aged 59 exact will retire at age 62
exact.
[6]

CT5 S20113

10

(i)

Five years ago a with profits whole life assurance policy was sold to a life then
aged 30 exact.
The sum assured is 150,000 payable at the end of year of death and
compound method of adding bonuses to the policy is used as follows:

## and an additional bonus of 5% on all existing bonuses (excluding the

simple bonus relating to that policy year)

Assume that bonuses vest at the start of each policy year and that the actual
past bonus additions have followed the assumptions stated above.
Calculate the net premium policy value just before payment of the 6th
Basis:
Mortality
AM92 Select
Rate of interest 4% per annum
(b)

11

[5]

Suggest two reasons why a life insurance company might use the super
compound method of adding bonuses to with profits policies, as opposed to
the compound method.
[2]
[Total 7]

## A pension scheme provides a pension on retirement of 1% of final pensionable salary

for each completed year of pensionable service. On retirement due to ill-health,
pensionable service is calculated as service that would have been completed by the
normal retirement age of 65. Final pensionable salary is defined as the average salary
in the last three years before retirement.
Derive an expression, without using commutation functions, for the present value of
the benefits for a new member age 30 with salary of 20,000 in the year after entry to
the scheme. Define all symbols used.
[8]

CT5 S20114

12

(i)

[4]

## A four-year unit-linked policy issued by a life insurance company to a life aged 56

exact has the following profit vector:
(1525.89, 334.08, 292.05, 933.82)
(ii)

Determine the net present value of the profits of this policy, assuming that the
company sets up reserves in order to zeroise future negative expected cash
flows on the policy.
Basis:
Mortality
Rate of interest on non-unit fund cash flows
Risk discount rate

13

AM92 Ultimate
4.5% per annum
7.5% per annum

[5]
[Total 9]

A life insurance company issues a 3-year without profits endowment assurance policy
to a male life aged 57 exact for a sum assured of 15,000 payable on maturity or at
the end of the year of death if earlier. Premiums of 4,700 are payable annually in
advance throughout the term of the policy.
The office holds net premium reserves for these policies, calculated using AM92
Ultimate mortality and interest of 4% per annum.
Surrenders occur only at the end of a year immediately before a premium is paid. The
surrender value payable is 75% of total premiums paid on the contract at the time the
surrender value is payable. Assume that at the end of the first and second policy
years, 10% and 5% respectively of all policies still in force at that time then surrender.
The company uses the following assumptions in carrying out profit tests of this
contract:
Rate of interest on cash flows
and Reserves
Mortality
Initial expenses
Renewal expenses
Risk discount rate

5% per annum
AM92 Select
65 per annum on the second and subsequent
7% per annum

(i)

(ii)

## Calculate the internal rate of return for this contract.

[10]
[2]

The company weakens the reserving basis by assuming that net premium reserves for
these policies are now calculated using AM92 Ultimate mortality and interest of 6%
per annum.
(iii)

Calculate the revised net present value of profits and comment on your
[4]
[Total 16]

CT5 S20115

14

## On 1 January 2001, a life insurance company issued a number of 30-year endowment

assurance policies that pay 100,000 at maturity, or 50,000 at the end of the year of
earlier death to lives then aged 35 exact. Premiums are payable annually in advance.
The company uses the following basis for calculating premiums and reserves:
Mortality
Interest
Initial commission
Initial expenses
Renewal expenses

AM92 Select
4% per annum
50% of the premium payable in the first policy year
300 paid at policy commencement date
2.5% of each premium from the start of the second policy year

(i)

Write down the recursive relationship between the gross premium reserves at
successive durations of these policies, defining all symbols used.
[4]

(ii)

Show that the annual premium for each policy is approximately 1,803.

[4]

There were 385 policies in force on 1 January 2010. During 2010, there were three
actual deaths, actual interest earned by the company was 5% and expenses were as
expected.
(iii)

Calculate the profit or loss made by the company from both mortality and
interest in respect of these policies for the year 2010 based on the formula
stated in (i) above.
[10]
[Total 18]

END OF PAPER

CT5 S20116

## INSTITUTE AND FACULTY OF ACTUARIES

EXAMINERS REPORT
September 2011 examinations

## Subject CT5 Contingencies

Core Technical
Purpose of Examiners Reports
The Examiners Report is written by the Principal Examiner with the aim of helping
candidates, both those who are sitting the examination for the first time and who are using
past papers as a revision aid, and also those who have previously failed the subject. The
Examiners are charged by Council with examining the published syllabus. Although
Examiners are not required to examine the content of Core Reading. Notwithstanding that,
the questions set, and the following comments, will generally be based on Core Reading.
For numerical questions the Examiners preferred approach to the solution is reproduced in
this report. Other valid approaches are always given appropriate credit; where there is a
commonly used alternative approach, this is also noted in the report. For essay-style
questions, and particularly the open-ended questions in the later subjects, this report contains
all the points for which the Examiners awarded marks. This is much more than a model
solution it would be impossible to write down all the points in the report in the time allowed
for the question.

T J Birse
Chairman of the Board of Examiners
December 2011

## Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011

CT5 introduces the fundamental building blocks that stand behind all life insurance and
pensions actuarial work.
Credit is given to students who produce alternative viable numerical solutions. In the case of
descriptive answers credit is also given where appropriate to different valid points made
which do not appear in the solutions below.
In questions where definitions of symbols and then formulae are requested, a different
notation system produced by a student to that used by examiners is acceptable provided it is
used consistently, is relevant and is properly defined and used in the answer.
Comments on the September 2011 paper
The general performance was slightly worse than in April 2011 but well-prepared candidates
scored well across the whole paper. Questions that were done less well were 7, 9, 10, 11 and
14(iii) and here more commentary is given to students to assist with further revision.
Most of the short questions were very straightforward where an answer could be produced
quickly and this is where many successful candidates scored particularly well. Students
should note that for long questions a reasonable level of credit is given if they can describe
the right procedures although to score well reasonable accurate numerical calculation is
necessary.

Page 2

## Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011

d 60

= 74.5020

(a)

10|1 q[50]

(b)

10 p[60]+1

= l71

(c)

a(12)

= (a[40]:20 11/ 24 (1

[40];20

l[50]

l[60]+1

9, 706.0977

= 7,854.4508

= 0.00768

9, 209.6568

= 0.85285

v 20l60
))
l[40]

## = 12.000 11/ 24 (1 0.3118 9, 287.2164 / 9,854.3036)

= 11.676
Straightforward question generally done well.

We have:
1 p75

## = 6,589.9258 / 6,879.1673 = 0.95795

= e where is the constant force

## Hence = ln(0.95795) = 0.04296

75.75

Hence

0.04296dt
75.25
0.5 p75.25 = e

= e 0.02148 = 0.97875
Hence

0.5 q75.25

## = 1 0.5 p75.25 = 0.02125

Again done well. Credit was given to those students who jumped straight to the solution of
(1 ( 1 p75 )0.5 ) .

p[ x ]

## = (1 0.25qx ) *(1 0.45qx ) = (1 0.25(1 p x )) *(1 0.45(1 p x ))

= (0.75 + .25 px ) *(.55 + .45 px ) = 0.4125 + 0.475 p x + 0.1125 p x2

This question was done reasonably well but many students failed to make the connection in
line 1.

## The expected value is A

30:20

This equals
( A30 ( v 20 (l50 / l30 ) A50 )) (1.04)1/2
= (0.16023 (0.45639 (9,712.0728 / 9,925.2094) 0.32907)) 1.019804
= 0.01353
The variance equals
2 1
A30:20
2

( A1

30:20

)2

2
20 2
2
1
A30:20 = (( A30 ( v ) (l50 / l30 ) A50 )) (1.04)

= 0.008997

## Variance = 0.008997 0.013532 = 0.008814

This question was done reasonably well. The most common error was to forget to use
continuous functions which was penalised as one of the key attributes being tested was to see
if students could work out the 1.04 factor for the variance.

(a)

viTx if Tx Ty
Z =
if Tx > Ty
0
where i is the valuation rate of interest.
1

(b)

A x: y

= e .04t t p x +t dt
0

xy

## = e .04t e .02t e.03t (0.02)dt = 0.02 e.09t dt

= 0.02 / 0.09
= 0.22222
In part(a)many students did not appreciate what a random variable form was. Part (b) was
generally well done.
Part (a) comes directly from Core Reading but there is some debate about the situation
where Tx = Ty i.e .a simultaneous death where it could be argued either that Z =0 or is
undefined. The examiners decided to accept all these alternative situations.
Page 4

## When a life table is constructed it is assumed to reflect the mortality experience of

a homogeneous group of lives i.e. all the lives to whom the table applies follow
the same stochastic model of mortality represented by the rates in the table. This
means that the table can be used to model the mortality experience of a
homogeneous group of lives which is suspected to have a similar experience.

## If a life table is constructed for a heterogeneous group then the mortality

experience will depend on the exact mixture of lives with different experiences
that has been used to construct the table. Such a table could only be used to model
mortality in a group with the same mixture. It would have very restricted uses.

For this reason separate mortality tables are usually constructed for groups which
are expected to be heterogeneous. This can manifest itself as class selection e.g.
separate tables for males and females, whole life and term assurance
policyholders, annuitants and pensioners, or as time selection e.g. separate tables
for males in England and Wales in 198082 (ELT14) and 199092 (ELT15).

Sometimes only parts of the mortality experience are heterogeneous e.g. the
experience during the initial select period for life assurance policyholders, and the
remainder are homogeneous e.g. the experience after the end of the select period
for life assurance policyholders. In such cases the tables are separate (different)
during the select period, but combined after the end of the select period. In fact
there are separate (homogeneous) mortality tables for each age at selection, but
they are tabulated in an efficient (space saving) way.

Well prepared students answered this question well. However many did not get to the heart
of the homogeneity discussion and went off on tangents regarding various forms of selection.

## Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011

EPV is
10, 000(a60:60 a60:60 ) + 10, 000 a5 A60:60
f
m
a60:60 = a60
+ a60
a60:60 = (15.632 0.5) + (16.652 0.5) (14.090 0.5) = 17.694

## Ax: y = (1 ax: y ) = 1 ln(1.04) 17.694 = 0.30603

Therefore

(1 v5 )
0.30603
EPV = 10, 000 (17.694 (14.090 0.5)) + 10, 000

= 41,040 + 13,894
= 54,934
Many students struggled here with the second term in the equation in the 2nd line and did not
appreciate how to mix a continuous assurance factor with an annuity.

8
Age

2029
3039
4049
5064
Total
(a)

All professions
Population Deaths

120,000
178,000
156,000
123,000
577,000

256
458
502
600
1,816

12,500
15,000
16,000
14,000
57,500

26.667
38.595
51.487
68.293
185.042

1,816
185.042
= 0.978
577, 000 57,500

## Standardised mortality ratio = 180/185.042 = 0.973

Indirectly standardised mortality rate =

1,816
185.042
= 0.003062
577, 000
180

Page 6

30
40
50
60
180

## Total Expected deaths 185.042

Area comparability factor =

(b)

Population

Profession A
Deaths
Expected
deaths

## Age retirement can be ignored in constructing the dependent decrements.

The following rates are required:
Age

q xd

59
60
61

0.01243
0.01392
0.01560

qix
0.055
0.06
0.065

## The dependent decrements are calculated as:

(aq )x = qx (1 0.5qx )
Age

(aq) dx

(aq)ix

59
60
61

0.012088
0.013502
0.015093

0.054658
0.059582
0.064493

## Probability of reaching 60 = (1 0.012088 0.054658) = 0.933254

Probability of retiring at age 60 = 0.2 * 0.933254 = 0.186651
Probability of reaching 61 = 0.8 * 0.933254 * (1 0.013502-0.059582) = 0.692038
Probability of retiring at age 61 = 0.2 * 0.692038 = 0.138408
Probability of reaching 62 = 0.8 * 0.692038 * (1-0.015093 0.064493) = 0.509569
Probability of retiring at age 62 = 0.2 * 0.509569 = 0.101914
Overall required probability thus 10.19%
This question was not done well overall. Students struggled to follow through the logical
sequences. In fact this question can be solved with the same answer without using multiple
decrements and the few students who realised this were given credit.

10

(a)

Year

SA

b1

b2

0
1
2
3
4
5

150,000
150,000
150,000
150,000
150,000
150,000

3,750
3,750
3,750
3,750
3,750

187.50
384.38
591.09
808.15

3,750.00
7,687.50
11,821.88
16,162.97
20,721.12

## Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011

If net premium denoted by P then
P=

a[30]

## 150, 000 0.16011

= 1099.81
21.837

Therefore, net premium reserve at end of 5th policy year is given by:
5V

(b)

## = (150, 000 + 20, 721.12) A35 Pa35

= 170,721.12 0.19219 1,099.81 21.003
= 32,810.89 23,099.31 = 9,711.58
The sum assured and bonuses increase more slowly than under other
methods for the same ultimate benefit, enabling the office to retain
surplus for longer.
This method rewards longer standing policyholders and discourages
surrenders, relative to other methods.

This question was also done poorly overall. A very large number of students attempted to
construct a complex net premium from the existing bonus flow where the question was only
seeking the normal net premium method. Part (b) was done better.

11

## Retirement other than ill-health:

65 30 1
*
*
0.01 20,000 tz30 + t + 0.5r30 + t v t + 0.5a30
+ (65 30) z65r65v 35a65
/ s30l30
t
+
+
0.5

t =0

## 0.01 20,000 (65 30)

65 30 1

t =0

Page 8

*
z30+ t + 0.5i30+ t v t + 0.5a30
+ t + 0.5 / s30l30

Where
a*x

## ix , rx , lx are values from a multiple decrement table at age x

sx

is the salary index for age x where s x +1 / sx is the ratio of salary in the
year beginning age x + 1 to salary in the year beginning age x

zx

## (sx3 + sx2 + sx1)/3

Other schemes were accepted but overall very few students managed to derive a full answer
in this question.

12

(i)

## Allocated premiums are invested in a fund(s) chosen by the policyholder

which purchases a number of units within that fund(s)

Each investment fund is divided into units, which are priced regularly
(usually daily)

Policyholder receives the value of the units allocated to their own policy

## Bid/offer spread is used to help cover expenses and contribute towards

profit

Charges are made from the unit account periodically to cover expenses and
benefits (i.e. fund management charge) and may be varied after notice of
change given.

benefit)

contracts

## Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011

(ii)

To calculate the expected reserves at the end of each year we have (utilising
the end of year cashflow figures):
p58 = 0.99365 p57 = 0.99435 p56 = 0.99497

933.82
= 893.61
1.045

3V

2V

1V

## The revised cash flow for year 1 will become:

1,525.89 p56 1,394.13 = 138.77
Revised profit vector becomes (138.77, 0, 0, 0) and
Net present value of profits = 138.77/(1.075) = 129.09
This question was generally done well.

13

(i) Reserves required on the policy per unit sum assured are:
0V57:3

= 1

a57:3

1V57:3

= 1

a58:2

2V57:3

= 1

a59:1

a57:3

a57:3

a57:3

=0

= 1

1.955
= 0.318815
2.870

= 1

1.0
= 0.651568
2.870

## Multiple decrement table:

T

d
q[57]
+ t 1

s
q[57]
+ t 1

( aq ) d[57]+t 1

( aq ) s[57]+t 1

(ap)[57]+t 1

t 1 (ap)[57]

1
2
3

0.004171
0.006180
0.007140

0.10
0.05
0.00

0.004171
0.006180
0.007140

0.099583
0.049691
0.000000

0.896246
0.944129
0.992860

1.000000
0.896246
0.846172

d
s
Probability in force (ap)[56]+t 1 = (1 q[56]
+t 1 ) (1 q[56]+t 1 )

Page 10

## Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011

The calculations of the profit vector, profit signature and NPV are set out in
the table below:
Policy
Year

Expenses

1
2
3

4700
4700
4700

470.00
65.00
65.00

Policy year

Increase
in reserves

Interest
on reserves

1
2
3

4286.05
4445.24
9773.52

0.00
239.11
488.68

Interest

211.50
231.75
231.75
Profit
vector
258.15
217.60
128.95

Death
claim

Maturity
claim

62.57
92.70
107.10

0.00
0.00
14892.90

Surrender
claim
351.03
350.02
0.00

In force
cash flow
4027.91
4423.73
10133.25

Cum probability
of survival

Discount
factor

NPV
Profit

1.00000
0.89625
0.84617

0.93458
0.87344
0.81630

241.26
170.34
89.07

(ii)

## IRR is determined by solving the following equation for i:

258.15(1 + i ) 1 + 195.02(1 + i ) 2 + 109.11(1 + i ) 3 = 0

## If i = 0.12 then LHS of equation = 2.64

If i = 0.13 then LHS of equation = 0.10
If i = 0.14 then LHS of equation = 2.74
Therefore IRR is 13%
(iii)

The revised reserves required on the policy per unit sum assured are:
0V57:3

= 1

1V57:3 = 1

2V57:3 = 1

a57:3
a57:3
a58:2
a57:3
a59:1
a57:3

=0

= 1

1.937
= 0.312389
2.817

= 1

1.0
= 0.645012
2.817

## Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011

And the revised cashflows become:
Policy
year

1
2
3

Increase
in reserves

Interest
on reserves

Revised
Profit vector

Cum probability
of survival

Discount
factor

NPV
profit

4199.66
4448.78
9675.18

0.00
234.29
483.76

171.76
209.24
25.69

1.00000
0.89625
0.84617

0.93458
0.87344
0.81630

160.52
163.79
17.74

## Total NPV profit = 21.02

The NPV of profit increases slightly if the reserving basis is weakened, as a
result of the surplus emerging being brought forward and the fact that the risk
discount rate is greater than the interest rate being earned on reserves.
In general well prepared students made a reasonable attempt with this question. Credit was
given to students who showed they understood the processes even if not all the arithmetical
calculations were correct.
Note that it is possible to solve (ii) using a quadratic equation process.

14

(i)

Formula is
(t V + P e) (1 + i ) = qx +t S + px +t t +1V
Definitions:
tV

## = gross premium reserve at time t

qx +t / p x +t = probability that a life aged x+t dies within /survives one year on
P

Page 12

## Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011

(ii)
Let P be the annual premium. Then equation of value is:

1
Pa[35]:30 = 50, 000 A[35]:30
+ 100, 000v30 30 p[35] + 300 + 0.5 P + 0.025 P a[35]:30 1

where
1
A[35]:30
= A[35]:30 v30 30 p[35] = 0.32187 0.30832

8,821.2612
= 0.32187 0.27492 = 0.04695
9,892.9151

a[35]:30 = 17.6313
17.6313P = 50, 000 0.04695 + 100, 000 0.27492 + 300 + 0.5 P + 0.025P 16.6313

P=

30,139.5
= 1,803.08
16.71552

(iii)
The gross premium prospective reserve per policy at the end of 2009 is given by:

9V

PRO

where

## A144:21 = A44:21 v 21 21 p44 = 0.45258 0.43883

8,821.2612
= 0.45258 0.39443 = 0.05815
9,814.3359

a44:21 = 14.2329

## = 2,907.50 + 39, 443.00 25,021.48 = 17,329.02

The gross premium prospective reserve per policy at the end of 2010 is given by:
10 V

PRO

where

## A145:20 = A45:20 v 20 20 p45 = 0.46998 0.45639

8,821.2612
= 0.46998 0.41075 = 0.05923
9,801.3123

## Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011

a45:20 = 13.7805

## = 2,961.50 + 41,075.00 24, 226.16 = 19,810.34

Combined mortality and interest profit =

## 385 (17,329.02 + 0.975 1,803.08 ) 1.05 3 50, 000 (385 3) 19,810.34

= 7, 715,929.05 150, 000 7,567,549.88
= 1, 620.83
i.e. a combined mortality and interest loss of 1,620.83 which can be split between mortality
profit and interest profit separately as follows:

## DSAR = 50, 000 19,810.34 = 30,189.66

EDS = 385 q44 DSAR = 385 0.001327 30,189.66 = 15, 423.75
ADS = 3 DSAR = 3 30,189.66 = 90,568.98
Therefore
Mortality profit = EDS ADS = 15,423.75 90,568.98 = 75,145.23 (i.e. a mortality loss)
Interest profit = 385 (17,329.02 + 0.975 1,803.08) (0.05 0.04) = 73,489.04
Alternatively: Interest profit = 75,145.23 1,620.83 = 73,524.40 (the small discrepancy
with the figure for interest profit above is due to figures being used from the Actuarial
Tables with only a limited number of decimal places)
Part (i) and (ii) were done well. In part (iii) most well prepared students were able to derive
the mortality profit but most struggled with the interest portion.
If a student got the combined total correct but then did not split up the content it was decided
to give full credit.

Page 14

## INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION
23 April 2012 (am)

## Subject CT5 Contingencies

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1.

Enter all the candidate and examination details as requested on the front of your answer
booklet.

2.

You must not start writing your answers in the booklet until instructed to do so by the
supervisor.

3.

## Mark allocations are shown in brackets.

4.

Attempt all 15 questions, beginning your answer to each question on a separate sheet.

5.

## AT THE END OF THE EXAMINATION

question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

CT5 A2012

(a)

Define

4 5 q[60]+1

in words.

(b)

## Calculate its value.

Basis:
Mortality

AM92

[3]

Under a policy issued by a life insurance company, the death benefit payable at the
end of year of death is a return of premiums paid without interest. A level premium
of 3,000 is payable annually in advance throughout the term of the policy.
For a policy in force at the start of the 12th policy year, you are given the following
information:
Reserve at the start of the policy year
Reserve at the end of the policy year per survivor
Probability of death during the policy year
Expenses incurred at the start of the policy year
Rate of interest earned

25,130
28,950
0.03
90
4% per annum

Reserves given above are immediately before payment of the premium due.
Calculate the profit/loss expected to emerge at the end of the 12th policy year per
policy in force at the start of that year.

[3]

Calculate:
(a)

a50:15

(b)

1
( IA)50:15

Basis:
Mortality
Rate of interest

AM92
6% per annum

[4]

## A joint life assurance contract provides a death benefit of 100,000 payable

immediately on the second death of two lives, a male life currently aged 60 exact and
a female life currently aged 55 exact.
Calculate the expected present value of the contract.
Basis:
Mortality
Rate of interest
Expenses

4% per annum
Nil
[4]

CT5 A20122

## A 10-year unit-linked policy has the following profit vector:

(40, 12, 6, 1, 5, 4, 8, 20, 25, 30)
Determine the revised profit vector if reserves are set up to zeroise future negative
cash flows on the following basis:
Mortality
Interest

2.5% per annum
[4]

(a)

## Calculate the constant force of mortality applicable to a life aged between 67

and 68 exact.

(b)

Calculate the value of 0.5 q67.25 using the assumption of a constant force of
mortality and the value derived in (a) above.
Basis: AM92 Ultimate

[4]

Describe the benefits typically provided by a salary-related pension scheme for active
members on age retirement.
[6]

## Explain the impact of occupation on mortality and morbidity.

(i)

List the main categories of expenses incurred by life insurance companies. [2]

(ii)

Give one example of each category in part (i) and indicate the manner in
which it is usually allowed for in the calculation of premiums.
[4]
[Total 6]

10

[6]

An insurance company writes policies that provides benefits of 1,000 in the event of
becoming disabled due to accident and 10,000 on death.
(a)
(b)

## Construct a multiple state transition model for these policies.

Give a formula for the expected present value of the benefits.
[6]

CT5 A20123

11

(i)

directly standardised mortality rates as the comparison measure of mortality in
two or more different populations
[4]
You are given the following data in respect of a sub-population:
Age

Population

50
55
60

100,000
95,000
80,000

(ii)

12

1,250

## Calculate the Standardised Mortality Ratio using ELT15 (Males) as the

mortality rate for the standard population.
[3]
[Total 7]

## An endowment assurance contract with a term of 10 years pays a sum assured of

100,000 immediately on death and a sum of 50,000 on survival for 10 years.
Calculate the expected present value and variance of this contract.
Basis:
Mortality
Rate of interest

13

x = 0.03 throughout
5% per annum

[8]

A life insurance company issues a 40-year with profit endowment assurance policy to
a life aged 20 exact. The sum assured of 85,000 plus declared reversionary bonuses
is payable on survival to the end of the term or immediately on death if earlier.
The company assumes that future annual bonuses will be declared at a rate of
1.92308% of the sum assured, compounded and vesting at the end of each policy year
(i.e. the death benefit does not include any bonus relating to the policy year of death).
Calculate the monthly premium payable in advance throughout the term of the policy.
Basis:
Mortality
Interest
Initial commission
Initial expenses
Renewal commission
Renewal expenses

CT5 A20124

AM92 Select
6% per annum
480% of the first monthly premium
325
2.5% of each monthly premium excluding the first
75 per annum at the start of the second and subsequent
policy years. The renewal expense is assumed to increase
by 5 per annum from the start of the third policy year.
[10]

14

A life insurance company issues 20-year decreasing term assurance policies to single
lives aged 40 exact. The death benefit, which is payable at the end of the year of
death, is 200,000 in the first policy year, 190,000 in the second policy year
thereafter reducing by 10,000 each year until the benefit is 10,000 in the twentieth
and final policy year. Premiums on the policies are payable annually in advance for
20 years or until earlier death.
The company calculates its reserves on a net premium basis and negative reserves are
permitted.
(i)

Show that the annual net premium for each policy is approximately equal to
204 using the basis below.
[4]

625 policies were in force at the start of the 10th policy year and 3 policyholders died
during that policy year.
(ii)

Calculate the mortality profit or loss to the life insurance company during the
10th policy year using the basis below.
[6]

(iii)

## Comment briefly on the results obtained in part (ii) above.

[2]

Basis:
Mortality
Interest
Expenses

AM92 Ultimate
4% per annum
Nil
[Total 12]

CT5 A20125

15

A life insurance company issues a three-year term assurance policy to a male life aged
57 exact under which level premiums are payable annually in advance throughout the
term of the policy or until earlier death. The sum assured is 150,000 payable at the
end of year of death.
The company uses the following assumptions to calculate the premium for this policy:
Rate of interest on cash flows
Mortality
Initial expenses
Renewal expenses
Initial commission
Renewal commission
Risk discount rate

6% per annum
AM92 Select
350
50 per annum on the second and third premium
dates
2.5% of the second and third years premiums
6% per annum

(i)

Write down the gross future loss random variable at the outset of the policy.
[5]

(ii)

Calculate the office premium using assurance and annuity functions, setting
the expected value of the gross future loss random variable to zero.
[4]

(iii)

Derive the office premium using a discounted cash flow projection, assuming
no withdrawals and using the same profit criterion as in part (ii).
[6]

(iv)

(a)

## setting up reserves within the calculation of part (iii).

(b)

having set up the reserves in part (a), increasing the risk discount rate
to 8% per annum.
[2]
[Total 17]

END OF PAPER

CT5 A20126

## INSTITUTE AND FACULTY OF ACTUARIES

EXAMINERS REPORT
April 2012 examinations

## Subject CT5 Contingencies

Core Technical

Introduction
The Examiners Report is written by the Principal Examiner with the aim of helping
candidates, both those who are sitting the examination for the first time and who are using
past papers as a revision aid, and also those who have previously failed the subject. The
Examiners are charged by Council with examining the published syllabus. Although
Examiners are not required to examine the content of Core Reading. Notwithstanding that,
the questions set, and the following comments, will generally be based on Core Reading.
For numerical questions the Examiners preferred approach to the solution is reproduced in
this report. Other valid approaches are always given appropriate credit; where there is a
commonly used alternative approach, this is also noted in the report. For essay-style
questions, and particularly the open-ended questions in the later subjects, this report contains
all the points for which the Examiners awarded marks. This is much more than a model
solution it would be impossible to write down all the points in the report in the time allowed
for the question.
T J Birse
Chairman of the Board of Examiners
July 2012

## General comments on Subject CT5

CT5 introduces the fundamental building blocks that stand behind all life insurance and
pensions actuarial work.
Credit is given to students who produce alternative viable numerical solutions. In the case of
descriptive answers credit is also given where appropriate to different valid points made
which do not appear in the solutions below.
In questions where definitions of symbols and then formulae are requested, a different
notation system produced by a student to that used by examiners is acceptable provided it is
used consistently, is relevant and is properly defined and used in the answer.
Comments on the April 2012 paper
The general performance was better this session than in recent diets and many students scored
well with a very pleasing increase in the number passing. Questions that were done less well
were 2, 10, 12, 13 and 15(i) and (iii) and here more commentary is given to students to assist
with further revision.
Most of the short questions were very straightforward where an answer could be produced
quickly and this is where many successful candidates scored particularly well. Students
should note that for long questions a reasonable level of credit is given if they can describe
the right procedures although to score well reasonable accurate numerical calculation is
necessary.

Page 2

## Subject CT5 (Contingencies) April 2012 Examiners Report

(a)

4|5 q[60]+1 is the probability that a life now aged 61 exact who entered the
selection period 1 year ago will die between the ages of 65 and 70 both exact

(b)

= 0.0833

## The death benefit in year 12 is 36,000

Profit emerging per policy in force at the start of the year is:

## (11V + P e) (1 + i ) (qx +t S ) px +t 12V

= (25,130 + 3, 000 90) 1.04 36, 000 0.03 (1 0.03) 28,950 = 0.10
This question overall caused problems and students sometimes had only a vague recall of the
iterative formula in line 3. The most common error was to forget expenses and the survival
factor before the closing reserve. It was also not on many occasions appreciated that the
accumulation minus the benefit costs gave the profit.

(a)

l 65
a 50:15 = a 50 v15
( a 65)
l
50
= (14.044 1) 0.41727

8,821.2612
(10.569 1)
9, 712.0728

= 9.417

(b)

( IA) 1

50:15

l
= ( IA)50 v15 65 (( IA)65 + 15 A65 )
l 50
8,821.2612
= 4.84555 0.41727
(5.50985 + 15 0.40177)
9,712.0728
= 0.47329

In (a) a surprising number of students thought that the required function could be derived
from the a due function for the same term minus 1 which is, of course, wholly incorrect.
Otherwise the question was generally well done.

Page 3

## Subject CT5 (Contingencies) April 2012 Examiners Report

JJJJJK where 60 relates to the male life and 55 the female life.
The value is 100000A60:55
JJJJJK = 100000 ( A + A A
100000 A60:55
60
55
60:55 )

## = 100000 (1 ln(1.04)(a60 + a55 a60:55 ))

= 100000 (1 ln(1.04)([a60 1 / 2] + [a55 1 / 2] [a60:55 1 / 2]))
= 100000 (1 0.039221 (15.632 + 18.210 14.756 0.5))
= 27104

Generally well done. Other methods such as multiplying non continuous functions by
(1.04)1/2 to obtain the continuous one were quite acceptable.

## The reserves required at the beginning of policy years 6, 4, 3 and 2 are:

4
= 3.902
1.025
1
= 0.976
3V =
1.025
1
(6 + .995 3V ) = 6.801
2V =
1.025
1
(12 + .995 2V ) = 18.309
1V =
1.025

5V

## Revised cash flow in policy year 5 = 5 0.995 5V = 1.118

Revised cash flow in policy year 1 = 40 0.995 1V = 58.218
=> revised profit vector: (58.22, 0, 0, 0, 1.12, 0, 8, 20, 25, 30)
Generally well done by well prepared students who were able to recall the techniques
involved.

Page 4

(a)

p67 = exp(

68
67

= 0.017985
(b)

## Using the constant force assumption:

0.5 q 67.25 = 1 0.5 p 67.25 = 1 exp(

67.75

67.25 dx)

## = 1 exp( 0.5 ) = 1 exp( 0.5 0.017985)

= 0.008952
Generally well done. However some students ignored the instruction to use (a) to get (b)
choosing the more direct route. The examiners penalised this approach, although some
credit was given.

## Pension schemes usually have a fixed Normal Pension Age (NPA).

Age retirement benefits may be provided on early or late retirement.
Pension usually depends on pensionable service at retirement, as defined in the
scheme rules, e.g. complete years of membership.
Pension for each year of service is usually related to pensionable salary, for example
1/80ths of pensionable salary for each year of service. 1/80 is described as the accrual
rate.
Pensionable salary can be defined as:
1. Salary at retirement (final salary)
2. Annual salary averaged over a few years before retirement (final average salary)
3. Annual salary averaged the whole of service (career average salary)
Pensions are commonly increased in payment to offset the effect of inflation.
Some benefit may be in the form of cash, sometimes by converting pension to cash.
There can be a spouses pension for married pensioners which is often a percentage of
the main pension on the members prior death.
Pensions may also be paid for an initial guarantee period like 5 years.

Other relevant comments were credited. No credit was given for any discussion on ill-health
retirement as this was not required from the question.
Many students scored reasonable marks.

Page 5

## Subject CT5 (Contingencies) April 2012 Examiners Report

Occupation can have several direct and indirect effects on mortality and morbidity.
Occupation determines a persons environment for 40 or more hours each week. The
environment may be rural or urban, the occupation may involve exposure to harmful
substances e.g. chemicals, or to potentially dangerous situations e.g. working at
heights. Much of this is moderated by health and safety at work regulations.
Some occupations are more healthy by their very nature e.g. bus drivers have a
sedentary and stressful occupation while bus conductors are more active and less
stressed. Some work environments e.g. publicans, give exposure to a less healthy
lifestyle.
Some occupations by their very nature attract more healthy or unhealthy workers.
This may be accentuated by health checks made on appointment or by the need to
pass regular health checks e.g. airline pilots. However, this effect can be produced
without formal checks, e.g. former miners who have left the mining industry as a
result of ill-health and then chosen to sell newspapers. This will inflate the mortality
rates of newspaper sellers.
A persons occupation largely determines their income, and this permits them to adopt
a particular lifestyle e.g. content and pattern of diet, quality of housing. This effect
can be positive and negative e.g. over indulgence.

Generally well done and credit was given for any other relevant points.

(i)

Initial Expense
Renewal Expense
Claim Expense

(ii)

Initial Expense
Underwriting (allowed for on a per policy basis although medical expenses
might be sum assured related) or;
Processing proposal and issuing policy (allowed for on a per policy basis) or;
Commission (allowed for directly and usually premium related) or;
Marketing (allowed for on a per policy basis on estimated volumes)
Renewal Expense
Administration (allowed for on a per policy per annum basis with allowance
for inflation) or;
Commission (allowed for directly and usually premium related) or;
Investment Expense (charged as a deduction from investment funds).
Claim Expense
Calculation and payment of benefit (allowed for on a per policy per annum
basis with allowance for inflation)

Page 6

## Subject CT5 (Contingencies) April 2012 Examiners Report

Central services e.g. premises, IT, legal (allowed for on a per policy per
annum basis with allowance for inflation)

Many students did not give a full answer referring only to direct and indirect expenses for
which only partial credit was given, Also many did not give the full number of distinctly
different examples. Other relevant examples were credited however.

10

x

a = able

i = disabled
x

0

## Value of disablement benefit = 1, 000 et ( t pxaa . x +t )dt

0

Generally the diagram was completed satisfactorily. Many students took the view that
returning to the able state from the disabled one was impossible and thus omitted the return
arrow. This was accepted so long as the assumptions were stated.
The resultant formulae were, however, on the whole poorly done.

11

(i)

## Crude Mortality Rate

Advantage do not need population and deaths split by age
Disadvantage differences in age structure between populations will be
confounded
Directly Standardised Mortality Rate
Advantage only reflects differences in mortality rates

Page 7

population
(ii)

## SMR = actual deaths / expected deaths

Expected deaths = 100000*0.00464+95000*0.00797+80000*0.01392 = 2335
SMR = 1250 / 2335 = 0.535

A straightforward question generally done well by well prepared students. Some students

12

1
x :n

Ax1:n =

10
0

## exp(( ln(1.05) .03)t ) .03dt

= 0.03
=
1
x:n

10
0

10

exp( 0.07879t )
exp( 0.07879t )dt = 0.03

0.07879

0.03
[1 exp( 0.7879)] =0.20759
0.07879

= exp(0.7879) = 0.45480

## The expected value is thus 100000 0.20759 + 50000 0.45480 = 43499

For the variance the rate used is (1.05)21=10.25% and ln(1.1025)=0.09758.
Hence:
2 1
Ax:n

= 0.03
=

1
x:n

10
0

10

exp(0.12758t )
exp(0.12758t )dt = 0.03

0.12758

0.03
[1 exp(1.2758)] =0.16949
0.12758

= exp(1.2758) = 0.27921

## The variance is thus (100000 ) 0.16949 + ( 50000 ) 0.27921 (43499)2 = (22378)2

2

The part relating to the expected value was generally done well. However by contrast the
part relating to the variance was done poorly. Many students failed to realise that the
integration process was the same as for the expected value with the exception of building in
the 10.25% interest rate.

Page 8

13

## Let P be the monthly premium. Then:

12 Pa(12)

[20]:40

@ 6% = 184.6092 P

where
11
1 v 40 40 p[20] )
(
24
11
9287.2164
= 15.801 1 0.09722
= 15.801 0.4169 = 15.3841
24
9980.2432

(12)
a[20]:40
= a[20]:40

EPV of benefits:

1

39

## q[20] (1 + b)39 v39.5 + (1 + b) 40 40 p[20]v 40

where b = 0.0192308
= 85, 000

(1.06)0.5
q[20] (1 + b)v + q[20] (1 + b) 2 v 2 + ... + q[20] (1 + b) 40 v 40
1
39
(1 + b)
+85, 000(1 + b) 40 v 40 40 p[20]

85, 000
1
(1.06)0.5 A[20]:40
@ i + 85, 000v 40 40 p[20] @ i
(1 + b)

where
i =

and

1.06
1 = 0.04
1+ b

1
A[20]:40
@ i = A[20]:40 v 40 40 p[20]

= 0.21746 0.20829

9287.2164
= 0.21746 0.19383 = 0.02363
9980.2432

EPV of benefits

## 85, 000 (1.06)0.5

=
0.02363 + 85, 000 0.19383
(1 + b)
= 2, 028.911 + 16, 475.550 = 18, 504.461

Page 9

## Subject CT5 (Contingencies) April 2012 Examiners Report

EPV of expenses
(12)
= 4.8P + 325 + 0.025 12 Pa[20]:40

## = 9.3902 P + 325 + 65 14.801 + 5 208.366 = 9.3902 P + 2, 328.895

where
( Ia)[20]:40 = ( Ia)[20] v 40 40 p[20] 40a60 + ( Ia)60
= 262.666 0.09722

9287.2164
[ 40 11.891 + 113.516]
9980.2432

## = 262.666 53.300 = 209.366

Equation of value gives

## 184.6092 P = 18,504.461 + 9.3902 P + 2,328.895

P=

20,833.356
= 118.90
175.219

The difficult part of this question was related to the EPV of Expenses and most students failed
to complete this complex part. The rest of the question was however generally reasonably
done by well prepared students.

14

(i)

Annual net premium for the decreasing term assurance is given by:

P =

1
210, 000 A40:20
10, 000( IA)140:20

a40:20

1
= A40:20 v 20 20 p40
where A40:20

= 0.46433 0.45639

and

9287.2164
= 0.46433 0.43004 = 0.03429
9856.2863

## ( IA)140:20 = ( IA)40 v 20 20 p40 [ 20 A60 + ( IA)60 ]

= 7.95699 0.43004 [ 20 0.45640 + 8.36234 ] = 0.43544

Page 10

P =

(ii)

= 204.39
13.927

## Reserve at the end of the 10th policy year given by:

10V

1
= 110, 000 A50:10
10, 000( IA)150:10 P a50:10

where
1
A50:10
= A50:10 v10 10 p50

= 0.68024 0.67556

9287.2164
= 0.68024 0.64601 = 0.03423
9712.0728

and

## ( IA)150:10 = ( IA)50 v10 10 p50 [10 A60 + ( IA)60 ]

= 8.55929 0.64601 [10 0.45640 + 8.36234 ] = 0.20875
10V

## = 110, 000 0.03423 10, 000 0.20875 204.39 8.314

= 3, 765.30 2, 087.50 1, 699.30 = 21.50

Therefore, sum at risk per policy in the 10th policy year is:
DSAR = 110,000 (21.50 ) = 110,021.50

EDS = 625 q49 110, 021.50 = 625 0.002241110, 021.50 = 154, 098.86
ADS = 3 110, 021.50 = 330, 064.50
i.e. mortality profit = 175,965.36 (i.e. a loss)

Page 11

## Subject CT5 (Contingencies) April 2012 Examiners Report

(iii)

The death strain at risk per policy in the 10th policy year for this decreasing
term assurance is very large (approximately equal to the sum assured payable
in the event of death).
The actual number of deaths during the 10th policy year (at 3) is approximately
double that expected (at 1.4) which accounts for the mortality loss.
However, a mortality experience investigation would need to consider a longer
time period and ideally, a larger number of policies to determine whether
actual mortality experience is heavier than expected.

Question generally done well by well prepared student. This was a straightforward question
of its type.

15

(i)

150, 000v

K[57] +1

+ 350 + 50aK

[57]

P(0.975aK

[57] +1)

(ii)

## E (Gross future loss random variable) = 0

1
150, 000 A[57]:3
+ 350 + 50 a[57]:3 1 = P 0.975a[57]:3 0.125

## where 1[57]:3 = [57]:3 v 3 3 p[57] = 0.84036 0.83962

9287.2164
= 0.84036 0.82502 = 0.01534
9451.5938

## and a[57]:3 = 2.820

150, 000 0.01534 + 350 + 50 1.820 = 2.6245 P
P=

= 1, 044.77
2.6245
(iii)

Mortality table:
x
57
58
59

Page 12

t
1
2
3

q[ x ]+t 1

p[ x]+t 1

t 1 p[ x ]

0.004171
0.006180
0.007140

0.995829
0.993820
0.992860

1.000000
0.995829
0.989675

## Subject CT5 (Contingencies) April 2012 Examiners Report

Cash flows (per policy at start of year) assuming annual premium is denoted
by P:
Year
Expenses
Interest
Claim
Profit vector
Cumulative probability
of survival
Profit signature
Discount factor
NPV of profit

1
P
0.15P + 350
0.051P 21
625.65
0.901P 996.65

2
P
0.025P + 50
0.0585P 3
927.00
1.0335P980.00

3
P
0.025P + 50
0.0585P 3
1071.00
1.0335P1124.00

1.000000
0.9010P 996.650
0.94340
0.85P 940.240

0.995829
1.0292P 975.912
0.890000
0.9160P 868.562

0.989675
1.0228P 1112.395
0.83962
0.8588P 933.989

Therefore:
3

## NPV = 0 =2.6248P 2742.791 P =

1

2742.791
= 1, 044.95
2.6248

which is consistent with the premium calculated in (ii) above (allowing for
rounding)
(iv)

(a)

profit is deferred but as the earned interest rate is equal to the risk
discount rate, there is no change to the NPV or premium

(b)

profit is deferred and because the risk discount rate is greater than the
earned interest rate, NPV falls. Therefore, the premium would need to
be increased to satisfy the same profit criterion.

Most students struggled with part (i) but well prepared ones completed parts (ii) and (iv)
satisfactorily. Part (iii) caused students great difficulties as often occurs with this approach
and many even failed to realise that the answers to (ii) and (iii) should numerically be the
same within rounding.

Page 13

## INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION
2 October 2012 (am)

## Subject CT5 Contingencies

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1.

Enter all the candidate and examination details as requested on the front of your answer
booklet.

2.

You must not start writing your answers in the booklet until instructed to do so by the
supervisor.

3.

## Mark allocations are shown in brackets.

4.

Attempt all 15 questions, beginning your answer to each question on a separate sheet.

5.

## AT THE END OF THE EXAMINATION

question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

CT5 S2012

## Institute and Faculty of Actuaries

Calculate:

(a)

12 p43

(b)

10|5 q55

(c)

a45:10

Basis:
Mortality
Rate of interest

AM92
6% per annum

[3]

Give three different forms of selection that would be expected in a group of lives
purchasing immediate annuities with an example of each.
[3]

[4]

Basis:
Mortality

ELT15 (Females)

[4]

s Exc,t s mx,t
x

Exc,t s mx,t
x

Exc,t

Exc,t
x

(a)

(b)

## Explain what is measured by the Area Comparability Factor by considering

the ratio of the numerator to the denominator.
[4]

A life insurance company issues a with profit whole life assurance policy to a life
aged 40 exact, under which the sum assured S and any attaching bonuses, are payable
are payable annually in advance ceasing at exact age 85 or on earlier death.
Write down an expression for the net future loss random variable at outset for this
policy defining all symbols that are used.
[4]

CT5 S20122

On 1 January 2007, a life insurance company sold a large number of 30-year pure
endowment policies to lives then aged 35 exact. The sum assured under each policy
throughout the term of the policy.
There were 3521 pure endowment policies still in force on 1 January 2011 and 8
policyholders died during 2011.
Calculate the total mortality profit or loss to the life insurance company during 2011
assuming the company calculates net premium reserves on the following basis:
Mortality
Interest
Expenses

AM92 Select
4% per annum
Nil
[4]

Examine the column of dx shown in the English Life Table No. 15 (Males) in the
Formulae and Tables for Examinations (Pages 6869).
Describe the key characteristics of this mortality table using the data to illustrate your
points.
[6]

(i)

## Explain what is meant by the following in the context of life insurance

policies:
(a)
(b)

(ii)

10

[4]

State the conditions necessary for gross premium prospective and gross
premium retrospective reserves to be equal.
[3]
[Total 7]

## A pension scheme provides a lump sum benefit to members on reaching retirement at

age 65 equal to one months pensionable salary for each complete year of service.
Pensionable salary is defined as average annual salary in the last two years before
retirement.
Calculate the cost of this benefit as a percentage of salary for a new member of the
scheme aged 35 exact, with salary in the next year of 20,000.
Basis:
Pension Scheme tables in the Formulae and Tables for Examinations
Interest 4% per annum
[8]

CT5 S20123

11

A special joint life annuity of 500 per week is payable in arrear in respect of a male
life aged 65 exact and a female life aged 62 exact. The annuity has the following
features:

The annuity is guaranteed in any event for the first 5 years at the level of 500 per
week.

At the end of the guarantee period if both lives are still surviving the annuity
continues at the same level until one life dies at which time it reduces to twothirds of the initial level and continues at this reduced level until the second life
dies.

At the end of the guarantee period if only one life has survived the annuity
reduces to two-thirds of the initial level and continues at this reduced level until
the second life dies.

At the end of the guarantee period if both lives have previously died then the
annuity ceases.

Basis:
Mortality
Rate of interest
Expenses

12

## PMA92C20 (male life), PFA92C20 (female life)

4% per annum
Nil

[8]

A life insurance company issues a special endowment assurance policy for a 25 year
term to two lives x and y. Under this policy, a sum assured of 100,000 is paid
immediately on the second death within the 25 year term. At the end of 25 years a
sum of 50,000 is paid to each survivor.
Calculate the annual premium paid continuously under this policy assuming this is
paid throughout the term or until the second death if earlier.
Basis:
Mortality

## Life x: x = 0.02 for all x

Life y: y = 0.03 for all y

Force of interest

5% per annum

Expenses

Nil

CT5 S20124

[10]

13

A life insurance company issues a with profit whole life assurance policy to a life
aged 55 exact. The sum assured is 75,000 together with any attaching bonuses and
is payable immediately on death. Level premiums are payable monthly in advance
ceasing on the policyholders death or on reaching age 85 if earlier.
Simple annual bonuses are added at the end of each policy year (i.e. the death benefit
does not include any bonus relating to the policy year of death).
The company calculates the premium on the following basis:
Mortality

AM92 Select

Interest

4% per annum

Expenses
Initial
Renewal
Claim
Commission
Initial
Renewal
Bonuses

275
65 at the start of the second and subsequent policy years and
payable until death
200 on death
75% of the total premium payable in the first policy year
2.5% of the second and subsequent monthly premiums
Simple bonus of 2.0% of basic sum assured per annum

(i)

## Calculate the monthly premium for this policy.

[6]

(ii)

Calculate the gross prospective policy value at the end of the 30th policy year
given that the total actual past bonus additions to the policy have followed the
assumptions stated in the premium basis above (including the bonus just
vested).

Mortality

AM92 Ultimate

Interest

4% per annum

Expenses
Renewal
Claim

250 on death

Commission
Renewal

Bonuses

## Simple bonus of 2.5% of basic sum assured per annum

[4]
[Total 10]

CT5 S20125

14

A life insurance company issues a four-year policy to a male life aged 30 exact that
offers the following benefits:

On death during the term of the policy or on survival to the end of the term, a sum
of 60,000.

On redundancy during the term of the policy, a return of 100% of total premiums
paid.

On surrender during the term of the policy, a return of 50% of total premiums
paid.

Premiums of 14,000 are payable annually in advance throughout the term of the
policy or until earlier claim. The death, surrender and redundancy benefits are
payable immediately on claim. The contract ceases on payment of any claim.
The company uses the following basis to profit test this contract:
Interest earned on cash flows
Expenses
Reserves

3% per annum
Ignore

The company has also calculated the following dependent rates of mortality, surrender
and redundancy which are used to profit test this contract:
Year t

d
(aq )[30]
+t 1

s
(aq)30
+t 1

r
(aq)30
+t 1

1
2
3
4

.000447
.000548
.000602
.000636

.098727
.049361
.024680
0

.023744
.024368
.024680
0

Calculate the expected profit margin to the company on this policy using a risk
discount rate of 5% per annum.

15

[10]

## A life insurance company issues a three-year unit-linked endowment assurance policy

to a male life aged 45 exact. The main features of the contract are:

## 3,000 per annum are payable yearly in advance

throughout the term of the policy or until earlier death

Allocation rates:

## 75% of premium is allocated to units in the first policy

year, 100% in the second and 105% in the third

Policy fee:

## 35 is deducted from the bid value of units at the start

of each policy year

Death benefit:

## 150% of the bid value of the units is payable at the end

of the policy year of death

Maturity benefit:

## 100% of the bid value of the units is payable

CT5 S20126

5%

Annual management charge: 1.5% of the bid value of units is deducted at the end of
each policy year (management charges are deducted
from the unit fund before death and maturity benefits
are paid).
The company uses the following assumptions in carrying out profit tests of this
contract:
Rate of growth on assets in the unit fund

## 5.0% per annum in year 1

4.5% per annum in year 2
4.0% per annum in year 3

## 3.0% per annum

Mortality
Withdrawals
Initial expenses
Renewal expenses

AM92 Select
None
275
80 per annum on the second and
2.5% of the second and subsequent
2.0% per annum
6.5% per annum

Initial commission
Renewal commission
Rate of expense inflation
Risk discount rate

For renewal expenses, the amount quoted is at outset, and the increases due to
inflation start immediately.
(i)

Calculate the non-unit fund cash flows in each year of the contract and hence
the expected present value of profit assuming that the policyholder dies in the
third year of the contract.
[9]

(ii)

Calculate the expected present value of profit for the policy if the policyholder
dies in the:
(a)
(b)

## first year of the contract.

second year of the contract.
[4]

(iii)

Hence calculate the expected present value of the contract allowing for the
possibility that the policyholder survives to the end of the contract.
[2]
[Total 15]

END OF PAPER

CT5 S20127

## INSTITUTE AND FACULTY OF ACTUARIES

EXAMINERS REPORT
September 2012 examinations

## Subject CT5 Contingencies

Core Technical
Introduction
The Examiners Report is written by the Principal Examiner with the aim of helping
candidates, both those who are sitting the examination for the first time and using past papers
as a revision aid and also those who have previously failed the subject.
The Examiners are charged by Council with examining the published syllabus. The
will generally base questions around it but are not required to examine the content of Core
For numerical questions the Examiners preferred approach to the solution is reproduced in
this report; other valid approaches are given appropriate credit. For essay-style questions,
particularly the open-ended questions in the later subjects, the report may contain more points
than the Examiners will expect from a solution that scores full marks.
D C Bowie
Chairman of the Board of Examiners
December 2012

## General comments on Subject CT5

CT5 introduces the fundamental building blocks that stand behind all life insurance and
pensions actuarial work.
Credit is given to students who produce alternative viable numerical solutions. In the case of
descriptive answers credit is also given to alternative valid points which do not appear in the
solutions below.
In questions where definitions of symbols and then formulae are requested, a different
notation system produced by a student to that used by examiners is acceptable provided it is
used consistently, is relevant and is properly defined and used in the answer.
Comments on the September 2012 paper
The general performance was lower than average this session. Questions that were done less
well were 6, 11, 12, and 15(ii) and (iii); more commentary on these questions is given in this
report to assist candidates with further revision.
However most of the short questions were very straightforward and this is where many
successful candidates scored particularly well. Students should note that for long questions a
reasonable level of credit is given if they can describe the right procedures; however, to score
well reasonable, accurate numerical calculation is necessary.

Page 2

## Subject CT5 (Contingencies) September 2012 Examiners Report

l55 9557.8179
=
= 0.97269
l43 9826.2060

(a)

12 p43

(b)

10|5 q55

(c)

l
a45:10 = a45 v10 55 a55 at 6%

l45

## l65 l70 8821.2612 8054.0544

=
= 0.08027
l55
9557.8179

9557.8179

= 14.850 0.55839
13.057
9801.3123

= 7.740
Generally well done

## Class selection e.g. males and females have different mortality/longevity

characteristics.

Time Selection mortality rates vary over time (in annuities generally improves).

Adverse Selection lives in better health than average may be more likely to
purchase an annuity

## Generally well done-other plausible types and examples were credited.

Nutrition has an important influence on morbidity and in the longer term on mortality.
Poor quality nutrition can increase the risk of contracting many diseases and hinder
recovery from sickness.
Excessive or inappropriate (e.g. too much fat) eating can lead to obesity and an
increased risk of associated diseases (e.g. heart disease, hypertension) leading to
increased morbidity and mortality.
Inappropriate nutrition may be the result of economic factors e.g. lack of income to
buy appropriate foods or the result of a lack of health and personal education resulting
in poor nutritional choices.
Also, social and cultural factors encourage or discourage the eating of certain foods
e.g. alcohol consumption.

Many candidates gave a reasonable answer but there was a tendency to overlook the obesity
risk in the second paragraph.

Page 3

3 p55.75

p58

## = (1 0.25 q55.75 ) (1 q56 ) (1 q57 ) (1 0.75 q58 )

0.25 0.00475
= 1
0.99469 0.99408 (1 0.75 0.00660)
1 0.75 0.00475
= 0.99881 0.99469 0.99408 0.99505
= 0.98274
Generally well done.

(a)

Exc,t

Exc,t

## Central exposed to risk in population being studied between ages x and x + t.

Central rate of mortality either observed or from a life table in population
being studied for ages x to x + t.
Central exposed to risk for a standard population between x and x + t.

m x ,t

mx,t

## population for ages x to x + t.

(b)

The area comparability factor (F) is the ratio of the mortality rates in the
standard population weighted by the age structure distribution of the standard
population to the mortality rates in the standard population weighted by the
age structure distribution of the observed population.
F is therefore is a measure of variation between population age structures.

Many candidates gave formulae that were not required. Also many did not give a complete

## The net future loss random variable is given by:

S (1 + b) K 40 +1 v
b
P
K40
T40

T40

Pamin( K

40 +1,45)

## = annual rate of future bonus

= curtate future lifetime of a life aged 40 exact
= complete future lifetime of a life aged 40 exact

Generally not done well. It is often the case that candidates have difficulties in setting out the
random variable expressions.

Page 4

5V

8821.2612
P 15.884
9856.2863

P=

a[35]:30

## 125, 000 0.30832

17.631

8821.2612
9892.9151 = 1949.13

DSAR = 0

5V

= 11,006.02

## EDS = 3521q39 DSAR = 3521 .00087 DSAR = 33, 714.41

ADS = 8 11,006.02 = 88,048.16
Generally done fine by well-prepared candidates

## Mortality just after birth (infant mortality) is very high.

Mortality then falls dramatically during the first few years of life and is at lowest
around ages 810.

There is a distinct hump in the deaths at ages around 1825. This is often
attributed to a rise in accidental deaths during young adulthood, and is called the
accident hump.

From middle age onwards there is a steep increase in mortality, reaching a peak at

The number of deaths at higher ages falls again (even though the mortality rate qx
continues to increase) since the probabilities of surviving to these ages are small.

Generally well done but many candidates did not score all available marks.

Page 5

(i)

(ii)

(a)

## The gross premium prospective policy reserve is the expected present

value of future benefits (including declared bonus and an allowance for
future bonus if applicable) and future expenses less the expected
present value of future gross premiums.

(b)

## The gross premium retrospective policy reserve is the expected

and benefits including bonuses included in past claims.

## Gross premium retrospective and prospective reserves will be equal if:

the mortality and interest rate basis used is the same as used to determine
the gross premium at the date of issue of the policy; and

the expenses valued are the same as those used to determine the original

## the gross premium is that determined on the original basis (mortality,

interest, expenses) using the equivalence principle

Generally done well but many answers were incomplete on a standard bookwork question.

10

Value of benefit:
r65 ( 6535)
1
v
20, 000 ( 65 35 )
l35
12

s63 + s64
2
s35

3757 ( 6535)
1
=
v
20, 000 ( 65 35 )
18866
12

11.151 + 11.328
2
6.655

= 5185
Assume value of contributions is K% of salary
Value of contributions of K% of salary
20, 000.K %.

N 35

D35

= 20, 000.K %.

502,836
= 316, 090.K %
31,816

Therefore K = 1.64
This question was generally poorly answered despite being a relatively straightforward
question. The main issue was in understanding how the benefit value arose.

Page 6

11

## Because the annuity is payable weekly this can reasonably be represented by

continuous annuity functions.
Working initially for a unit annualised payment:
PV = a5 + v5
+v5

m
l70
m
l65

f
l67
2

__________ 1

## m ):67( f ) + a70( m ):67( f )

70(
f
3

l62 3

f
f
m
m
l67
l70
2
5 l70 l67 2

a
+
v

1 f 70( m)
1 m f a67( f ) at 4%
m

l65 l62 3

l65 l62 3

m
l70
m
l65

9238.134
=
= 0.95754,
9647.797

f
l67
f
l62

9605.483
= 0.97973
9804.173

## a70( m ):67( f ) = a70( m ):67( f ) 0.5 = 9.733

__________
a70(
m ):67( f ) = 11.062 + 13.611 9.733 = 14.940

1
2

## PV = 4.5403 + 0.82193 0.95754 0.97973 14.940 + 9.733

3
3

2
+0.82193 0.95754 0.02027 11.062
3
2
+0.82193 0.04246 0.97973 13.611
3
= 4.5403+10.1816+0.1176+0.3103
= 15.1498
The annualised benefit is 500 52.18 = 26090 p.a. (NB 52 acceptable)
So PV = 26090 15.1498 = 395,258
The key to this question is to break down carefully the component parts of the annuity. Once
this is done the question is then a relatively simple calculation of annuity functions. The
question was generally done poorly and many candidates failed to realise that a weekly
annuity could be closely approximated by a continuous one.

Page 7

12

25

0

= 100000

25
0

25
25

.07t 25
.05e .1t
0.03e.08t
0.02e
= 100000
+

.07
.08
.1

0
0

## 2 3 1 2e 1.75 3e2 e 2.5

= 100000 +
+

8
2
7 8 2 7
= 100000{(0.28571 + 0.375 0.5) (.04965 + .05075 .04104)}
= 10135

## The value of the survival benefits are:

e 1.25 (100000e .5 e .75 + 50000e .5 (1 e .75 ) + 50000e .75 (1 e .5 ))

= 50000e1.75 + 50000e2
= 8688.7 + 6766.8 = 15456 say

## The value of annualised premium P is:

P

25 .05t .02t
e
{e
(1 e .03t ) + e .03t (1 e.02t ) + e .05t }dt
0

= P

25
0

## .07t 25 .08t 25 .1t 25

e
e
e

= P
+

0.07 0 0.08 0 0.1 0
1
1 1 e 1.75 e2 e 2.5
= P
+

+

.07
.07
.08
.1
.08
.1

= 13.432P

Page 8

## Subject CT5 (Contingencies) September 2012 Examiners Report

So P =

10135 + 15456
= 1905.23
13.432

Many well prepared candidates made a very good attempt at this difficult question but in
general terms it was done quite poorly. As in Question 11 the key is to organise the
component parts logically.

13

(i)

If the monthly premium and sum assured are denoted by P and S respectively
then:
0.975 12 Pa(12)

[55]:30

+ 0.025 P

## = (0.98S + 200) A[55] + 0.02 S ( IA)[55] +275 + 65(a[55] 1) + 0.75 12 P

0.975 12 Pa(12)

[55]:30

+ 0.025 P

= (1.04)0.5 (0.98 75, 000 + 200) A[55] + 0.02 75, 000( IA)[55]

+275 + 65(a[55] 1) + 9 P
where
a(12)

[55]:30

(12)
(12)
= a[55]
v 3030 p[55]a85

11
11

24
24

11
3385.2479
11

= 15.891 .30832
5.333
24
9545.9929
24

## = 15.433 0.533 = 14.900

(0.975 12 14.9 + 0.025)P

## = (1.04)0.5 [ 73, 700 0.38879 + 1,500 8.58908] +275 + 65 14.891 + 9 P

174.355 P = (1.04)0.5 [28, 653.823 + 12,883.62] + 275 + 967.915 + 9 P
165.355 P = 42, 360.046 + 275 + 967.915 P = 263.69

Page 9

(ii)

## V prospective = ( 0.975S + B + 250 ) A85 + 0.025S ( IA)85 + 80a85

where B = 30 0.02 75, 000 = 45, 000

V prospective = (1.04)0.5 {( 0.975 75, 000 + 45, 000 + 250 ) A85 + 0.025 75, 000( IA)85 } + 80a85
= (1.04)0.5 (118,375 0.7949 + 1,875 4.40856) + 80 5.333
= 104,389.51 + 426.64 = 104,816.15
Generally part (i) was done well. Very few candidates successfully completed part (ii) as is often the
case with prospective reserve calculations.

14
We have the following multiple decrement table:
Year t

d
(aq )[30]
+ t 1

s
(aq)30
+t 1

r
(aq)30
+t 1

(ap)[ x ]+t 1

1
2
3
4

.000447
.000548
.000602
.000636

.098727
.049361
.024680
0

.023744
.024368
.024680
0

.877082
.925723
.950038
.999364

t 1

(ap)[30]

1.000000
.877082
.811935
.771370

Cash flows:
Year
t
1
2
3
4

P
E
on P-E
14000.00 700.00
399.00
14000.00 700.00
399.00
14000.00 700.00
399.00
14000.00 700.00
399.00

## Death Surrender Redundancy

Claim
Claim
Claim
27.22
701.38
337.37
33.37
701.34
692.46
36.66
526.00
1051.99
38.73
0
0

Maturity
Claim
0
0
0
59961.84

Profit
Vector
12633.04
12271.82
12084.35
-46301.57

Note: allowance for year interest roll up is included in death, surrender and redundancy costs
Year t

Profit
Vector

1
2
3
4

12633.04
12271.82
12084.35
-46301.57

=>

Cum
probability
of survival
1.0
.877082
.811935
.771370

Profit
signature

Discount
factor

12633.04
10763.40
9811.71
-35715.60

.952381
.907029
.863838
.822702

NPV of
Profit signature
12031.46
9762.72
8475.72
-29383.31

= 45,333.44

Page 10

## Therefore, profit margin = 886.61/45,333.44 = 1.96%

Credit was given for correct data items and many well prepared candidates scored a
reasonable proportion of the marks available. Very few got to the final answer however.

15
Risk discount rate
Interest on investments (1st yr)
Interest on investments (2nd yr)
Interest on investments (3rd yr)
Interest on non-unit funds
Death benefit (% of bid value of units)

Initial expense
Renewal expense
Expense inflation

3000.00
6.5%
5.0%
4.5%
4.0%
3.0%
150%

275
80
2.0%

20.0%
2.5%

## Allocation % (1st yr)

Allocation % (2nd yr)
Allocation % (3rd yr)
Management charge
Policy Fee

75.0%
100.0%
105.0%
5.0%
1.5%
35

Mortality table:
X

q[ x ]+t 1

p[ x]+t 1

t 1 p[ x ]

45
46
47

0.001201
0.001557
0.001802

0.998799
0.998443
0.998198

1.000000
0.998799
0.997244

## Unit fund (per policy at start of year)

yr 1
value of units at start of year
Alloc
B/O
policy fee
interest
management charge
value of units at year end

0.000
2250.000
112.50
35.000
105.125
33.114
2174.511

yr 2
2174.511
3000.000
150.000
35.000
224.528
78.211
5135.828

yr 3
5135.828
3150.000
157.500
35.000
323.733
126.256
8290.805

Page 11

## Cash flows (per policy at start of year)

yr 1
expenses
interest
man charge
extra death benefit
profit vector
(i)

785.000
112.500
875.000
0.675
33.114
1.306
54.984

yr 2
35.000
150.000
156.600
0.852
78.211
3.998
103.464

yr 3
115.000
157.500
158.232
3.472
126.256
7.470
0.418

If policyholder dies in the 3rd year of contract, non unit cash flows at end of each year
are:
yr 1 = ( 785 + 112.5 875 + 0.675 + 33.114 ) = 56.289
yr 2 = ( 35 + 150 156.6 + 0.852 + 78.211) = 107.463
yr 3 = ( 115 + 157.5 158.232 3.472 + 126.256 0.5 8290.805 ) = 4138.351

## = [52.854 + 94.746 3425.930] 0.998799 0.998443 0.001802 = 5.891

(ii)

(a)

If policyholder dies in the 1st year of contract, non unit cash flow at end of 1st
year is:
yr 1 = ( 785 + 112.5 875 + 0.675 + 33.114 0.5 2174.511) = 1030.967

## 1030.967 v q[45] = 968.967 0.001201 = 1.163

(b)

If policyholder dies in the 2nd year of contract, non unit cash flows at end of
each year are:
yr 1 == 56.289 (derived above)
yr 2 = ( 35 + 150 156.6 + 0.852 + 78.211 0.5 5135.828 ) = 2460.451

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## Subject CT5 (Contingencies) September 2012 Examiners Report

(iii)

If policyholder survives until end of contract, non unit cash flows at end of each year
are:
yr 1 == 56.289 (derived above)
yr 2 = 107.463 (derived above)
yr 3 = ( 115 + 157.5 158.232 3.472 + 126.256 ) = 7.052

## = [52.854 + 94.746 + 5.838] 0.998799 0.998443 0.998198 = 152.737

Expected present value of policy is therefore = 1.163 3.291 5.891 + 152.737
= 142.39
Candidates generally found this question difficult particularly parts (ii) and (ii). Part credit
was given in (i) for correctly calculating the data items and well prepared candidates scored
a fair proportion of the marks here.

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