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You are on page 1of 181

Institute of Actuaries

EXAMINATION

6 April 2005 (pm)

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.

4.

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

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

question paper.

In addition to this paper you should have available the 2002 edition of the

Formulae and Tables and your own electronic calculator.

CT5 A2005

Faculty of Actuaries

Institute of Actuaries

[2]

(a)

function.

(b)

Hence calculate the value using the mortality table AM92 Ultimate with 4%

interest.

[3]

A life insurance company sells an annual premium whole life assurance policy where

the sum assured is payable at the end of the year of death. Expenses are incurred at

the start of each policy year, and claim expenses are nil.

(a)

successive durations, with provisions calculated on the premium basis. Define

all the symbols that you use.

(b)

[4]

A life insurance company issues an annuity to a life aged 60 exact. The purchase

price is 200,000. The annuity is payable monthly in advance and is guaranteed to be

paid for a period of 10 years and for the whole of life thereafter.

Calculate the annual annuity payment.

Basis:

Mortality

AM92 Ultimate

Interest

6% per annum

[4]

CT5 A2005

Alive

Sick

Dead

Assume that the transition probabilities are constant at all ages with

= 1% and = 5%.

= 2%, = 4%,

Calculate the present value of a sickness benefit of 2,000 p.a. paid continuously to a

life now aged 40 exact and sick, during this period of sickness, discounted at 4% p.a.

and payable to a maximum age of 60 exact.

[4]

Calculate the probability of survival to age 60 exact using ELT15 (Males) for a life

aged 45 exact using two approximate methods. State any assumptions you make.

[5]

A joint life annuity of 1 per annum is payable continuously to lives currently aged x

and y while both lives are alive. The present value of the annuity payments is

expressed as a random variable, in terms of the joint future lifetime of x and y.

Derive and simplify as far as possible expressions for the expected present value and

the variance of the present value of the annuity.

[5]

Pensionable Salary for each year of pensionable service subject to a minimum pension

of 20/80ths of Final Pensionable Salary. Final Pensionable Salary is defined as the

average salary earned in the three years before retirement. Normal retirement age is

65 exact.

Derive a formula for the present value of the ill-health retirement benefit for a

member currently aged 35 exact with exactly 10 years past service and salary for the

year before the calculation date of 20,000.

[5]

Explain how an insurance company uses risk classification to control the profitability

of its life insurance business.

[5]

CT5 A2005

10

You are given the following statistics in respect of the population of Urbania:

Males

Age band

20

30

40

50

Females

Exposed to

risk

Observed

Mortality rate

Exposed to

risk

Observed

Mortality rate

125,000

200,000

100,000

90,000

0.00356

0.00689

0.00989

0.01233

100,000

250,000

200,000

150,000

0.00125

0.00265

0.00465

0.00685

29

39

49

59

Calculate the directly and indirectly standardised mortality rates for the female lives,

using the combined population as the standard population.

[6]

11

A life insurance company issues a 25-year with profits endowment assurance policy

to a male life aged 40 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.

Calculate the monthly premium payable in advance throughout the term of the policy

if the company assumes that future reversionary bonuses will be declared at a rate of

1.92308% of the sum assured, compounded and vesting at the end of each policy year.

Basis:

Interest

6% per annum

Mortality

AM92 Select

Initial commission

Initial expenses

Renewal commission

second policy year

Renewal expenses

Claim expense

[10]

CT5 A2005

12

(i)

assurance policies, show that:

A1x:n =

(ii)

A1x:n

[5]

Calculate the expected present value and variance of the present value of a

term assurance of 1 payable immediately on death for a life aged 40 exact, if

death occurs within 30 years.

Basis:

Interest

4% per annum

Mortality

AM92 Select

Expenses: None

[6]

[Total 11]

CT5 A2005

13

to a male life aged 40 exact under which level premiums of 1,000 per annum are

payable in advance. In the first year, 50% of the premium is allocated to units and

102.5% in the second and subsequent years. The units are subject to a bid-offer

spread of 5% and an annual management charge of 0.5% of the bid value of the units

is deducted at the end of each year.

If the policyholder dies during the term of the policy, the death benefit of 4,000 or

the bid value of the units after the deduction of the management charge, whichever is

higher, is payable at the end of the year of death. On surrender or on survival to the

end of the term, the bid value of the units is payable at the end of the year of exit.

The company uses the following assumptions in its profit test of this contract:

Rate of growth on assets in the unit fund

6% per annum

4% per annum

AM92 Select

5% per annum in the second and

subsequent policy years.

Initial expenses

commission

Renewal expenses

subsequent premium dates

Initial commission

Renewal commission

years premiums

8% per annum

(i)

Calculate the profit margin on the assumption that the office does not zeroise

future negative cashflows and that decrements are uniformly distributed over

the year.

[13]

(ii)

CT5 A2005

(a)

Calculate the expected provisions that must be set up at the end of each

year, per policy in force at the start of each year.

(b)

Calculate the profit margin allowing for the cost of setting up these

provisions.

[4]

[Total 17]

14

(i)

Write down in the form of symbols, and also explain in words, the expressions

death strain at risk , expected death strain and actual death strain .

[6]

(ii)

15-year term assurances with a sum assured of 150,000 where the death

benefit is payable at the end of the year of death

15-year pure endowment assurances with a sum assured of 75,000

5-year single premium temporary immediate annuities with an annual

benefit payable in arrear of 25,000

On 1 January 2002, the company sold 5,000 term assurance policies and 2,000

pure endowment policies to male lives aged 45 exact and 1,000 temporary

immediate annuity policies to male lives aged 55 exact. For the term

assurance and pure endowment policies, premiums are payable annually in

advance. During the first two years, there were fifteen actual deaths from the

term assurance policies written and five actual deaths from each of the other

two types of policy written.

(a)

Calculate the death strain at risk for each type of policy during 2004.

(b)

During 2004, there were eight actual deaths from the term assurance

policies written and one actual death from each of the other two types

of policy written. Calculate the total mortality profit or loss to the

office in the year 2004.

Basis:

Interest

4% per annum

Mortality

PMA92C20 for annuities

[13]

[Total 19]

END OF PAPER

CT5 A2005

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

April 2005

Subject CT5

Contingencies

Core Technical

EXAMINERS REPORT

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.

M Flaherty

Chairman of the Board of Examiners

15 June 2005

Faculty of Actuaries

Institute of Actuaries

April 2005

Examiners Report

The profit vector is the vector of expected end-year profits for policies which are still

in force at the start of each year.

The profit signature is the vector of expected end-year profits allowing for

survivorship from the start of the contract.

(a)

50:20

(b)

A50:20

1 A50:20

d

A50 v 20 20 p50 (1 A70 )

0.32907 0.45639

8054.0544

(1 0.60097)

9712.0728

0.480093

1 0.480093

13.5176

d

50:20

(a)

( tV ' OP et )(1 i )

qx t ( S )

p x t ( t 1V ' )

where

tV

'

OP = office premium

et

S = sum assured

p x t is the probability that a life aged x + t survives one year on the

premium/valuation mortality basis

qx t is the probability that a life aged x + t dies within one year on the

premium/valuation mortality basis

Page 2

(b)

April 2005

Examiners Report

and provision) equals outgo (death claims and closing provision for survivors)

if assumptions are borne out.

(12)

10

(12)

(12)

10 | 60

1 v10

10

(12)

10 | 60

10 p60

(12)

70

(12)

1 0.55839

0.058128

@ 6%

(12)

60

(12)

60:10

8054.0544

9287.2164

7.59720

(12)

v10 10 p60 70

0.867219

7.59720 + v10

0.867219

8.682 = 11.801

Page 3

April 2005

Examiners Report

20

2000.e

ii

p40

dt where

ln(1.04)

0

t

ii

t p40

exp

)ds

exp( .05t )

So value is

20

t

2000 e

5%t

dt where

ln(1.04)

e t (.05 ln(1.04))

(.05 ln(1.04))

2000

20

18, 653

Require to calculate

14 p46

(a)

l60

l46

So

q45

14 p45

0.91023

(1 )q45

(1 q45 )

0.00266

(1 .00266)

x t

constant

.001332

p45

45

p45

So

Page 4

Then

(b)

86714

95266

14 p45

45

ln(1 q45 )

e

0.002664

14 p45

0.998669

April 2005

Examiners Report

Define a random variable Txy, the lifetime of the joint life status

The expected value at a rate of interest i is

axy

E (aTxy )

1 v

1 E (v

Txy

Txy

1 Axy

The variance is

Txy

1 v

var

1

2

1

2

Txy

var(v

( 2 Axy ( Axy ) 2 )

where 2 Axy is at (1 i ) 2 1

Past Service

29

i35 t v35 t z35 t

10

20000

a35

80

s34

v35

t 0 l35

or

z ia

M

10

20000 s 35

80

D35

Page 5

April 2005

Examiners Report

Future Service

z ia

M

10

20000 s 35

80

D35

z ia

R

1

20000 s 45

80

D35

9

Insurance works on the basis of pooling independent homogeneous risks

The central limit theorem then implies that profit can be defined as a random

variable having a normal distribution.

Life insurance risks are usually independent

Risk classification ensures that the risks are homogeneous

Lives are divided by risk factors

More factors implies better homogeneity

But the collection of more factors is restricted by

The cost of obtaining data

Problems with accuracy of information

The significance of the factors

The desires of the marketing department

10

Age band

20

30

40

50

29

39

49

59

Males

Exposed

to risk

125000

200000

100000

90000

Observed

Mortality

rate

0.00356

0.00689

0.00989

0.01233

Females

Exposed

to risk

100000

250000

200000

150000

Observed

Mortality

rate

0.00125

0.00265

0.00465

0.00685

Male

Actual

deaths

Female

Actual

deaths

Total

Actual

deaths

Total

Exposed

to risk

445

1378

989

1109.7

3921.7

125

662.5

930

1027.5

2745

570

2040.5

1919

2137.2

6666.7

225000

450000

300000

240000

1215000

Female

Expected

deaths using

total

mortality

rates

253.333333

1133.61111

1279.33333

1335.75

4002.02778

Direct

Indirect

Page 6

Total

Expected

deaths using

female

rates

281.25

1192.5

1395

1644

4512.75

0.003714

0.003764

11

April 2005

Examiners Report

EPV of premiums:

12 Pa (12)

[40]:25

a (12)

155.124 P

11

(1

24

a[40]:25

[40]:25

13.290

11

1 (1.06)

24

25 p[40]v

25

25

8821.2612

9854.3036

12.927

EPV of benefits:

100, 000

(1.06)1/ 2 {q[40] (1 b)v

(1 b)

....

24

q[40] (1 b) 2 v 2

where b = 0.0192308

D65

100, 000

1

(1.06)1/ 2 A[40]:25

@ i ' 100, 000

@ i'

(1 b)

D[40]

100, 000

(1.06)1/ 2 (.38896 .33579) 100, 000 .33579 38949.90

1.0192308

where i '

1.06

1 0.04

1 b

EPV of expenses:

.875 12 P 175 0.025 12 P(a (12)

[40]:25

a (12)

[40]:1

a[40]:1

11

(1

24

p[40]v ) 1

[40]:1

11

1 (1.06)

24

9846.5384

9854.3036

0.974

.025

38949.9 =973.748

Page 7

April 2005

Examiners Report

and P = 289.98

12

(i)

n 1

A1x:n

1

t |Ax:1

t 0

n 1

vt t p x A1x

t:1

t 0

1

A1x

vs s p x

t:1

x t s ds

1

A1x

v s q x t ds

t:1

qx

qx

iv

t

n 1

A1x:n

vt . t p x .qx

t 0

n 1

vt 1. t px .q x

t 0

Page 8

A1x:n

v s ds

iv

t

x t s

qx

(ii)

var( A1x:n

i

var(

A1x:n

April 2005

Examiners Report

var( A1x:n )

( 2 A1x:n

A140 :30

( A1x:n ) 2 )

v30 . 30 p 40 . A70

A 40

0.23041 v30

2 1

A 40 :30

8054.0544

0.60097 0.078970

9854.3036

v30 . 30 p 40 . 2 A70

A 40

0.06775 v30

8054.0544

0.38975 0.037469

9854.3036

where v = 1/1.0816

var( A1x:n )

0.04

ln(1.04)

Expected value =

1

A[40]:30

0.04

0.078970 0.080539

ln(1.04)

13

Annual premium

1000.00

8.0%

Allocation % (2nd yr +)

Interest on

investments

6.0%

Man charge

Interest on sterling

provisions

4.0%

B/O spread

Minimum death

benefit

Initial expense

Renewal expense

50.0%

102.50%

0.50%

5.0%

4000.00

% prm

Total

150

20.0%

350

50

2.5%

75

Page 9

(i)

April 2005

Examiners Report

x

q xd

q xs

40

0.000788

0.10

41

0.000962

0.05

42

0.001104

0.05

43

0.001208

0.05

(aq ) dx

(aq ) sx

(ap)

t 1 ( ap )

40

0.000749

0.09996

0.899291

1.000000

41

0.000938

0.04998

0.949086

0.899291

42

0.001076

0.04997

0.948951

0.853504

43

0.001178

0.04997

0.948852

0.809934

yr 1

yr 2

yr 3

yr 4

0.000

500.983

1555.400

2667.495

alloc

500.000

1025.000

1025.000

1025.000

B/O

25

51.25

51.25

51.25

28.500

88.484

151.749

218.475

2.518

7.816

13.404

19.299

500.983

1555.400

2667.495

3840.421

value of units at

start of year

interest

management

charge

value of units at

year end

Page 10

April 2005

Examiners Report

yr 1

yr 2

yr 3

yr 4

unallocated

premium

500.000

25.000

25.000

25.000

B/O spread

25.000

51.250

51.250

51.250

350.000

75.000

75.000

75.000

interest

7.000

1.950

1.950

1.950

man charge

2.518

7.816

13.404

19.299

extra death

benefit

2.619

2.293

1.434

0.188

end of year

cashflow

181.898

45.177

38.730

31.589

0.899291

0.853504

0.809934

discount factor

0.925925926

0.85733882

expected p.v. of

profit

88.54607934

expenses

probability in

force

premium

signature

expected p.v. of

premiums

1000

0.793832241 0.735029853

832.67667

731.74245

642.95174

3207.370861

profit

margin

2.76%

(ii)

(a)

To calculate the expected provisions at the end of each year we have (utilising the end of year

cashflow figures and decrement tables in (i) above):

31.589

30.374

1.04

2V (1.04) ( ap ) 42 3V

38.73

1V

45.177

3V

(1.04) (ap ) 41

2V

2V

1V

64.9552

102.7164

Page 11

April 2005

Examiners Report

These need to be adjusted as the question asks for the values in respect of the beginning of

the year. Thus we have:

Year 3

Year 2

Year 1

30.374(ap)42 = 28.823

64.9552(ap)41 = 61.648

102.7164(ap)40 = 92.372

(b)

Based on the expected provisions calculated in (a) above, the cash flow for years 2, 3 and 4

will be zeroised whilst year 1 will become:

181.898

92.372 = 89.526

Hence the table blow can now be completed for the revised profit margin.

revised end of

year cash flow

89.526

0.899291

0.853504

0.809934

discount factor

0.925925926

0.85733882

0.793832241

0.735029853

expected p.v. of

profit

82.89461768

probability in

force

profit margin

14

(i)

2.58%

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 )

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

Page 12

(ii)

April 2005

Examiners Report

Annual premium for pure endowment with 75,000 sum assured given by:

P PE

a45:15 D45

11.386 1677.97

3465.71

Annual premium for term assurance with 150,000 sum assured given by:

PTA

P EA 2 P PE

a45:15

2 P PE

2 3465.71 473.20

11.386

for pure endowment with 75,000 sum assured given by:

3V

PE

D60

D48

75, 000

75, 000

P PE a48:12

882.85

3465.71 9.613 11289.63

1484.43

3V

TA

3V

EA

3V

PE

(2 3465.71 473.20)a48:12

2 11289.63

777.63

for temporary immediate annuity paying an annual benefit of 25,000 given

by:

3V

IA

25, 000a58:2

25, 000(a58:3

1)

25, 000 16.356 (1.04)

9802.048

15.254 1

9864.803

47, 037.91

Page 13

April 2005

Examiners Report

Sums at risk:

Pure endowment:

DSAR = 0

Term assurance:

DSAR = 150,000

Immediate annuity:

11,289.63 = 11,289.63

777.63 = 149,222.37

ADS

EDS

ADS

For pure endowment

EDS 1995 q47

ADS 1

11, 289.63

11, 289.63

40,586.11

11, 289.63

For immediate annuity

EDS

995 q57

ADS 1

72, 037.91

72, 037.91

72, 037.91

Hence, total mortality profit = 77,748.65

Page 14

111, 673.89

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

7 September 2005 (pm)

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.

4.

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

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

question paper.

In addition to this paper you should have available the 2002 edition of the

Formulae and Tables and your own electronic calculator.

CT5 S2005

Faculty of Actuaries

Institute of Actuaries

company s underwriting process and give an example.

[2]

[3]

A graph of f0(t), the probability density function for the random future lifetime, T0, is

plotted on the vertical axis, with t plotted on the horizontal axis, for data taken from

the English Life Table No. 15 (Males).

You are given that f0(t) = t p0

t 80 and then falls.

t.

80 .

Calculate the value of 1.75 p45.5 on the basis of mortality of AM92 Ultimate and

assuming that deaths are uniformly distributed between integral ages.

[3]

[3]

Calculate:

(a)

(b)

The probability that a life aged 20 exact will die before age 21.25 exact.

The curtate expectation of a life aged 20 exact.

[4]

Define (12)

60:50:20

CT5 S2005

[5]

A life insurance company prices its long-term sickness policies using the following

three-state continuous-time Markov model, in which the forces of transition , ,

and are assumed to be constant:

Healthy

Sick

Dead

The company issues a particular long-term sickness policy with a benefit of 10,000

per annum payable continuously while sick, provided that the life has been sick

continuously for at least one year. Benefit payments under this policy cease at age 65

exact.

Write down an expression for the expected present value of the sickness benefit for a

healthy life aged 20 exact. Define the symbols that you use.

[5]

A life insurance company issues an annuity contract to a man aged 65 exact and his

wife aged 62 exact. Under the contract, an annuity of 20,000 per annum is

guaranteed payable for a period of 5 years and thereafter during the lifetime of the

man. On the man s death, an annuity of 10,000 per annum is payable to his wife, if

she is then alive. This annuity commences on the monthly payment date next

following, or coincident with, the date of his death or from the 5th policy anniversary,

if later and is payable for the lifetime of his wife. Annuities are payable monthly in

advance.

Calculate the single premium required for the contract.

Basis:

Mortality

Interest

Expenses

CT5 S2005

4% per annum

none

[9]

A life insurance company issues an annuity policy to two lives each aged 60 exact in

return for a single premium. Under the policy, an annuity of 10,000 per annum is

payable annually in advance while at least one of the lives is alive.

(i)

Write down an expression for the net future loss random variable at the outset

for this policy.

[2]

(ii)

Basis:

Mortality

Interest

Expenses

(iii)

PMA92C20 for the first life, PFA92C20 for the second life

4% per annum

ignored

[3]

Calculate the standard deviation of the net future loss random variable at the

outset for this policy, using the basis in part (ii).

You are given that a60:60 = 11.957 at a rate of interest 8.16% per annum.

[4]

[Total 9]

CT5 S2005

10

A life insurance company issued a with profits whole life policy to a life aged 20

exact, on 1 July 2002. Under the policy, the basic sum assured of 100,000 and

attaching bonuses are payable immediately on death. The company declares simple

reversionary bonuses at the start of each year. Level premiums are payable annually

in advance under the policy.

(i)

Give an expression for the gross future loss random variable under the policy

at the outset. Define symbols where necessary.

[3]

(ii)

Basis:

Mortality

AM92 Select

Interest

6% per annum

Bonus loading

Expenses

Initial

200

Renewal

subsequent years

[4]

(iii)

On 30 June 2005 the policy is still in force. A total of 10,000 has been

declared as a simple bonus to date on the policy.

The company calculates provisions for the policy using a gross premium

prospective basis, with the following assumptions:

Mortality

Interest

Bonus loading

Renewal expenses

AM92 Ultimate

4%

4% per annum simple

5% of each premium

CT5 S2005

[4]

[Total 11]

11

contract to a male life aged 62 exact under which level annual premiums of 10,000

are payable in advance throughout the term of the policy or until earlier death. 85% of

each year s premium is invested in units at the offer price.

There is a bid-offer spread in unit values, with the bid price being 95% of the offer

price.

There is an annual management charge of 1.25% of the bid value of units.

Management charges are deducted at the end of each year, before death or maturity

benefits are paid.

On the death of the policyholder during the term of the policy, there is a benefit

payable at the end of the year of death of 20,000, or the bid value of the units

allocated to the policy, if greater. On maturity, 115% of the full bid value of the units

is payable.

The company holds unit provisions equal to the full bid value of the units. It sets up

non-unit provisions to zeroise any negative non-unit fund cashflows, other than those

occurring in the first year.

The life insurance company uses the following assumptions in carrying out profit tests

of this contract:

Mortality

Expenses

AM92 Ultimate

Initial

Renewal

600

100 at the start of each of the second and third policy years

8% per annum

Non-unit fund

interest rate

4% per annum

Non-unit fund

provision basis

CT5 S2005

[14]

12

On 1 January 2000, a life insurance company issued joint life whole life assurance

policies to couples. Each couple comprised one male and one female life and both

were aged 50 exact on 1 January 2000. Under each policy, a sum assured of 200,000

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.

(i)

Basis:

Mortality

PFA92C20 for the female

Interest

4% per annum

Expenses

Initial

Renewal

1,000

5% of each premium payment

[5]

(ii)

On I January 2004, 5,000 of these policies were still in force. Under 100 of

these policies only the female life was alive. Both lives were alive under the

other 4,900 policies.

The company calculates provisions for the policies on a net premium basis,

using PMA92C20 and PFA92C20 mortality for the male and female lives

respectively and 4% per annum interest.

During the calendar year 2004, there was one claim for death benefit, in

respect of a policy where the female life only was alive at the start of the year.

In addition, one male life died during the year under a policy where both lives

were alive at the start of the year. 4,999 of the policies were in force at the

end of the year.

Calculate the mortality profit or loss for the group of 5,000 policies for the

calendar year 2004.

[9]

[Total 14]

CT5 S2005

13

Under the rules of a pension scheme, a member may retire due to age at any age from

exact age 60 to exact age 65.

On age retirement, the scheme provides a pension of 1/60th of Final Pensionable

Salary for each year of scheme service, subject to a maximum of 40/60ths of Final

Pensionable Salary. Only complete years of service are taken into account.

Final Pensionable Salary is defined as the average salary over the three-year period

before the date of retirement.

The pension scheme also provides a lump sum benefit of four times Pensionable

Salary on death before retirement. The benefit is payable immediately on death and

Pensionable Salary is defined as the annual rate of salary at the date of death.

You are given the following data in respect of a member:

Date of birth

Date of joining the scheme

Annual rate of salary at 1 January 2005

Date of last salary increase

1 January 1979

1 January 2000

50,000

1 April 2004

(i)

Derive commutation functions to value the past service and future service

pension liability on age retirement for this member as at 1 January 2005. State

any assumptions that you make and define all the symbols that you use.

[12]

(ii)

Derive commutation functions to value the liability in respect of the lump sum

payable on death before retirement for this member as at 1 January 2005.

State any assumptions that you make and define all the symbols that you use.

[6]

[Total 18]

END OF PAPER

CT5 S2005

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

September 2005

Core Technical

EXAMINERS REPORT

Faculty of Actuaries

Institute of Actuaries

September 2005

Examiners Report

In general, this examination was done well by students who were well prepared.

Several questions gave difficulties particularly Question 7 and 12(ii) the latter one

being very challenging. To help students comments are attached to those questions

where particular points are of relevance. Absence of comments can be indicate that

the particular question was generally done well.

Adverse selection is the manner in which lives form part of a group, which acts

against a controlled process of selecting the lives with respect to some characteristic

that affects mortality or morbidity.

An example is where a life insurance company does not distinguish between smokers

and non-smokers in proposals for term assurance cover. A greater proportion of

smokers are likely to select this company in preference to a company that charges

different rates to smokers and non-smokers. This would be adverse to the company s

selection process, if the company had assumed that its proportion of smokers was

similar to that in the general population.

Other examples were credited.

Occupation can have several direct effects on mortality and morbidity. Occupation

determines a person s 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. pubs, give exposure to a less healthy lifestyle.

Some occupations by their very nature attract more healthy workers. This may be

accentuated by health checks made on appointment or by the need to pass regular

health checks e.g. airline pilots. Some occupations can attract less healthy workers,

for example, 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 person s occupation largely determines their income, which permits them to adopt a

particular lifestyle e.g. content and pattern of diet, quality of housing. This effect can

be positive or negative e.g. over-indulgence.

Other appropriate examples were credited.

As t increases,

, hence f 0 t

p0

decreases.

A deceptively straightforward answer which many students struggled to find. The key

point is to compare the 2 parameters as shown.

Page 2

1.75 p45.5

September 2005

Examiners Report

1 q45

*(1 q46 ) *(1 0.25q47 )

1 0.5q45

1 0.001465

*(1 0.001622) *(1 0.25*0.001802)

1 0.5*0.001465

0.999267 *0.998378*0.99955 0.997197

(a)

1.25

0.015dt

0

1 e

(b)

(12)

0.01875

0.018575

p20

k 1

1 e

60:50:20

e

k 1

k

0.015dt

0

0.015k

k 1

0.015

1 e

0.015

66.168.

is the present value of 1 p.a. payable monthly in advance while two lives

aged 60 and 50 are both still alive, for a maximum period of 20 years.

(12)

60:50:20

(12)

(12)

60:50

v 20 20 p60:50 80:70

(a60:50 11

) v 20 20 p60:50 (a80:70 11 )

24

24

(15.161 0.458) v 20

6953.536 9392.621

(6.876 0.458) 12.747

9826.131 9952.697

Page 3

where

t

hh

p20

*

20 t

ss

* 1 p20

t*

44 t

0

t u 1

u

ss

p21

t du dt

ss

1 p20 t

ss

p21

0 t

Examiners Report

hh

p20

45

September 2005

is the probability that a life who is sick at age 20 t is sick continuously for

one year thereafter

is the probability that a life who is sick at age 21 t is still sick at

age 21 t u

This question was not done well and few students obtained the whole result. Partial

credits were given for correct portions. There were other potentially correct

approaches which were credited provided proper definitions of symbols given.

12

5

12

5

4.5477

D70

D65

v5

12

a70

l70

l65

12

9238.134

9647.797

D70 12

a

D65 70

0.957538

D67

D62

v5

12

l70 D67 12

a

l65 D62 67

0.787027

a67

a70|67

10, 000 1

9605.483

9804.173

12

a67

12)

a70:67

0.80527

Page 4

l70 D67 12

a

l65 D62 70|67

(i)

September 2005

Examiners Report

10, 000a

A

B

max K 60

1, K 60

1|

(ii)

A

B

A

B

P 10, 000 a60

a60

a60

* a60

Variance =

108

d2

181,940

2

60 :60

108

0.038462

60 :60

* 1 0.075444*11.957

1 0.038462*18.194

10

(i)

100, 000 1 bK 20

vT20

I eaK

20

fvT20

GaK

20

I is the initial expense

e is the annual renewal expense and

f is the claim expense

G is the gross annual premium

(ii)

Ga 20

100,000 A 20

3,000 IA

20

200 0.05Ga 20

200 0.05G *(16.877 1) 1] 16.083G 4604.206 6204.373 200

G

684.49

Page 5

(iii)

September 2005

Examiners Report

110,000 A23

4,000 IA

23

0.95 * 684.48 * a 23

0.95 * 684.49 * 22.758

24, 057.48

11

Unit fund

Year

Fund at the start of the year

Premium

Allocation to units

Interest

Management charge

Fund at the end of the year

0

10000

8075

646

109.0123

8611.988

8611.988

10000

8075

1334.959

225.274

17796.67

3

17796.67

10000

8075

2069.734

349.268

27592.14

Year

Premium margin

Expenses

Interest

Death cost

Maturity cost

Management charge

Profit

1925

600

53

115.156

0

109.013

1371.857

1925

100

73

24.995

0

225.274

2098.28

1925

100

73

0

4138.821

349.268

1891.55

= 1768.192

Reduced profit at the end of year 2 = 2098.28

Page 6

4138.821 (1

p64)) / 1.04

1768.192*p63 = 350.146

September 2005

Examiners Report

p62

2 p62

0.989888

0.978659

1371.857

1.15

350.146* p62

p62 2 p62

1.15 1.152

1455.003

26007.788

Profit margin =

1455.003

1.152

26007.788

5.59%

Most students completed the tables satisfactorily in this question but struggled to get

the revised profit vectors. Very few produced a complete result.

12

(i)

0.95* P * a

1000 200000* A

50m :50 f

50m :50 f

50m :50 f

a50m

50m :50 f

a50 f

a50m:50 f

1.040.5 * A

1.040.5 *(1 d * a

50m :50 f

50m :50 f

0.95* P * 20.694 1000 200000*0.208109

P

(ii)

2,168.02 .

200000 * (1.04)0.5 *

1

a

50 :50

= 200000 * (1.04)0.5 *

at 4%

1

20.694

.04

1.04

= 2011.39

We require 3 provisions at end of 5th policy year

Page 7

September 2005

Examiners Report

55m :55 f

200000 * (1.04)0.5 * 1

50m :50 f

= 200000 * (1.04)0.5 1

18.843 19.539 17.688

= 11196.46

Male only alive

200000 A55m

= 200000 * (1.04)0.5 * 1

2011.39 a55m

.04

*17.364

1.04

2011.39 *17.364

.04

*18.210

1.04

2011.39 *18.210

= 32820.60

Female only alive

200000 A55 f

2011.39 a55 f

= 200000 * (1.04)0.5 * 1

= 24482.39

Mortality Profit Loss

= Expected Death Strain

(a) Both lives die during 2004

no actual claims

Result

= (4900 * q54m * q54 f

= 849.37

(b) Female alive at begin 2004, death during 2004

Result

= (100 * q54 f

Page 8

1) (200000 *1.040.5

24482.39)

1 actual claim

= (100 * 0.000912

=

September 2005

Examiners Report

1) (179478.39)

163109.96

(c) Both lives alive beginning 2004, males only die during 2004 -1 actual claim. Here

the claim cost is the change in provision from joint lives to female only

surviving i.e.

Result = (4900 * q54m * q54 f

1) (24482.39 11196.46)

1) (13285.93)

= 50845.17

(d) Both lives alive beginning 2004, females only die during 2004 no actual claims.

Claim cost change in provision from joint lives to male only surviving

Result = (4900 * p54m * q54 f

0) (32820.611 11196.46)

= 96538.66

Hence overall total = 849.37 163109.16 + 50845.17 + 96538.66

=

14876.77

For part (i) assuming renewal expenses did not include the first premium (answer

2162.62) was also fully acceptable.

Part (ii) was very challenging and very few students realised the extension of

mortality profit/loss extended to joint life contracts involved reserve change costs on

first death. Most just considered the first 2 components of the answer and in many

cases failed to correctly cost this part. A few exceptional students did manage to

reach the final result.

13

(i)

l26 t = no. of members aged 26 + t last birthday

r26 t = no. of members who retire age 26 + t last birthday

in the year of age x to x + 1

Page 9

1

s26 t 3 s26 t

3

to a retiree aged exactly 26 + t.

Define z26

September 2005

s26

r

; a26

t 1

Examiners Report

Past service:

Assume that retirements take place uniformly over the year of age between 60

and 65. Retirement for those who attain age 65 takes place at exact age 65.

Consider retirement between ages 26 + t and 26 + t + 1, 34 t

38 .

26 t 1 2

r26 t r

50000*5 z26 t 12 v

a

26

60

s25.25

l26 26

v

ra

where zC26

and

D26

z26

26 t

r

r26 t a26

ra

50000*5 zC26

t

s

60

D26

s25.25v 26l26

For retirement at age 65, the present value of the benefits is:

50000*5 z65 v65 r65 r

a65

60

s25.25 v 26 l26

ra

where zC65

ra

50000*5 zC65

s

60

D26

r

z65v65r65 a65

ra

50000*5 z M 60

s

60

D26

ra

where z M 60

39

ra

C26

t 34

Future service:

Assume that retirements take place uniformly over the year of age, between

ages 60 and 65. Retirement at 65 takes place at exactly age 65.

If retirement takes place between ages 60 and 61, the number of future years

service to count is 34. If retirement takes place at age 61 or after, the number

of future years service to count is 35.

For retirement between ages 60 and 61, the present value of the retirement

benefits is:

Page 10

September 2005

60 1 2

r60 i

34*50000 z60 1 2 v

a

26

60

s25.25 v

l26 60

Examiners Report

ra

34*50000 zC60

s

60

D26

For retirement at later years, the formula is similar to the above, with 35 in

place of 34.

Adding all these together gives:

50000

ra

ra

34 z C60

35( z C61

...

60 D26

where

50000

60 D26

ra

M 60

ra

C65

)

ra

M 60

ra

35* zC60

z

t

ra

C60

t 0

(ii)

addition, define d 26 t as the number of members dying age 26 t last

birthday.

Assume that deaths take place on average in the middle of the year of age.

The present value of the death benefit, for death between ages 26 t and

26 t 1 , is

26 t

s

v

50000* 4* 26.25 t

s25.25

v 26

d

where sC26

s26.25 t v

26 t

d 26

d 26 t

l26

50000* 4*

d

C26

s

D26

Adding the present value of benefits for all possible years of death gives

38 s

50000* 4*

s

t 0

d

where s M 26

38

d

C26

d

C26

D26

s

t

200000*

d

M 26

D26

t 0

Examiners felt that this question was quite simple provided students

constructed proper definitions and followed them through logically allowing

of course for the adjusted salary scale. The above answer is one of a number

possible and full credit was given for credible alternatives.

Page 11

September 2005

Examiners Report

Many students, however struggled with this question despite these remarks.

Page 12

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

5 April 2006 (pm)

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.

4.

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

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

question paper.

In addition to this paper you should have available the 2002 edition of the

Formulae and Tables and your own electronic calculator.

CT5 A2006

Faculty of Actuaries

Institute of Actuaries

using the following three-state continuous-time Markov model, with age-dependent

forces of transition x, x and x:

x

Active

Retired

Dead

whether death occurs before or after retirement. Give an expression to value this

benefit for an active life currently aged x.

[2]

(i)

adding bonuses.

[2]

(ii)

Suggest a reason why a life insurance company might use the super compound

method of adding bonuses as opposed to the compound method.

[1]

[Total 3]

(a)

65:60

(b)

5 p65:60

(c)

1

2 q65:65

[4]

State the main difference between an overhead expense and a direct expense incurred

in writing a life insurance policy and give an example of each.

[4]

CT5 A2006 2

A life office issues term assurance policies to 500 lives all aged 30 exact with a term

of 25 years. The benefit of 10,000 is payable at the end of the year of death of any

of the lives into a special fund. Calculate the expected share of this fund for each

survivor after 25 years.

Basis:

Mortality

Interest

AM92 Select

4% per annum

[4]

A life office has issued for a number of years whole-life regular premium policies to a

group of lives through direct advertising. Assured lives are only required to complete

an application form with no further evidence of health. Outline the forms of selection

that the insurer should expect to find in the mortality experience of the lives.

[5]

(i)

Show that:

t

(ii)

px

px t (

x t

x t s)

[2]

aged x to be as follows:

tV x

(1

tV x ) x t

tV x

[4]

Px

[Total 6]

(i)

annually in advance until the death of the last survivor of two lives using the

following basis:

First life:

male aged 70, mortality table PMA92C20

Second life:

female aged 67, mortality table PFA92C20

Rate of interest: 4% per annum

[2]

(ii)

functions.

[5]

[Total 7]

CT5 A2006 3

(i)

axy:n

(ii)

[3]

Express a xy:n as the expected value of random variables and hence show that

a xy:n

1 Axy:n

[4]

[Total 7]

10

exact. Each policy provides a sum assured of 10,000 payable at the end of the year of

death or 20,000 payable if the life survives until the maturity date. Premiums on the

policy are payable annually in advance for 15 years or until earlier death.

You are given the following information:

Number of deaths during the 13th policy year

Number of policies in force at the end of the 13th policy year

4

195

(i)

Calculate the profit or loss arising from mortality in the 13th policy year.

[7]

(ii)

[2]

Basis:

Mortality

Interest

Expenses

AM92 Ultimate

4% per annum

none

[Total 9]

11

on retirement at 65 or earlier other than on the grounds of ill-health. The amount of

the benefit is 1,000 for each year of an employee s service, with proportionate parts

of a year counting.

(i)

Give a formula to value this benefit for an employee currently aged x with n

years of past service, defining all terms used.

[5]

(ii)

Using the Pension Scheme Tables from the Actuarial Formulae and Tables,

calculate the value for an employee currently aged 30 exact with exactly 10

years past service.

[2]

(iii)

employee s service to fund the future retirement benefit.

[3]

[Total 10]

CT5 A2006 4

12

(i)

(a)

(b)

(c)

Directly Standardised Mortality Rate

Indirectly Standardised Mortality Rate

[3]

(ii)

The data in the following table are taken from data published by the Office of

National Statistics in 2001.

England and Wales

Population

Number of

births

Population

Number of

births

Under 25

3,149,000

153,000

71,000

4,000

25 35

3,769,000

339,000

74,000

6,000

35+

3,927,000

103,000

82,000

1,000

(a)

Using the population for England and Wales as the standard population

calculate crude birth rates and the directly and indirectly standardised

birth rates for Tyne and Wear.

(b)

comment briefly on the answers you have obtained.

[8]

[Total 11]

CT5 A2006 5

13

Level premiums are payable monthly in advance throughout the duration of the

contract. The sum assured of 250,000 plus declared reversionary bonuses are

payable at maturity or at the end of the year of death if earlier.

(i)

Show that the monthly premium is 647.47 if the life insurance company

assumes that future simple reversionary bonuses will be declared at the rate of

2% per annum 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).

Basis:

mortality

interest

initial expenses

renewal expenses

claims expenses

AM92 Select

4% per annum

250 plus 50% of the gross annual premium

3% of the second and subsequent monthly premiums

300 on death; 150 on maturity

[7]

(ii)

At age 60 exact, immediately before the premium then due, the life wishes to

surrender the policy. The life insurance company calculates a surrender value

equal to the gross retrospective policy value, assuming the same basis as in (i)

above.

Calculate the surrender value using the retrospective policy value at the end of

the 25th policy year immediately before the premium then due and just after

the declared bonus has increased the sum assured plus reversionary bonuses to

375,000. Assume that the life insurance company has declared a simple

bonus throughout the duration of the policy consistent with the bonus loading

assumption used to derive the premium in (i) above.

[6]

(iii)

State with a reason whether the surrender value would have been larger, the

same or smaller than in (ii) above if the office had used the prospective gross

premium policy value, on the same basis.

[1]

[Total 14]

CT5 A2006 6

14

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

45 exact under which level premiums are payable yearly in advance. In the 1st year,

35% of the premium is allocated to units and 105% in the 2nd and 3rd years. The

units are subject to a bid-offer spread of 5% and an annual management charge of

0.5% 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 surrender

benefits are paid.

If the policyholder dies during the term of the policy, the death benefit of the bid

value of the units is payable at the end of the year of death. The policyholder may

surrender the policy only at the end of each year. On surrender or on survival to the

end of the term, the bid value of the units is payable at the end of the year of exit.

The company uses the following assumptions in its profit test of this contract:

Rate of growth on assets in the unit fund

Rate of interest on non-unit fund cash flows

Independent rates of mortality

Independent rates of withdrawal

Initial expenses

Renewal expenses

Initial commission

Renewal commission

5% per annum

4% per annum

AM92 Ultimate

5% per annum

250

50 per annum on the 2nd and 3rd

premium dates

20% of 1st premium

2.5% of the 2nd and 3rd years

premiums

The company sets premiums so that the net present value of the profit on the policy is

15% of the annual premium.

(i)

Using a risk discount rate of 8% per annum, calculate the premium for the

policy on the assumption that the company does not zeroise future expected

negative cash flows.

[12]

(ii)

Explain why the company might need to zeroise future expected negative

cash flows on the policy.

[2]

[Total 14]

END OF PAPER

CT5 A2006 7

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

April 2006

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.

M Flaherty

Chairman of the Board of Examiners

June 2006

Comments

No comments are given.

Faculty of Actuaries

Institute of Actuaries

10, 000 e

( t p xaa

x t

pxar

April 2006

Examiners Report

x t ) dt

(i)

these days on an annual basis) under which two bonus rates are declared each

year. The first rate, usually the lower, is applied to the basic sum assured and

the second rate is applied to the bonuses already declared.

(ii)

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

and thereby providing greater investment freedom.

(a)

65:60

(b)

5 p65:60

l70 l65

.

l65 l60

(c)

1

2 q65:65

. 2 q65:65

(1

2 p65 . 2 p65 )

65

60

9238.134 9647.797

.

9647.797 9826.131

.(1

0.940160

2 p65:65 )

9521.065 9521.065

.

9647.797 9647.797

0.013050

Overhead expenses are those that in the short term do not vary with the amount of

business.

An example of an overhead expense is the cost of the company s premises (as the sale

of an extra policy now will have no impact on these costs).

Direct expenses are those that do vary with the amount of business.

An example of a direct expense is commission payment to a direct salesman (as the

sale of an extra policy now will have an impact on these costs).

Page 2

April 2006

Examiners Report

1

10, 000(1.04) 25 . A[30]:25

. 25 p[30]

10, 000(1.0425 ( A[30] v 25 . 25 p[30] . A55 ))

25 p[30]

10, 000

9923.7497

x0.38950)

9557.8179

9923.7497

536.65

Time selection

the experience would be different in different time periods; in

developed economies mortality has tended to improve with time.

Class selection

The insurer may price policies differently depending on fixed

factors such as age/sex. Also different groups of recipients may have different

mortality based on factors such as occupation.

Temporary Initial Selection

if there is no evidence of health required then there is

an expectation that poor lives would be likely to take out the insurance and in the

short term the experience would be adverse. This effect should reduce with duration.

Conversely, if there are medical questions on the application form then we would

expect to see some form of self selection and mortality experience would be better in

the short term.

This is also evidence of adverse selection as highlighted above.

Spurious selection

If there is no evidence of health required then the duration

effect would be confounded by the differential mortality experience of withdrawals,

as those lives withdrawing would be expected to have lighter mortality.

Page 3

(i)

1

s px

px

x t s

ln( s px t )

(ln l x

Examiners Report

ln l x t )

t s

x t

Multiplying through by s px

(ii)

April 2006

Now

t Vx

Ax

ax

Px ax

ax t

ax

p x t ds

px t (

x t s )ds

x t

p x t ds

x t ax t

Ax

x t (1

t Vx )

t Vx

x t (1

Page 4

x t ax t

Ax t )

ax

t Vx )

(1

t Vx ) x t

t Vx

(1

t Vx ) x t

t Vx

ax t

ax

1

ax

ax

ax

Px

(1

ax t )

ax

(i)

April 2006

Examiners Report

70:67

70 67 70:67

11.562 14.111 10.233

15.440

(ii)

Variance:

1

d

Axy ( Axy ) 2

(1 (1 v 2 ). 2xy ) (1 d .xy ) 2

where normal functions are at a rate of interest i and functions with a left

superscript are at a rate of interest i2+2i.

The expression (1-v2) in the right hand side of the above equation can also be

expressed as 2d.

(i)

of 1 per annum

payable continuously

until the second death

of 2 lives

currently age x and y

for a maximum n years

(ii)

a xy:n

E (amin(max(T

x ,Ty ),n )

Tx and Ty are random variables which measures the complete lifetime of two

lives aged x and y

E (amin(max(T

x ,Ty ), n )

1 E (v

1 v

1 Axy:n

Page 5

10

(i)

April 2006

Examiners Report

Let P be the net premium for the policy payable annually in advance. Then,

equation of value becomes:

Pa45:15

v 20 20 p45 )

P

773.52

13V

v 7 7 p58 ) Pa58:2

14, 772.48 1,512.23 13, 260.25

Death strain at risk per policy = 10,000

13,260.25 = 3,260.25

ADS 4 3, 260.25

13, 041.00

3, 260.25

3, 665.66

(ii)

The death strain at risk is negative. Hence, the life insurance company makes

money on early deaths.

More people die than expected during the year considered so the company

makes a mortality profit.

11

(i)

Mr

1, 000.n. x

Dx

v xlx

Where Dx

C xr

vx

r

C65

M xr

Rx

1, 000.

Dx

rx for x < 65

65

v r65

65 x

C xr

t 0

r

Mx

Page 6

M xr C xr for x < 65

64 x

Rx

April 2006

Examiners Report

Mx

t 0

782

25,502

1000.

7,874

7,874

(ii)

1, 000.10.

(iii)

C.

Nx

Dx

N 30

4, 231.902

90684, D30

Therefore C

12

4, 231.902

7874

367.45

Definitions:

(i)

(a)

category to the total exposed to risk in the same category.

(b)

the mortality rate of a

category weighted according to a standard population.

(c)

an approximation to the

directly standardised mortality rate being the crude rate for the

standard population multiplied by the ratio of actual to expected deaths

for the region.

This is the same as the crude rate for the local population multiplied by

the Area Comparability Factor.

Page 7

(ii)

(a)

April 2006

Examiners Report

Calculations.

England and Wales

Total

Population

Number of births

Population

Number of births

10,845,000

595,000

227,000

11,000

Tyne and Wear: 11,000/227,000 = 4.85%

England and Wales

Population

Fertility rate

Expected number of

births

Under 25

3,149,000

0.0563

177,408

25 35

3,769,000

0.0811

305,595

35+

3,927,000

0.0122

47,890

Total

10,845,000

530,893

England and Wales

Fertility rate

Population

Expected Births

Under 25

0.0486

71,000

3,450

25 35

0.0899

74,000

6,656

35+

0.0262

82,000

2,151

227,000

12,256

Total

(b)

The indirectly standardised rate does not require local records of births

to be analysed by age grouping.

The standardised rates are similar so the approximation is acceptable.

Both standardised rates are higher than the crude rate, showing that the

reason for the low cruder rate compared to the national population is

due to population distribution by age.

Both standardised rates are below the crude rate for England and

Wales so the birth rate of Tyne and Wear is lower, even allowing for

the age distribution.

Page 8

13

(i)

April 2006

Examiners Report

EPV of premiums =

(12)

12 Pa[35]:30

12 a[35]:30

12 P 17.631

11

(1 v30 30 p[35] )

24

11

689.23

1

24

2507.02

207.5841P

(245, 000 300) A[35]:30

0.03 12 Pa (12)

[35]:30

5000 IA

1

[35]:30

where

IA

1

[35]:30

7.47005

IA

[35]

689.23

7.89442 30 0.52786

2507.02

0.946137

689.23

2507.02

207.5841P

126,506.762

195.3866

647.47

Page 9

(ii)

retrospective

25V

April 2006

Examiners Report

(a)

(1 i ) 25

(12)

0.97 12 Pa[35]:25

p

25 [35]

1

245,300 A[35]:25

5, 000 IA

1

[35]:25

where

IA

1

[35]:25

IA

7.47005

retrospective

v 25 25 p[35] IA

60

25 A60

882.85

8.36234 25 0.4564

2507.02

0.507198

1

A[35]:25

A[35]:25

v 25 25 p[35]

a (12)

a[35]:25

11

(1 v 25 25 p[35] ) 16.029 0.29693 15.73207

24

[35]:25

25V

[35]

(b)

Page 10

Surrender value would be the same i.e. 25V retrospective 25V prospective at

4% per annum rate of interest as the equality of bases ensures that the

prospective and retrospective reserves of any policy at any given time t

should be equal.

14

(i)

April 2006

Examiners Report

Let P be the annual premium required to meet the company s profit criteria.

Then:

(a)

Here not all decrements are uniform as whilst deaths can be assumed to

be uniformly distributed over the year, surrenders occur only at the

year end.

Hence:

(aq ) dx

qxw (1 qwd )

aq

q xd

qxw

45

46

47

0.001465

0.001622

0.001802

0.05

0.05

0.05

(b)

d

x

0.001465

0.001622

0.001802

aq

w

x

ap

t 1 ( ap ) x

0.049927 0.948608 1

0.049919 0.948459 0.948608

0.049910 0.948288 0.899716

Value of units

at start of year

Allocation

Bid/offer

Interest

Management

charge

Value of units

at start of year

Year 1

0

Year 2

0.347379P

Year 3

1.405063P

0.35P

0.0175P

0.016625P

0.001746P

1.05P

0.0525P

0.067244P

0.007061P

1.05P

0.0525P

0.120128P

0.012613P

0.347379P

1.405063P

2.510077P

Page 11

(c)

April 2006

Examiners Report

Unallocated

premium

Bid/offer

Expenses

Interest

Management

charge

End of year

cashflows

Probability in

force

Discount factor

Expected

present value

of profit

Year 1

0.65P

Year 2

-0.05P

Year 3

-0.05P

0.0175P

0.2P+250

0.0187P-10

0.001746P

0.0525P

0.025P+50

-0.0009P-2

0.007061P

0.0525P

0.025P+50

-0.0009P-2

0.012613P

0.487946P-260

-0.016339P-52 -0.010787P-52

0.948608

0.899716

0.925926

0.857339

0.793832

0.430809P320.170863

(ii)

establishing reserves in the non-unit fund at earlier durations so that the

company does not expect to have to input further money in the future. The

expected non-unit fund cashflows derived in (i) are negative in years 2and 3 so

need to be eliminated.

Page 12

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

12 September 2006 (pm)

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.

4.

Attempt all 12 questions, beginning your answer to each question on a separate sheet.

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

question paper.

In addition to this paper you should have available the 2002 edition of the

Formulae and Tables and your own electronic calculator.

CT5 S2006

Faculty of Actuaries

Institute of Actuaries

the point of retirement, the fund can choose to buy an annuity from a life insurance

company, or pay the pension directly themselves on an ongoing basis.

A mortality study of pensioners has established that the experience of those whose

pension is received through annuities paid by insurance companies is lighter than the

experience of those being paid directly by pension funds.

Explain why the mortality experiences of the two groups differ. Your answer should

include reference to some form of selection.

[4]

model, with constant forces of transition, to price its stand-alone critical illness

policies:

Healthy

Critically ill

Dead

Under these policies, a lump sum benefit is payable on the occasion that a life

becomes critically ill during a specified policy term. No other benefits are payable.

A 20-year policy with sum assured 200,000 is issued to a healthy life aged 40 exact.

(i)

Write down a formula, in integral terms, for the expected present value of

benefits under this policy.

[2]

(ii)

Basis:

:

:

:

Interest:

0.01

0.02

3

8% per annum

[3]

[Total 5]

70: 1

Basis: Mortality: ELT15 (Males)

Interest:

7.5% per annum

[5]

CT5 S2006

A life insurance company issues a reversionary annuity contract. Under the contract

an annuity of 20,000 per annum is payable monthly for life, to a female life now

aged 60 exact, on the death of a male life now aged 65 exact. Annuity payments are

always on monthly anniversaries of the date of issue of the contract.

Premiums are to be paid monthly until the annuity commences or the risk ceases.

Calculate the monthly premium required for the contract.

Basis:

Mortality:

Interest:

Expenses:

PMA92C20 for the male

4% per annum

5% of each premium payment

1.5% of each annuity payment

[6]

Tx and Ty are the complete future lifetimes of two lives aged x and y respectively:

Let the random variable g(T) take the following values

g(T) =

aT

aT

if

Tx

Ty

if

Tx

Ty

(i)

[2]

(ii)

[2]

(iii)

Write down an expression for the variance of g(T) using assurance functions.

[2]

[Total 6]

CT5 S2006

A member of a pension scheme is aged 55 exact, and joined the scheme at age 35

exact. She earned a salary of 40,000 in the 12 months preceding the scheme

valuation date.

The scheme provides a pension on retirement for any reason of 1/80th of final

pensionable salary for each year of service, with fractions counting proportionately.

Final pensionable salary is defined as the average salary over the three years prior to

retirement.

Using the functions and symbols defined in, and assumptions underlying, the

Example Pension Scheme Table in the Actuarial Tables:

(i)

Calculate the expected present value now of this member s total pension.

[4]

(ii)

future service element of the pension.

[2]

[Total 6]

The following data relate to a certain country and its biggest province:

Age-group

Country

Population

Deaths

0-19

20-44

45-69

70 and over

Total

2,900,000

3,500,000

2,900,000

700,000

10,000,000

580

2,450

20,300

49,000

72,330

Province

Population

800,000

1,000,000

900,000

300,000

3,000,000

The population figures are from a mid-year census along with the deaths that occurred

in that year.

There were 25,344 deaths in the province in total.

Calculate the Area Comparability Factor and a standardised mortality rate for the

province.

[6]

A pure endowment policy for a term of n years payable by single premium is issued to

lives aged x at entry.

(i)

Derive Thiele s differential equation for t V , the reserve for this policy at time

t (0 < t < n).

[5]

(ii)

(iii)

CT5 S2006

[2]

[2]

[Total 9]

to a female life aged 60 exact under which level premiums of 5,000 per annum are

payable in advance. In the first year, 85% of the premium is allocated to units and

104% in the second and third years. The units are subject to a bid-offer spread of 5%

and an annual management charge of 0.75% of the bid value of the units is deducted

at the end of each year.

If the policyholder dies during the term of the policy, the death benefit of 20,000 or

the bid value of the units after the deduction of the management charge, whichever is

higher, is payable at the end of the year of death. On survival to the end of the term,

the bid value of the units is payable.

The company holds unit reserves equal to the full bid value of the units but does not

set up non-unit reserves.

It uses the following assumptions in carrying out profit tests of this contract:

Mortality:

Surrenders:

Expenses:

Initial:

Renewal:

Non-unit fund interest rate:

Risk discount rate:

AM92 Ultimate

None

600

100 at the start of each of the second and

third policy years

6% per annum

4% per annum

10% per annum

(i)

Calculate the expected net present value of the profit on this contract.

(ii)

State, with a reason, what the effect would be on the profit if the insurance

company did hold non-unit reserves to zeroise negative cashflows, assuming it

used a discount rate of 4% per annum for calculating those reserves. (You do

not need to perform any further calculations.)

[2]

[Total 12]

CT5 S2006

[10]

10

A life insurance company is reviewing the 2005 mortality experience of its portfolio

of whole life assurances.

You are given the following information:

Age exact on

1 Jan 2005

on 1 Jan 2005

in force on 31 Dec 2005

69

70

500,000

400,000

175,000

150,000

There were 2 death claims during 2005 arising from these policies as follows:

Date of issue of

policy

policy

Sum assured

1 Jan 1980

1 Jan 1982

45

46

12,000

10,000

Sums assured are payable at the end of the year of death.

Net premium reserves are held, based on mortality of AM92 Ultimate and interest of

4% per annum.

(i)

(ii)

Calculate the mortality profit or loss for 2005 in respect of this group of

policies.

[8]

(a)

Calculate the amount of expected death claims for 2005 and compare it

with the amount of actual claims.

(b)

Suggest a reason for this result compared with that obtained in (i).

[4]

[Total 12]

CT5 S2006

11

A life insurance company issues identical deferred annuities to each of 100 women

aged 63 exact. The benefit is 5,000 per annum payable continuously from a

woman s 65th birthday, if still alive at that time, and for life thereafter.

(i)

Write down an expression for the random variable for the present value of

future benefits for one policy at outset.

[3]

(ii)

Basis:

(iii)

12

Mortality:

Interest:

PFA92C20

4% per annum

[2]

Calculate the total variance of the present value at outset of these annuities,

using the same basis as in part (ii).

[8]

[Total 13]

A life insurance company issues a 10-year decreasing term assurance to a man aged

50 exact. The death benefit is 100,000 in the first year, 90,000 in the 2nd year, and

decreases by 10,000 each year so that the benefit in the 10th year is 10,000. The

death benefit is payable at the end of the year of death.

Level premiums are payable annually in advance for the term of the policy, ceasing

on earlier death.

(i)

Basis:

Interest:

Mortality:

Initial expenses:

6% per annum

AM92 Select

200 and 25% of the total annual premium (all incurred

on policy commencement)

Renewal expenses: 2% of each premium from the start of the 2nd policy year

and 50 per annum, inflating at 1.923% per annum, at

the start of the second and subsequent policy years

Claim expenses:

200 inflating at 1.923% per annum

Inflation:

For renewal and claim expenses, the amounts quoted are

at outset, and the increases due to inflation start

immediately.

[8]

(ii)

Write down an expression for the gross future loss random variable at the end

of the ninth year, using whatever elements of the basis in (i) that are relevant.

[3]

(iii)

Calculate the gross premium reserve at the end of the ninth year, using the

premium basis.

[3]

(iv)

END OF PAPER

CT5 S2006

[2]

[Total 16]

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

September 2006

Core Technical

EXAMINERS REPORT

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.

M A Stocker

Chairman of the Board of Examiners

November 2006

Comments

No comments are given

Faculty of Actuaries

Institute of Actuaries

If funds chose at random which annuities to insure and which to self-insure, we would

expect approximately the same mortality experience in both groups. The self-insured

experience is heavier, meaning their lives are somehow below standard on average.

The most likely explanation is that the pension funds make informed decisions based

on the health or reason for retirement of the pensioners. Those retiring early due to

ill-health or those known to have poor health are retained for payment directly by the

fund. That should be cheaper than paying a premium to the insurer based on normal

mortality for these lives. The remainder of the lives, known to be on reasonable health

are insured.

This is adverse selection.

Sensible comments regarding other forms of selection are also acceptable.

20

(i)

HH

t p40 40+t dt

20

HH

= 200, 000 et t p40

40+t dt

0

t

20

= 200, 000 e t e

( 40 + r +40 + r ) dr

0

40+t dt

where:

t

HH

p40

is the probability that the healthy life aged 40is healthy at age 40+t

HH

p40

is the probability that the healthy life aged 40 is healthy at all points up

to age 40+t (These 2 probabilities are the same for this model)

t

= ln(1.08) = 0.076961

(ii)

t

20

( 40 + r +40 + r ) dr

0

40+t dt

0

t

20

{(0.01) +(0.02)}dr

0

(0.02)dt

0

20

= 200, 000 e

0

(0.076961)t (0.03)t

20

0

e

=

= 37,396.79[1 0.11775] = 32,993.32

0

0.106961

Page 2

1

A1

70:1

0

= -ln(p70) = -ln(1 - .03930) = 0.040093

t p70 = exp(-t) = exp(-.040093t)

.075 = ln(1.075) = 0.07232

1

A1

70:1

0

1

(0.040093)

e (0.07232+0.040093)t

0

(0.07232 + 0.040093)

= (0.35610)(0.89368 1) = 0.0379

EPV of benefits:

(12)

(12)

(12)

20, 000a65|60

= 20, 000(a60

a65:60

) = 20, 000(a60 a65:60 ) = 20, 000(15.652 11.682)

= 79, 400

EPV premiums:

(The premium term will be the joint lifetime of the two lives because if his death is

first the annuity commences or if her death is first, there will never be any annuity.)

Let P be the monthly premium

(12)

12 Pa65:60

= 12 P(a65:60 11

) = 12 P(12.682 0.458) = 146.688 P

24

1.015(79,400) = (1 - 0.05)(146.688P) 80,591 = 139.3536P P

= 578.32 per month

(i)

(ii)

This is the present value of a joint life annuity of amount 1 per annum payable

continuously until the first death of 2 lives (x) and (y).

Page 3

2

(iii)

(i)

Var[ g (T )] =

A xy ( A xy ) 2

2

40, 000

ia

ra

+ z M 55

)

20 ( z M 55

20 (34, 048 + 128, 026)

= 40, 000

= 119, 737

80

s54 D55

80 (9.745)(1,389)

z

ia

ra

=

= 41, 628

80

s54 D55

80

(9.745)(1,389)

EPV total pension benefits = 119,737 + 41,628 = 161,365

s

(k )(40, 000)

(ii)

N 55

88, 615

= 41, 628 ( k )(40, 000)

= 41, 628 k = .159

s54 D55

(9.745)(1,389)

ACF =

s Exc,t s mx,t

x

Exc,t

Exc,t s mx,t

x

Exc,t

x

Here

s

E xc,t

E xc,t s m x ,t

E xc,t

Age-group

Population

Deaths

Population

019

2044

4569

70 and over

2,900,000

3,500,000

2,900,000

700,000

580

2,450

20,300

49,000

800,000

1,000,000

900,000

300,000

leading to

m x ,t

0.0002 160

0.0007 700

0.007 6,300

0.07

Total

Page 4

10,000,000

72,330

3,000,000

E xc,t s m x ,t

21,000

28,160

72,330

10, 000, 000

ACF =

28,160

=

3, 000, 000

25,344

= (0.77056)

= (0.77056)(0.008448) = 0.00651

3, 000, 000

8

tV

(i)

=

n t

px +t e( nt )

tV =

t

t

t

t

1

l

( nt px +t ) = ln( nt px +t ) = ln x + n = {ln(l x+ n ) ln(l x +t )} = x+t

t

t l x +t t

n t p x +t t

( nt px +t ) = ( x +t )( nt px+t )

t

( nt )

(e

) = e( nt )

t

( n t )

( x +t )( nt px +t )} + { nt px+t e( nt ) } = nt px +t e( nt ) ( x+t + )

t V = {e

t

t V = ( x +t + ) t V

t

(ii)

The change in reserve at time t consists of the interest earned and the release

of reserves from the deaths.

(The release may be more easily seen if the last line of (i) is rewritten as:

t

benefit.)

(iii)

nV

= 1.

Page 5

(i)

Survival table

qx

x

60

61

62

px

0.008022

0.009009

0.010112

t-1px

0.99198

0.99099

0.98989

1

0.991978

0.983041

Unit fund

Value of

units at

start of

year

Year 1

Year 2

Year 3

Allocation

0.00

4,247.65

9,665.87

4,250.00

5,200.00

5,200.00

Bid/offer

212.50

260.00

260.00

Interest

Management

charge

Value of

units at

end of year

242.25

551.26

876.35

32.10

73.04

116.12

4,247.65

9,665.87

15,366.10

Non-unit fund

Unallocated

premium

Year 1

Year 2

Year 3

Bid/offer

750.00

-200.00

-200.00

212.50

260.00

260.00

Non-unit

fund cash

flow (profit

vector)

Year 1

Year 2

Year 3

282.73

-61.66

27.66

Total NPV

Expenses

Interest

Management

charge

600.00

100.00

100.00

14.50

-1.60

-1.60

32.10

73.04

116.12

Probability

in force at

start of

year

1

0.991978

0.983041

Profit

signature

Discount

factor

282.73 0.909091

-61.16 0.826446

27.19 0.751315

Extra

death

benefit

End of year

cashflows

126.37

93.10

46.86

282.73

-61.66

27.66

Expected

present

value of

profit

257.03

-50.55

20.43

226.91

(ii)

Page 6

The NPV would decrease. Holding reserves would delay the emergence of

some of the Year 1 cash flow, and as the non-unit fund earns 4%, well below

the risk discount rate, the NPV would reduce.

10

(i)

The 2 deaths were 70 and 69 respectively at 1/1/2005. The reserves for these

policies at 31/12/2005 were

26V

a

9.998

= 5, 626.10 and

18.823

a45

24V

a

10.375

= 10, 000 1 70 = 10, 000 1

= 4, 410.92

18.563

a46

Age 69: 500,000 - (175,000 + 4,410.92) = 320,589.08

Age 70: 400,000 - (150,000 + 5,626.10) = 244,373.90

Expected death strain:

(q69)(320,589.08) + (q70)(244,373.90)

= (0.022226)(320,589.08) + (0.024783)(244,373.90)

= 7,125.41 + 6,056.32

= 13,181.73

Actual death strain:

(12,000-5,626.10)+(10,000-4,410.92) = 6,373.90+5,589.08 = 11,962.98

Mortality profit = EDS ADS = 13,181.73-11,962.98 = 1,218.75 profit

(ii)

(a)

Expected claims:

(q69)(500,000)+(q70)(400,000)

= (0.022226)(500,000) + (0.024783)(400,000)

= 11,113 + 9,913.2 = 21,026.20

Actual claims:

12,000 + 10,000 = 22,000

(b)

Actual claims were higher than expected claims but the company still

made a mortality profit. This can only have occurred because the

deaths were disproportionately concentrated on lower DSAR lives

(policies more mature on average). (This can be seen by comparing the

ratio of reserves to sum assured for the death claim policies with the

corresponding ratio for the full portfolio.)

Page 7

11

(i)

g(T) =

5, 000v 2 aT

if T63 < 2

63 2

63

a2 )

(ii)

E[ g (T )] = (100)(5, 000)v 2 2 p63a65 = (500, 000)(0.92456)(0.992617)(14.871 0.5)

= (500, 000)(13.1887) = 6,594,350

(iii)

Var[ g (T )] = E[ g (T ) 2 ] E[ g (T )]2

For 1 of annuity:

E[ g (T ) ] = t p6363+t [v 2 at 2 ]2 dt

2

Let t = r + 2

E[ g (T ) ] = r + 2 p6363+ r + 2 [v 2 ar ]2 dr

2

0

2

1 v r

= r p652 p6365+ r v

dr

0

4

=

=

2 p63v

2

r p6565+r [1 2v

2 p63v

2

+ v 2 r ]dr

0

4

[1 2 A65 + A65 ]

where

0.04

A65 = (1.04)0.5 (1 da65 ) = 1.019804{1

(14.871)} = 0.436515

1.04

2

E[ g (T ) 2 ] =

(0.992617)(0.85480)

(0.039221) 2

Page 8

For annuity of 5,000 we need to increase by 5,0002 and for 100 (independent)

lives we need to multiply by 100.

Total variance = (15.680)(5,0002)(100) = 39,200,000,000 = (197,999)2

12

EPV benefits:

110, 000 A 1

[50]:10

1

[50]:10

(functions @ 6% p.a.)

= 110, 000{ A[50] v10 10 p[50] A60 } 10, 000{( IA)[50] v10 10 p[50] (10 A60 + ( IA)60 )}

= 110, 000 A[50] 10, 000( IA)[50] + v10 10 p[50]{10, 000(( IA)60 A60 )}

= (110, 000)(0.20463) (10, 000)(4.84789) + (0.55839)(0.95684){10, 000(5.46572 0.32692)}

= 22,509.30 48, 478.90 + 27, 456.09 = 1, 486.49

Let P be annual premium

6%

Pa[50]:10

= 7.698 P

EPV expenses

6%

4%

200 + 0.25 P + 0.02 Pa[50]:9

+ 50a[50]:9

+ 200 A 1

4%

[50]:10

4%

p A )

(4%) 10 [50] 60

6%

4%

= 150 + 0.23P + 0.02 Pa[50]:10

+ 50a[50]:10

+ 200( A[50] v10

= 150 + 415.90 + 6.73 + P(.23 + 0.15396) = 572.63 + 0.38396 P

Equation of value:

7.698P = 1,486.49 + 572.63 + 0.38396P 7.31404P = 2,059.12 so P = 281.53 p.a.

(ii)

GFLRV = 10, 000v

.06

+ 200(1.01923)9 v

.04

+50(1.01923)9 0.98(281.53)

or

GFLRV = 10, 000v

.06

+ 200(1.01923)10 v

.06

+50(1.01923) 0.98(281.53)

9

Page 9

(iii)

9V

+50(1.01923)9 0.98(281.53)

= (10, 000)(0.007140)(0.94340) + (237.40)((0.007140)(0.96154) + 59.35 275.90

= 67.36 + 1.63 + 59.35 275.90 = 147.56

(iv)

The reserve is negative. The expected future income exceeds expected future

outgo, because past outgo exceeded past income, meaning the office needs a

net inflow in the last year to recoup previous losses. However, it is at risk of

the policy lapsing, and never getting this net inflow.

Page 10

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

17 April 2007 (am)

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.

4.

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

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

question paper.

In addition to this paper you should have available the 2002 edition of the

Formulae and Tables and your own electronic calculator.

CT5 A2007

Faculty of Actuaries

Institute of Actuaries

Calculate

(i)

5|10q[52]

(ii)

Basis:

Mortality: AM92 Select

[3]

State, with examples, three distinct types of selection in the membership of a pension

scheme.

[3]

x

a =able

i = ill

x

d = dead

Assume that the transition probabilities are constant at all ages with = 2%, = 6%,

= 1% and = 3%.

An able life age 55 exact takes out a 10-year sickness contract that provides a noclaim bonus of 100 if the insured remains able for the full duration of the contract.

Calculate the expected present value of the bonus at the beginning of the contract with

a force of interest of 0.04.

[4]

(i)

In the context of net premiums and reserves, state the conditions necessary for

equality of prospective and retrospective reserves.

[2]

(ii)

Give two reasons why, in practice, these conditions may not hold.

CT5 A20072

[2]

[Total 4]

death, with a savings benefit of 500 payable on every fifth anniversary of the

inception of the policy.

The following basis is used:

Force of mortality: x = 0.05 for all x

Force of interest: = 0.04

Expenses:

None

Calculate the level premium payable annually in advance for life.

[5]

salary at the date of death. Normal Pension Age is 65. State a formula, without using

commutation functions, for the present value of this benefit to a life aged 35 exact

with salary of 25,000 who has just received a salary increase. Define all symbols

used.

[5]

A term assurance contract for a life aged 50 exact for a term of 10 years provides a

benefit of 10,000 payable at the end of the year of death. Calculate the expected

present value and variance of benefits payable under this contract.

Basis:

Mortality: AM92 Select

Interest:

4% per annum

[6]

You are given the following statistics in relation to the mortality experience of

Actuaria and its province Giro:

Actuaria

Exposed to risk Number of deaths

Age

019

2039

4059

6079

(i)

(ii)

300,000

275,000

200,000

175,000

25

35

100

500

Exposed to risk

12,000

10,000

9,000

8,000

Giro

Number of deaths

2

3

6

50

Define all the symbols that you use.

[2]

for Giro.

[4]

[Total 6]

CT5 A20073

annual income of 15,000. The annuity is payable monthly in advance and is

guaranteed to be paid for a period of 5 years and for the whole of life thereafter. On

the annuitants death a survivors pension is paid at the rate 7,500 per annum for the

remainder of life for the spouse of the annuitant who is currently aged 55 exact under

the following circumstances:

(a)

If the life dies within the guarantee period then the survivors pension

commences with the first payment immediately after the end of the guarantee

period.

(b)

If the life dies after the guarantee period has expired then the survivors

pension commences with the first payment immediately after the death of the

first life.

Basis:

Annuitant mortality: PMA92C20

Spouse mortality:

PFA92C20

Interest:

4% per annum

[6]

10

Let X be a random variable representing the present value of the benefits of a whole of

life assurance, and Y be a random variable representing the present value of the

benefits of a temporary assurance with a term of n years. Both assurances have a sum

assured of 1 payable at the end of the year of death and were issued to the same life

aged x.

(i)

(ii)

Describe the benefits provided by the contract which has a present value

represented by the random variable X - Y.

[1]

Show that

and hence or otherwise that

Var( X Y ) =

Ax ( n | Ax ) 2 2 A1x:n

functions 2A are determined using an interest rate of i2 + 2i.

CT5 A20074

[7]

[Total 8]

11

A five-year unit-linked policy issued to a life aged 50 exact has the following pattern

of end of year cashflows per policy in force at the start of each year:

(-95.21, -30.18, -20.15, 77.15, 120.29)

12

(i)

Explain why a life office might need to set up non-unit reserves in respect of a

unit-linked life assurance policy.

[2]

(ii)

Calculate the non-unit reserves required for the policy in order to zeroise

negative cashflows assuming AM92 Ultimate mortality and that reserves earn

interest at the rate of 5% per annum.

[2]

(iii)

Determine the net present value of the profits before and after zeroisation

assuming the risk discount rate used is 8% per annum and state with reasons

which of these figures you would expect to be higher.

[6]

[Total 10]

A life office issued 750 identical 25-year temporary assurance policies to lives aged

30 exact each with a sum assured of 75,000 payable at the end of year of death.

Premiums are payable annually in advance for 20 years or until earlier death.

(i)

Show that the annual net premium for each policy is approximately equal to

104 using the basis given below.

[2]

(ii)

Calculate the net premium reserve per policy at the start and at the end of the

[4]

20th year of the policy.

(iii)

Calculate the mortality profit or loss to the life office during the 20th year if

twelve policyholders die during the first nineteen years of the policies and two

[4]

policyholders die during the 20th year.

Basis:

Mortality:

Interest:

AM92 Ultimate

4% per annum

[Total 10]

CT5 A20075

13

A life office issues with-profit whole of life contracts, with the sum assured payable

immediately on death of the life assured. Level premiums are payable monthly in

advance to age 65 or until earlier death.

The life office markets two versions of this policy, one assumed to provide simple

bonuses of 4% per annum of the sum assured vesting at the end of each policy year

and the other assumed to provide compound bonuses of 4% of the sum assured, again

vesting at the end of each policy year. The death benefit under each version does not

include any bonus relating to the policy year of death.

The following basis is assumed to price these contracts:

Mortality

Interest

Initial expenses

Renewal expenses

Initial commission

Renewal commission

Claims expenses

AM92 Select

4% per annum

300

2.5% of the second and subsequent monthly premiums

50% of the gross annual premium

2.5% of the second and subsequent monthly premiums

250 at termination of the contract

Calculate the level monthly premium required for each version of this policy issued to

a life aged 30 exact at outset for an initial sum assured of 50,000.

[12]

14

A life office issues a 4-year non profit endowment assurance policy to a male life

aged 61 exact for a sum assured of 100,000 payable on survival to the end of the

term or at the end of the year of death if earlier. Premiums are payable annually in

advance throughout the term of the policy.

There is a surrender benefit payable equal to a return of premiums paid, with no

interest. This benefit is payable at the end of the year of surrender.

The life office uses the following assumptions to price this contract:

Mortality

Surrenders

Interest

Initial expenses

Renewal expenses (on the second

and subsequent premium dates)

AM92 Select

None

4% per annum

500

50 per annum plus 2.5% of the premium

In addition, the company holds net premium reserves, calculated using AM92

Ultimate mortality and interest of 4% per annum.

In order to profit test this contract, the life office assumes the same mortality and

expense assumptions as per the pricing basis above. In addition, it assumes it earns

5% per annum on funds and that 5% of all policies still in force at the end of 1, 2, and

3 years then surrender.

Calculate, using a risk discount rate of 8% per annum, the expected profit margin on

this contract.

[18]

END OF PAPER

CT5 A20076

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

April 2007

Core Technical

EXAMINERS REPORT

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.

M A Stocker

Chairman of the Board of Examiners

June 2007

Comments

Comments, where applicable, are given in the solutions that follow.

Faculty of Actuaries

Institute of Actuaries

(i)

5|10 q[52]

(ii)

e.g. works versus staff. Alternatively ill-health retirements, other early retirement and

normal retirements experience different mortality

Temporary Initial selection employee turnover rates vary with duration of

employment, recent joiners are most likely to leave.

Time selection turnover rates vary with economic conditions.

Other answers given credit if properly defined with pension fund specific examples.

65

EPV = 100e

55

= 100e0.09*[6555]

= 100e 0.9

= 40.66

(i)

(ii)

Page 2

basis.

The basis is the same as the basis used to calculate the premiums used in

the reserve calculation.

The assumptions used for the retrospective calculation (for which the

experienced conditions over the duration of the contract up to the valuation

date are used) are not generally appropriate for the prospective calculation

(for which the assumptions considered suitable for the remainder of the

policy term are used).

calculated may not be appropriate for the retrospective or prospective

reserve some years later.

1000* 0.05*e

0

0.09t

dt = 1000*0.05 / 0.09

= 555.56

500*(e-0.45 + e-0.9 + e-1.35 +)

= 500*e-0.45/(1 - e-0.45) = 500*0.63763/0.36237

= 879.81

Value of premiums:

P*(1 + e-.09 + e -.18 + e-.27 +.)

= P*(1/1 - e-.09) = 11.619*P

Hence

11.619*P = 555.56+879.81

P = 123.54

29

4 25, 000 t =0

s36l35v35

definitions:

d x number of deaths in year of age x to x + 1

l x number of lives alive at age x exact

Other schemes given credit if properly defined.

Page 3

Present value

1

10000 A[50]:10

= 10000( A[50] v10

l60

l[50]

A60 )

9706.0977

0.45640) = 336.60

Variance

1

1

= 100002 ( 2 A[50]:10

( A[50]:10

)2 )

= 100002 (( 2 A[50] v 20

l60

l[50]

9706.0977

The function with the 2 suffix is calculated at rate i2+2i i.e 8.16% in this case.

(i)

mortality rate to the crude mortality rate in the standard population.

SMR =

Ecx,t mx,t

x

Ecx,t s mx,t

x

E xc,t = central exposed to risk in population being studied between age x and age x + t

mx,t = central mortality rate in population being studied for ages x to x + t

s

(ii)

+ 500 8 / 175)

= 2.058

As the SMR is greater than 1, Giro experiences heavier mortality than

Actuaria

Page 4

(12)

(12)

Purchase price = 15, 000a(12) + 7500 5 a60

+ 7500 5 a60:55

5

5

(12)

+7500v5 (1 5 p 60) 5 p55 a(12)

65

60 + 7500v (1 5 p 55) 5 p60 a

l65l60

l60l55

l65

l60

+7500v5 [(1 l 65 / l 60)l 60 / l 55)(a60 11/ 24) + (1 l 60 / l 55)l 65 / l 60)(a65 11/ 24)]

= 15000 (1 0.82193) / 0.039157 + 7500 0.82193 9647.797

+7500 0.82193 9647.797

9826.131

9848.431

9917.623

9826.131

+7500 0.82193 (1 9848.431/ 9917.623) 9647.797 / 9826.131 (13.666 11/ 24)

= 68213.86 + 79940.67 + 103244.12 + 1799.09 + 557.72

= 253755 to nearest

The following is an alternative derivation of the formula for the purchase price above.

(12)

(12)

15, 000a5|(12) + 15, 000v5 5 p60 (1 5 p55 )a65

+ 7,500v5 5 p55 (1 5 p60 )a60

(12)

(12)

(12)

+ v5 5 p60 5 p55 (15, 000a65

+ 7,500[a60

a65:60

])

10

(i)

assured of 1 payable at the end of the year of death of a life now aged x

provided the life dies after age x + n.

(ii)

X = vk+1

Cov(X, Y)

all k

v k +1 0 k < n

Y=

kn

0

Page 5

k = n 1

Now E[XY] =

k =0

k = n 1

k =0

(v k +1 ) 2 P[ K x = k ] +

k =

vk +1 0 P[ K x = k ]

k =n

(v 2 ) k +1 P[ K x = k ]

= 2 A1x:n

Where 2A is determined using a discount function v2 , i.e. using an interest rate

i* = (1 + i)2 1 = 2i + i2

Then: Cov(X, Y) = 2 A1x:n Ax . A1x:n

Now: Var(X Y) = Var(X) + Var(Y) 2 Cov(X, Y)

= ( 2 Ax ( Ax ) 2 ) + ( 2 A1x:n ( A1 ) 2 ) 2( 2 A1x:n Ax . A1x:n )

x:n

x:n

= 2 Ax 2 A1x:n ( Ax A1x:n ) 2

= 2 Ax 2 A1x:n ( nAx ) 2

The Examiners regret that two typographical errors occurred in the question wording set in

the Examination:

In line 2 of 10(ii) the symbol shown as 2 A1x should have been 2 A1x:n .

In the same line the function on the left hand side of the equation should have read

Cov(X,Y) and not have included in the brackets 2 assurance functions (which as

erroneously stated would have equated to zero).

In the event this question was done well despite the errors. The majority of students

attempting the question noticed the first error as obvious and adjusted accordingly. The

second error was rarely noticed by students who often went on to produce an otherwise good

proof.

The question has been corrected for publication. The Examiners wish to sincerely apologise

for these errors and wish to assure students that the marking system was sympathetically

adjusted to meet the circumstances.

Page 6

11

(i)

outset a product should be self-supporting. Many products produce profit

signatures that usually have a single financing phase. However, some

products, particularly those with substantial expected outgo at later policy

durations, can give profit signatures which have more than one financing

phase. In such cases these later negative cashflows should be reduced to zero

by establishing reserves in the non-unit fund at earlier durations. These

reserves are funded by reducing earlier positive cashflows.

(ii)

20.15

= 19.190

1.05

1

1

(30.18 + p51 19.190) =

(30.18 + 0.99719 19.190) = 46.968

1V =

1.05

1.05

2V

(iii)

Before zeroisation, the net present value (based on a risk discount rate of 8%)

is:

NPV =

+

+

1.08

1.082

1.083

1.084

1.085

95.21 0.99749 30.18 0.99469 20.15 0.99155 77.15 0.98804 120.29

+

+

1.08

1.082

1.083

1.084

1.085

Profit in year 1 = 95.21 p50 1V = 95.21 0.99749 46.968 = 142.06

So profit vector will become (-142.06, 0, 0, 77.15, 120.29)

And NPV after zeroisation will be:

NPV =

142.06

+ 0 + 0 + 3 50 4

+

1.08

1.08

1.085

142.06

0.99155 77.15 0.98804 120.29

+0+0+

+

1.08

1.084

1.085

Page 7

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

the profits has been deferred and the risk discount rate is greater than the

accumulation rate.

12

(i)

1

Net premium per policy is P where Pa30:20 = 75, 000 A30:25

P=

9557.8179

0.38950

9925.2094

=

9712.0728

21.834 1.0420

17.444

9925.2094

( 0.16023 0.14070 ) = 104.30

= 75, 000

( 21.834 7.7903)

(ii)

Net premium reserve per policy at the end of the 20th year

1

= 75, 000 A50:5

0 = 75, 000 A50 v5 5 p50 A55

9557.8179

0.38950 = 75, 000 0.014014 = 1051.06

9712.0728

Net premium reserve per policy at the start of the 20th year

Sq49 + 20Vp49

P

1+ i

75, 000q49 + 1051.06 p49

=

104.30

1.04

75, 000 0.002241 + 1051.06 0.997759

=

104.30

1.04

= 1065.68

(iii)

EDS = 738q49 73,949 = 122,301

ADS = 2 73,949 = 147,898

Mortality profit = 122,301 147,898 = -25,597 (i.e. a loss)

Page 8

13

(i)

Let P be the monthly premium for the contract with simple bonus. Then

equation of value (at 4% p.a. interest) is:

12 P(.95a(12)

[30]:35

where a(12)

[30]:35

= a[30]:35

11

11

8821.2612

1 v35 35 p[30] = 19.072 1 1.0435

24

24

9923.7497

= 18.7169

Therefore:

12 P(.95 18.7169) 5.95 P = (48, 000 + 250) 1.040.5 0.16011 + 2, 000 1.040.5 6.91644 + 300

i.e.

207.42266 P = 7,878.299 + 14,106.825 + 300

P=

(ii)

22, 285.124

= 107.44

207.42266

Let P be the monthly premium for the contract with compound bonus. Then

equation of value (at 4% p.a. interest) is:

@ 4%

(12)

12 P(.95a[30]:35

) 5.95 P = 50, 000 v 0.5 q[ x ] + v1.5 p[ x ]q[ x ]+1 (1.04) + ... + 250 A[30]

+ 300

@ 4%

+ 300

v 1.04q[ x ] + v1.5 1.042 p[ x ]q[ x ]+1 + ... + 250 A[30]

1.04

50, 000

@ 4%

v 1.04q[ x ] + v 2 1.042 p[ x ]q[ x ]+1 + ... + 250 A[30]

+ 300

0.5

(1.04 )

50, 000

(1.04 )

0.5

@ 0%

@ 4%

A[30]

+ 250 A[30]

+ 300

@ 0%

=1

where A[30]

50, 000

(1.04 )

0.5

P =

49,369.854

= 238.02

207.42266

Page 9

14

X

q[dx ] = ( aq )[ x ]

q[sx ]

( aq )[sx] = q[sx]

61

62

63

64

0.006433

0.009696

0.011344

0.012716

0.05

0.05

0.05

0.04968

0.04952

0.04943

(ap)[61]+t 1

t 1 ( ap )[61]

1

2

3

4

0.943887

0.940784

0.939226

0.987284

1

0.94389

0.88799

0.83403

Pa[61]:4 = 100, 000 A[61]:4 + (50 + 0.025 P)(a[61]:4 1) + 500

P(0.975a[61]:4 + 0.025) = 100, 000 A[61]:4 + 50(a[61]:4 1) + 500

P=

= 23,565.37

3.66175

1V61:4

= 1

a62:3

2V61:4

= 1

a63:2

3V61:4

= 1

a64:1

Page 10

a61:4

a61:4

a61:4

= 1

2.857

= 0.23240

3.722

= 1

1.951

= 0.47582

3.722

= 1

1.000

= 0.73133

3.722

(1 ( aq ) )

d

[ x]

Year t

1

2

3

4

Prem

Expense

Opening

reserve

Interest

Death

Claim

Surr

Claim

Mat

Claim

Closing

reserve

Profit

vector

23565.4

23565.4

23565.4

23565.4

500

639.1

639.1

639.1

0

23240.0

47582.0

73133.0

1153.3

2308.3

3525.4

4803.0

643.3

969.6

1134.4

1271.6

1170.7

2333.9

3494.5

0

0

0

0

98728.4

21935.9

44764.4

68688.4

0

468.8

406.7

716.4

862.3

Year t

Profit signature

Discount factor

1

2

3

4

468.8

383.9

636.2

719.2

.92593

.85734

.79383

.73503

434.1

329.1

505.0

528.6

Year t

Premium

t 1 p[61]

Discount factor

NPV of premium

1

2

3

4

23565.4

23565.4

23565.4

23565.4

1

0.94389

0.88799

0.83403

1

.92593

.85734

.79383

23565.4

20595.6

17940.6

15602.1

Profit margin =

1, 796.8

= 0.0231 i.e. 2.31%

77, 703.7

Page 11

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

28 September 2007 (am)

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.

4.

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

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

question paper.

In addition to this paper you should have available the 2002 edition of the

Formulae and Tables and your own electronic calculator.

CT5 S2007

Faculty of Actuaries

Institute of Actuaries

Px

tVx

i

qx+t

=

=

=

=

0.017

0.468

0.03

0.024

In a special mortality table with a select period of one year, the following

relationships are true for all ages:

0.5 q[ x ]

= (0.33)qx

0.5 q[ x ]+ 0.5

= (0.5)qx

Express p[ x ] in terms of px .

[2]

[3]

A twelve-year life insurance contract has the following profit signature before any

non-unit reserves are created:

(+1, -1, +1, +1, +1, -1, 0, -1, +1, -1, +1, +1)

Non-unit reserves are to be set up to zeroise the negative cash flows.

Write down the revised profit signature, ignoring interest.

[3]

An annuity makes monthly payments in arrear to a life aged 65 exact where each

payment is 1.0039207 times greater than the one immediately preceding. The first

monthly amount is 1,000.

Calculate the expected present value of the annuity using the following basis:

Mortality: PFA92C20

Interest:

9% per annum

[4]

(i)

[2]

(ii)

State the main disadvantage of this rate and outline how is it overcome in

practice.

[2]

[Total 4]

CT5 S20072

Calculate the probability that a pensioner aged 75 exact will die between ages 75.5

and 76.5 assuming:

(a)

(b)

a constant force of mortality between consecutive birthdays.

[5]

A life insurance company sells two whole life contracts to lives aged 40 exact at

entry. Level monthly premiums are payable in advance until the death of the life

assured. Death benefits are paid at the end of the year of death.

Under policy A, the sum assured is 100,000 during the first year and it increases by

5,000 at the end of each year for surviving policyholders.

Policy B is a with profit policy with initial sum assured of 100,000. The company

intends to declare simple annual reversionary bonuses of 5% of the original sum

assured each year, vesting at the end of each policy year.

After ten years, the total declared bonuses under the with profit policy amount to

50,000.

Calculate the net premium reserve required for each policy after ten years.

Basis:

Mortality: AM92 Select

Interest:

4% per annum

[6]

(a)

(b)

(c)

class selection

spurious selection

time selection.

CT5 S20073

[6]

A life office issues an annuity to a woman aged 65 exact and a man aged 68 exact.

The annuity of 20,000 per annum is payable annually in arrears for as long as either

of the lives is alive.

The office values this benefit using the following basis:

Interest:

Mortality:

10

4% per annum

PFA92C20

PMA92C20

(i)

(ii)

Calculate the probability that the life office makes a profit in this case if it

charges a single premium of 320,000.

[4]

[Total 6]

[2]

A policy provides a benefit of 500,000 immediately on the death of (y) if she dies

after (x).

(i)

the complete future lifetimes of (x) and (y) respectively) for the present value

of the benefit under this policy.

[2]

(ii)

Write down an expression for the expected present value of the benefit in

terms of an integral.

(iii)

11

Female:

Males:

[2]

Suggest, with a reason, the most appropriate term for regular premiums to be

payable under this policy.

[2]

[Total 6]

Let X be a random variable representing the present value of the benefits of a pure

endowment contract and Y be a random variable representing the present value of the

benefits of a term assurance contract which pays the death benefit at the end of the

year of death. Both contracts have unit sum assured, a term of n years and were

issued to the same life aged x.

(i)

expression for the covariance of X and Y.

[4]

(ii)

simplify it as far as possible using standard actuarial notation.

[4]

[Total 8]

CT5 S20074

12

endowment policies to a group of lives aged 40 exact. In each case, the sum assured

was 75,000 and premiums were payable annually in advance.

On 1 January 2006, 500 policies were still in force. During 2006, 3 policyholders

died, and no policy lapsed for any other reason.

The office calculates net premiums and net premium reserves on the following basis:

Interest:

Mortality:

13

4% per annum

AM92 Select

(i)

Calculate the profit or loss from mortality for this group for the year ending

31 December 2006.

[7]

(ii)

[2]

[Total 9]

aged 30 exact. The sum assured of 200,000 is payable at maturity or at the end of

the year of death if earlier. Level premiums are payable annually in advance for the

duration of the contract.

(i)

Show that the annual premium is approximately 2,007, using the following

basis:

Interest:

Mortality:

Expenses:

Initial:

Renewal:

Claim:

6% p.a.

AM92 Ultimate

300 plus 50% of the annual premium

2% of the second and subsequent annual premiums

600 on death; 200 on maturity

[6]

(ii)

Write down the gross premium future loss random variable after 25 years,

immediately before the premium then due is paid.

[3]

(iii)

Calculate the retrospective policy reserve after 25 years, using the same basis

as in (i), but with 4% p.a. interest.

[6]

(iv)

Explain whether the reserve in (iii) would have been smaller, the same or

greater than in (iii) if the office had used the prospective gross premium

reserve, on the same basis.

[3]

[Total 18]

CT5 S20075

14

A life office uses the following three-state model to calculate premiums for a 2-year

accelerated critical illness policy issued to healthy policyholders aged 63 exact at

entry.

C: Critically ill

H: Healthy

D: Dead

In return for a single premium payable at entry, the office will pay benefits of:

100,000 if the policyholder dies from the healthy state;

60,000 if he is diagnosed as having a critical illness;

40,000 if he dies from the critically ill state.

All benefits are payable at the end of the relevant policy year.

Let St represent the state of the policyholder at age 63 + t, so that S0 = H and for t = 1,

2, St = H, C or D. The transition probabilities are defined as follows:

ij

p63

+t = Pr(St+1= j | St = i ).

t

HC

p63

+t

HD

p63

+t

CD

p63

+t

0

1

0.04

0.06

0.02

0.03

0.25

0.33

(i)

[3]

(ii)

Calculate the net present value at entry of the benefits assuming a rate of

interest of 10% per annum for each of the outcomes in (i).

[3]

(iii)

[3]

(iv)

Calculate the mean and variance of the present value at entry of the total

benefits per policy.

[5]

(v)

The office expects to sell 10,000 of these policies. The single premium is set

at a level which will ensure that the probability that the office makes a profit is

0.95. Calculate the amount of the single premium, assuming the profit is

normally distributed.

[6]

[Total 20]

END OF PAPER

CT5 S20076

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

September 2007

Core Technical

EXAMINERS REPORT

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.

M A Stocker

Chairman of the Board of Examiners

December 2007

Faculty of Actuaries

Institute of Actuaries

(0.468 + 0.017)(1.03) = 0.024 + (0.976)( t +1Vx )

t +1Vx

= (1 0.33qx )(1 0.5qx ) = (1 0.33(1 px ))(1 0.5(1 px ))

= (0.67 + 0.33 px )(0.5 + 0.5 p x )

= 0.335 + 0.5 px + 0.165 p x 2

(+1, -1, +1, +1, +1, -1, 0, -1, +1, -1, +1, +1)

(+1, -1, +1, +1, +1, -1, 0, -1, 0, 0, +1, +1)

(+1, -1, +1, +1, +1, -1, -1, 0, 0, 0, +1, +1)

(+1, -1, +1, +1, +1, -2, 0, 0, 0, 0, +1, +1)

(+1, -1, +1, +1, -1, 0, 0, 0, 0, 0, +1, +1)

(+1, -1, +1, 0, 0, 0, 0, 0, 0, 0, +1, +1)

(0, 0, +1, 0, 0, 0, 0, 0, 0, 0, +1, +1)

All positives after last negative remain unchanged.

Consider last negative in year 10. The underlying cash flow that year, per policy in

force at start of year 10, is

1

px

= ( NUCF )10 .

( NUCF )10

1+i

= ( px +8 )(( NUCF )10 )

per policy in force at the start of year 9.

The change in year 9 cash flow is

( NUCF )9 = ( p x +8 )(( NUCF )10 ) = p x +8 ( NUCF )10

Page 2

and the change in year 9 profit signature becomes

( PS )*9 = 8 px px +8 ( NUCF )10 = 9 p x ( NUCF )10 = 1

resulting in a revised year 9 profit signature of +1-1=0.

The other results follow by repeating this step from year 9 towards year 1 wherever

there are negative values in the profit signature.

1

1.091/12

1.0039207 + +

+ 2 /12 p65 1.0039207

2 /12 + 3/12 p65

3/12

1.09

1,000

EPV = 1.0039207

( 1/12 p65

1

1.041/12

1.048076

1.09

+ 2 /12 p65

1.09

1 leading to

= 1.04

1

1.042 /12

+ 3/12 p65

1

1.043/12

++

12,000

(12)

= 1.0039207

a65

@ 4%p.a.

s Exc,t mx,t

5

(i)

Exc,t

Where:

s

Exc,t : Central exposed to risk in standard population between ages x and x+t

population being studied for ages x to x+t

(ii)

The main disadvantage is that it requires age-specific mortality rates, mx,t , for

the group / population in question, and these are often not available

conveniently. To overcome this, indirect standardisation, which relies on

easily available data, can be used.

Page 3

0.5| q75

UDD t qx = (t )qx , 0 t 1

(a)

0.5| q75

0.5 p75

0.5 p75 (1

p75.5 ) =

using

0.5| q75

= [( 0.5 p75 )( 0.5 q75.5 ) + ( p75 )( 0.5 q76 )] = [(1 0.5 q75 )( 0.5 q75.5 ) + (1 q75 )( 0.5 q76 )]

(0.5)(.05)

(b)

t

t

t

Constant force of mortality t px + r = e = (e ) = ( px ) , 0 r + t 1

0.5| q75

= (0.974679)[1 0.944987] = 0.05362

Policy A:

10V

(12)

= 145, 000 A50 + 5, 000( IA)50 ( NP)a50

where NP from

[40]

NP

and

10V

= 36,923.15

Policy B:

10V

(12)

= 150, 000 A50 ( NP)a50

where NP from

[40]

Page 4

and

(a)

10V

= 29,342.33

mortality

e.g. sex, male and female rates differ at all ages

(b)

which are not the true causes of these differences. The influence of some

confounding factor has been ignored.

e.g. Regional mortality differences actually explained by the different

composition of occupations in the different regions.

(c)

Time selection: within a population, mortality varies over calendar time. The

effect is usually noticed at all ages and usually rates become lighter over time

e.g. ELT12 male mortality vs. ELT15male

(i)

68:65

f

= 20, 000(a68 + a65

a68:65 )

(ii)

i.e. if 20,000 an >320,000 or an >16.

At 4% p.a., a26 =15.9828 and a27 = 16.3296 so if the office makes the 27th

payment under this annuity, it incurs a loss. It therefore makes a profit so long

as both lives have died before this time, with probability 27 q

68:65

27 68:65

f

m

= ( 27 q68

)( 27 q65

) = (1

m

l95

m

l68

)(1

f

l92

f

l65

1,020.409

3,300.559

= (1 9,440.717

)(1 9,703.708

) = (0.891914)(0.65987) = 0.5885

Page 5

10

(i)

500, 000vTy

g (T ) =

0

(ii)

E[ g (T )] = 500, 000 vt (1 t px ) t p y y +t dt

Ty > Tx

Ty Tx

(iii)

11

(i)

Lifetime of (y). If (y) dies first, no benefit is possible and if (y) dies second,

SA becomes payable immediately. (x)s lifetime is irrelevant in this context.

Premium could be payable for joint lifetime of (x) and (y) but this is shorter

than (y) and therefore we use (y)s lifetime.

v n

X =

0

Kx n

Kx < n

0

Y = K +1

v x

Kx n

Kx < n

XY = 0 for all K x

COV ( X , Y ) = E[ XY ] E[ X ]E[Y ] = 0 ( Ax:n1 )( A1x:n )

(ii)

= 2 Ax:n1 ( Ax:n1 ) 2 + 2 A1x:n ( A1x:n ) 2 2( Ax:n1 )( A1x:n )

= { 2 Ax:n1 + 2 A1x:n } {( Ax:n1 ) 2 + ( A1x:n ) 2 + 2( Ax:n1 )( A1x:n )}

= { 2 Ax:n1 + 2 A1x:n } {( Ax:n1 ) + ( A1x:n )}2

= 2 Ax:n ( Ax:n ) 2

12

(i)

P(13.930) = (75, 000)(0.45639)(0.94245)

P = 32, 259.45 /13.93 = 2,315.83

Mortality profit = Expected Death Strain Actual Death Strain

DSAR = 0 15V = (75, 000 A55:51 Pa55:5 )

= (75, 000v5 5 p55 Pa55:5 )

= {(75, 000)(0.82193)(0.97169) (2,315.83)(4.585)} = 49, 281.51

EDS = (q54)(500)(-49,281.51) = (0.003976)(500)(-49,281.51) = -97,971.64

ADS = (3)(-49,281.51) = -147,844.53

Page 6

Mortality Profit = -97,971.64 - (-147,844.53) = 49,872.89 profit.

13

(ii)

endowments, the death strain is negative because no death claim is paid and

there is a release of reserves to the company on death. In this case, more

deaths than expected means this release of reserves is greater than required by

the equation of equilibrium and the company therefore makes a profit.

(i)

Pa30:35 = 200, 600 A30:35 400 A30:351 + (0.02) Pa30:35 0.02 P + 300 + (0.5)( P)

Pa30:35 = 15.150 P

A30:35 = 0.14246

A30:351 = v35 35 p30 = (0.13011)(0.88877) = 0.11563

= (200,600)(0.14246) - (400)(0.11563)

= 28,577.48 - 46.25 = 28,531.23

EPV of remaining expenses:

[(0.02)(15.150P)] - 0.02P + 0.5P + 300 = 0.783P + 300

Equation of value:

15.150P = 28,531.23 + 300 + 0.783P 14.367P = 28,831.23

P = 2,006.77 per annum = 2,007 p.a.

(ii)

K55 +1

(0.98)(2, 007)(aK +1 )

200, 600v

55

GFLRV =

10

200, 200v (0.98)(2, 007)(a10 )

K55 < 10

K55 10

Page 7

(iii)

25V

retro

1

{0.98Pa30:25

v 25 25 p30

1

}

0.48 P 300 200, 600 A30:25

a30:25 = a30 v 25 25 p30 a55 = 21.834 (0.36123)(15.873) = 16.100

1

A30:25

= A30 v 25 25 p30 A55 = 0.16023 (0.36123)(0.38950) = 0.01953

25V

retro

(iv)

1

{[2, 007][(0.98)(16.100) (0.48)] 300 (200, 600)(0.01953)}

0.36123

1

{30, 703.09 300 3,917.72} = 73,319.96

0.36123

pro

pro

retro

V@retro

4% < V@6% = V@ 6% < V@ 4%

and expenses and lower interest leads to lower reserves but prospective

reserves are meeting the excess of future benefits claims over future

premiums and lower interest leads to higher reserves.

14

Transition probabilities not given explicitly are

Outcome

HH

p63

+t

CC

p63

+t

DD

p63

+t

0.94

0.91

0.75

(not needed)

0.67

1.00

(not needed)

1.00

PV of Cash

flow (000's)

PV Ben

(PV Ben)2

Prob.

Prob.

E[PVB]

E[PVB2]

HH

0.00

HC

60v2

49.59

HD

100v2

82.64

CC

60v

54.55

CD

60v+40v2

87.60

DD

100v

90.91

8264.46

Total

Page 8

79.73554

0.02

9.56364 677.61492

(iv)

Var.

= (1,000)2{(677.61492 - (9.56364)2}

= 586,151,710 = (24,210.57)2

(v)

EPV(profit) = (10,000)(SP - 9,563.64) = 10,000SP - 95,636,400

Var.(profit) = Var.(SP - EPV(bens)) = Var.(EPV(bens))

For 10,000 independent policies,

Var.(profit) = (10,000)(586,151,710) = (2,421,057)2

St. Dev.(profit) = 2,421,057

We need SP so Prob.(profit > 0) = 0.95

profit ( EPV (profit) 0 (10, 000SP 95, 636, 400)

Pr .

>

= 0.95

StDev(profit)

2, 421, 057

95, 636, 400 10, 000 SP

Pr . z >

= 0.95

= 0.05

2, 421, 057

2, 421, 057

= 1 (0.05) = 1.6449

2, 421, 057

SP =

= 9,961.88 = 9,962

10, 000

Page 9

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

14 April 2008 (am)

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.

4.

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

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

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 A2008

Faculty of Actuaries

Institute of Actuaries

(a)

Express

(b)

5|10 q40

in words.

[2]

contract.

[4]

Explain why a life insurance company will need to set up reserves for the endowment

assurance contracts it has sold.

[4]

A life insurance company sells a term assurance and critical illness policy with a 20

year term to a life aged 40 exact. The policy provides a benefit of 50,000 payable

immediately on death or earlier diagnosis of critical illness. No further benefit is paid

in the event of death within the term after a prior critical illness claim has been paid.

The company prices the policy using the following multiple state model:

Healthy (h)

x

Dead (d)

x

Calculate the expected present value of the benefits under the policy.

Basis: i = 5% per annum

x = 0.005 at all ages

x = 0.006 at all ages

x = 0.003 at all ages

[5]

to an annuitant aged y.

(a)

Derive an expression for the present value of the reversionary annuity using

random variables for the future lifetimes.

(b)

annuity in terms of assurance functions.

[5]

CT5 A20082

A parent who has just died left a bond in their will that provides a single payment of

15,000 in 10 years time. The payment of 15,000 will be shared equally between

the local cats home and such of the parents two sons (currently aged 25 and 30

exact) who are then still alive. Calculate the expected present value of the share due

to the cats home.

Basis: Mortality AM92 Ultimate

Interest 3% per annum

[5]

A defined benefit pension scheme provides a pension on retirement for any reason of

one-sixtieth of final pensionable salary for each year of service (with proportion for

part years of service). Final pensionable salary is average salary over the three years

immediately preceding retirement. Calculate the cost of providing future service

benefits for a new member aged 40 exact as a percentage of salary.

Basis: Example Pension Scheme Table in the Formulae and Tables for Examinations

Handbook

[6]

(i)

Show that

t s qx+ s

(t s )qx

,

(1 sqx )

( 0 s < t 1)

(ii)

[4]

(a)

(b)

a constant force of mortality

CT5 A20083

[3]

[Total 7]

A life insurance company prices annuities using a basis which incorporates the

location of the proposing annuitants as an additional rating factor.

(i)

Identify three factors that influence mortality and would cause the insurance

company to adopt location as a rating factor. State which form of selection is

demonstrated by the use of location as a rating factor.

[4]

(ii)

The company has produced the following data in respect of two locations.

Calculate the standardised mortality ratio for each location based on the

standard mortality table ELT15(Males).

Age

60

61

62

63

Location A

Initial exposed Number

to risk

of deaths

100

1

175

3

190

2

210

3

Location B

Initial exposed Number

to risk

of deaths

200

3

150

3

170

3

100

2

[4]

[Total 8]

10

A male life aged 60 exact wants to buy the following benefits within one policy:

(a)

currently aged 55 exact commencing on his death and for the rest of her life,

and

(b)

currently aged 13 exact commencing on the death of either grandparent and

ceasing when the grandson reaches age 21

Basis:

Mortality

Wife PFA92C20

Grandson ignore

Interest

4% per annum

[10]

CT5 A20084

11

then aged 50 exact. Under the policy, the basic sum assured of 75,000 and attaching

bonuses are payable at maturity or immediately on death, if earlier. The company

declares compound reversionary bonuses 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).

Level premiums are payable annually in advance under the policy.

(i)

approximately 7,487.

Basis:

Mortality

Interest

Bonus loading

Expenses

AM92 Select

6% per annum

1.92308% of the sum assured, compounded and

vesting at the end of each policy year

Initial

350 plus 50% of the annual premium

Renewal 5% of each premium payable in the second and

subsequent years

[7]

At aged 55 exact, immediately before the premium then due and just after the

declared bonus relating to the 5th policy year has been added to the policy, the policy

is still in force.

(ii)

Calculate the reserve for the policy at this point in time using a gross premium

prospective basis assuming the same basis as in (i) above. You should also

assume that the life insurance company has declared a compound bonus

throughout the duration of the policy consistent with the bonus loading

assumption used to derive the premium in (i) above.

[5]

[Total 12]

CT5 A20085

12

10-year term assurances with a sum assured of 50,000 where the death benefit is

payable at the end of the policy year of death

maturity

For the term assurance and pure endowment policies, premiums are paid annually in

advance.

The company sold 5,000 policies of each type to lives then aged 50 exact. During the

first policy year, there were five actual deaths from each of the two types of policies

written.

(i)

Assuming each type of policy was sold to a distinct set of lives (i.e. no life

buys more than one type of policy).

(a)

Calculate the death strain at risk for each type of policy at the end of

the second policy year of the policies.

(b)

During the second policy year, there were ten deaths from each of the

two types of policy written. Calculate the total mortality profit or loss

to the company during the second policy year.

Basis:

Interest

Mortality

Expenses

4% per annum

AM92 Ultimate for term assurance and pure endowment

Nil

[11]

(ii)

The company now discovers that 5,000 lives had bought one of each type of

policy.

(a)

higher, lower or unchanged to that calculated in (i)(b).

(b)

State whether the variance of the benefits paid out by the company in

future years would be higher, lower or unchanged to that in (i). Explain

your answer by general reasoning.

[3]

[Total 14]

CT5 A20086

13

A life insurance company issues a 4-year unit-linked endowment policy to a life aged

50 exact under which level premiums of 750 are payable yearly in advance

throughout the term of the policy or until earlier death. In the first policy year, 25%

of the premium is allocated to units and 102.5% in the second and subsequent years.

The units are subject to a bid-offer spread of 5% and an annual management charge of

1% 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 3,000 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 only at the end of each policy

year. On surrender, the bid value of the units is payable at the end of the policy year

of exit. On maturity, 110% of the bid value of the units is payable.

The company uses the following assumptions in carrying out profit tests of this

contract:

Rate of growth on assets in the unit fund

Rate of interest on non-unit fund cash flows

Mortality

Initial expenses

Renewal expenses

Initial commission

Renewal commission

Risk discount rate

5.5% per annum

AM92 Select

150

65 per annum on the second and

subsequent premium dates

10% of first premium

2.5% of the second and subsequent

years premiums

8.5% per annum

In addition assume that at the end of each of the first 3 years, 10% of all policies still

in force then surrender.

(i)

Calculate the profit margin for the policy on the assumption that the company

does not zeroise future expected negative cash flows.

[13]

(ii)

negative cash flows.

(a)

Calculate the expected reserve that must be set up at the end of each

policy year, per policy in force at the start of each policy year.

(b)

Calculate the profit margin allowing for the cost of setting up these

reserves.

[5]

[Total 18]

END OF PAPER

CT5 A20087

Faculty of Actuaries

Institute of Actuaries

Core Technical

EXAMINERS REPORT

April 2008

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.

M A Stocker

Chairman of the Board of Examiners

June 2008

Faculty of Actuaries

Institute of Actuaries

The probability that an ultimate life age 40 dies between 45 and 55 (all exact)

5|10 q40

=

= 0.024704

l40

9856.2863

The following are three types of guaranteed reversionary bonuses. The bonuses are

usually allocated annually in arrears, following a valuation.

Simple the rate of bonus each year is a percentage of the initial (basic) sum assured

under the policy. The effect is that the sum assured increases linearly over the term of

the policy.

Compound the rate of bonus each year is a percentage of the initial (basic) sum

assured and the bonuses previously added. The effect is that the sum assured increases

exponentially over the term of the policy.

Super compound two compound bonus rates are declared each year. The first rate

(usually the lower) is applied to the initial (basic) sum assured. The second rate is

applied to bonuses previously added. The effect is that the sum assured increases

exponentially over the term of the policy. The sum assured usually increases more

slowly than under a compound allocation in the earlier years and faster in the later

years.

(Note: credit given if special reversionary bonus mentioned)

The expected cost of paying benefits usually increases as the life ages and the

probability of a claim by death increases. In the final year the probability of payment

is large, since the payment will be made if the life survives the term, and for most

contracts the probability of survival is large.

Level premiums received in the early years of a contract are more than enough to pay

the benefits that fall due in those early years, but in the later years, and in particular in

the last year of an endowment assurance policy, the premiums are too small to pay for

the benefits. It is therefore prudent for the premiums that are not required in the early

years of the contract to be set aside, or reserved, to fund the shortfall in the later years

of the contract.

If premiums received that were not required to pay benefits were spent by the

company, perhaps by distributing to shareholders, then later in the contract the

company may not be able to find the money to pay for the excess of the cost of

benefits over the premiums received.

(Credit given for other valid points)

Page 2

Value =

20

hh

50, 000 vt . t p40

( 40+t + 40+t )dt

0

20

hh

0.008dt

= 50, 000 e ln(1.05)t . t p40

0

40+t

hh

t p40

hh

t p40

= exp(

( s + s )ds )

40

40+t

= exp(

=e

0.008ds )

40

0.008t

Therefore, value =

20

0

20 0.05679t

e

dt

0

.05679t

= 400

= 400*[e

/ .05679]020

= 400*(5.65531 + 17.60873)

= 4781.4

(a)

Define random variables Tx and Ty for the complete duration of life for the

lives aged x and y.

Define a random variable Z for the value of the reversionary annuity, which

has the following definition:

Z = aTy | aTx | if Ty > Tx = 0 otherwise

Z = aTy | aTxy | where Txy is a random variable for the duration to the first

death

Ty

Txy

(1 v ) (1 v

Z=

(b)

E[ Z ] =

Txy

( E[v

Txy

(v

v y)

] E[v y ]) ( A xy A y )

=

Page 3

= 9894.4299 / 9953.6144 = 0.994054

The probability that the life age 30 survives 10 years

= 9856.2863 / 9925.2094 = 0.993056

There are four possible outcomes:

Outcome

Both survive

Only 25 survives

Only 30 survives

Neither survive

V100.9940540.99305615000/3

V100.994054(1-0.993056)15000/2

V10(1-0.994054)0.99305615000/2

V10(1-0.994054)(1-0.993056)15000

z

ra

ia

1

( R 40 + R 40 ) 1

(2884260 + 887117)

.S .

= .S .

= 2.5S

s

60

60

25059

D40

s

k

N 40

k

(363573)

.S . s

=

.S .

= k /100*14.5S

100

25059

D40 100

Page 4

value

3672.67

38.52

32.95

0.46

(i)

sqx

t s qx+ s

= (1 t s px + s )

= (1

px

)

s px

= (1

(1 t qx )

)

(1 s qx )

= (1

(1 tqx )

)

(1 sq x )

=

(ii)

= s.qx

(t s ).qx

(1 s.qx )

= 0.5q62/(1-0.25q62) = 0.50.00355/(1-0.25*0.00355)

= 0.001777

(a)

0.5q62.25

(b)

derived from the expression p = e-. p62=0.99645 => 62=0.003556

t s

t s qx+ s

(i)

= 0.001776

Housing as quality of housing will be impacted by occupationally influenced

income levels

Climate different locations having different climates

Using location is a spurious form of class selection as it disguises the

underlying causes

Page 5

(ii)

Actual deaths (location B) = 11

The calculation of the expected deaths is

Age

Standard

Mortality

Rate

0.01392

0.01560

0.01749

0.01965

60

61

62

63

Total

Location A

Number

Initial

of deaths

Exposed

to risk

100

1.4

175

2.7

190

3.3

210

4.1

11.5

Location B

Number

Initial

Exposed of deaths

to risk

200

2.8

150

2.3

170

3.0

100

2.0

10.1

Location A = 9/11.5 = 0.78

Location B = 11/10.1 = 1.09

10

(a)

wife

(12)

(12)

value = 5000(a55

a60:55

) = 5000(18.210 14.756) = 17, 270

Note no effect of monthly payments

(b)

grandson

value =

(12)

2000(a8|(12) a60:55:8|

)

a8|(12)

(1 v8 )

i (12)

= 6.7327 x 0.04

0.039285

= 6.855

(12)

(12)

(12)

= a60:55

v8 8 p60 . 8 p55 a68:63

a60:55:8|

= (14.756 1) + 11/ 24 v8

9440.717 9775.888

(11.372 1 + 11/ 24)

9826.131 9917.623

= 6.721

Therefore value = 2000(6.855-6.721) = 268

Page 6

11

(i)

EPV of premiums:

Pa[50]:10 = 7.698 P

EPV of benefits:

75, 000

(1.06)1/ 2{q[50] (1 + b)v +1 q[50] (1 + b) 2 v 2

(1 + b)

+.... + 9 q[50] (1 + b)10 v10 } + 75, 00010 p[50] (1 + b)10 v10

where b = 0.0192308

=

75, 000

1

1

@ i ' + 75, 000 10 p[50]

(1.06)1/ 2 A[50]:10

(1 + b)

(1 + i ' )10

75, 000

(1.06)1/ 2 (.68007 .64641) + 75, 000 .64641 = 2,550.091 + 48, 480.75

1.0192308

= 51, 030.84

where i ' =

1.06

1 = 0.04

1+ b

.5 P + 350 + 0.05 P (a[50]:10 1) = 0.8349 P + 350

Equation of value gives 7.698P = 51,030.84+ 0.8349P + 350

and P = 7,486.54

(ii)

EPV of benefits and expenses:

=

82, 494.3

1

1

(1.06)1/ 2 A55:5

+ 0.05 Pa55:5

@ i ' + 82, 494.3 5 p55

(1 + b)

(1 + i ' )5

82, 494.3

(1.06)1/ 2 (.82365 .79866) @ i ' + 82, 494.3 0.79866 + 0.05 7486.54 4.423

1.0192308

= 2, 082.43 + 65,884.90 + 1, 655.65 = 69, 622.98

=

Page 7

EPV of premiums:

Pa55:5 = 4.423P = 33,112.97

12

(i)

(a)

Annual premium for pure endowment with 50,000 sum assured given

by:

P PE =

50, 000

50, 000

10 p50 v10 =

0.64601 = 3885.10

a50:10

8.314

Annual premium for term assurance with 50,000 sum assured given

by:

PTA = P EA P PE =

=

a50:10

P PE

3885.10 = 205.83

8.314

for pure endowment with 50,000 sum assured given by:

2V

PE

2V

TA

= 2V EA 2V PE

= 50, 000 0.73424 4090.93 6.91 8276.96

= 166.71

Sums at risk:

Pure endowment: DSAR = 0 8,276.96 = 8,276.96

Term assurance: DSAR = 50,000 166.71 = 49,833.29

Page 8

(b)

For term assurance

ADS = 10 49,833.29 = 498,332.90

For pure endowment

EDS = 4995 q51 8, 276.96 = 4995 .002809 8, 276.96 = 116,133.65

ADS = 10 8, 276.96 = 82, 769.60

Hence, total mortality profit = 167,511.70

(ii)

(a)

The actual mortality profit would remain as that calculated in (i) (b).

(b)

The variance of the benefits would be lower than that calculated in (i).

In this case, the company would not pay out benefits under both the PE

and the TA but will definitely pay out one of the benefits. Under the

scenario in (i), the company could pay out all the benefits (if all the TA

policyholders die and the PE policyholders survive). Alternatively,

they could pay out no benefits at all (if all the TA policyholders

survive and the PE policyholders immediately die).

Page 9

13

Annual premium

750.00

25.0%

8.5%

Allocation % (2nd yr +)

Interest on

investments

6.5%

Man charge

1.0%

Interest on sterling

provisions

5.5%

B/O spread

5.0%

Minimum death

benefit

Initial expense

3000.00

% prm

Total

150

10.0%

225

65

2.5%

83.75

Renewal expense

(i)

Page 10

x

qxd

qxs

50

0.001971

0.1

51

0.002732

0.1

52

0.003152

0.1

53

0.003539

0.0

(aq) dx

(aq) sx

(ap)

t 1 ( ap )

50

0.001971

0.09980

0.898226

1.000000

51

0.002732

0.09973

0.897541

0.898226

52

0.003152

0.09968

0.897163

0.806195

53

0.003539

0.00000

0.996461

0.723288

102.50%

Unit fund (per policy at start of year)

yr 1

yr 2

yr 3

yr 4

0.000

187.806

968.018

1790.635

alloc

187.500

768.750

768.750

768.750

B/O

9.375

38.4375

38.4375

38.4375

11.578

59.678

110.392

163.862

1.897

9.778

18.087

26.848

187.806

968.018

1790.635

2657.961

value of units at

start of year

interest

management

charge

value of units at

year end

yr 1

yr 2

yr 3

yr 4

unallocated

premium

562.500

18.750

18.750

18.750

B/O spread

9.375

38.4375

38.4375

38.4375

225.000

83.750

83.750

83.750

19.078

3.523

3.523

3.523

man charge

1.897

9.778

18.087

26.848

extra death

benefit

5.543

5.551

3.812

1.210

0.000

0.000

0.000

264.855

362.307

63.359

53.311

306.804

expenses

interest

Extra maturity

benefit

end of year

cashflow

Page 11

probability in

force

discount factor

0.898226

0.806195

0.723288

0.921659

0.849455

0.782908

0.721574

620.894

513.620

424.701

expected p.v. of

profit

91.809

premium

signature

750.000

expected p.v. of

premiums

2309.215

profit

margin

3.98%

(ii)

(a)

(utilising the end of year cashflow figures and decrement tables in (i)

above):

306.804

= 290.809

1.055

2V 1.055 ( ap )52 3V = 53.311 2V = 297.833

3V

1V

These need to be adjusted as the question asks for the values in respect

of the beginning of the year. Thus we have:

Year 3 290.809(ap)52 = 260.903

Year 2 297.833(ap)51 = 267.318

Year 1 313.437(ap)50 = 281.538

(b)

Based on the expected provisions calculated in (a) above, the cash flow

for years 2, 3 and 4 will be zeroised whilst year 1 will become:

362.307 281.538 = 80.769

Page 12

Hence the table below can now be completed for the revised profit

margin.

revised end of

year cash flow

probability in

force

discount factor

80.769

0.898226

0.806195

0.723288

0.921659

0.849455

0.782908

0.721574

expected p.v. of

profit

74.442

profit margin

3.22%

Page 13

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

22 September 2008 (am)

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.

4.

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

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

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 S2008

Faculty of Actuaries

Institute of Actuaries

Calculate (to the nearest integer) the lower quartile of the complete future lifetime of a

person aged 25 exact who is subject to mortality according to ELT15 (Females). [3]

The profit signature of a 3-year assurance contract issued to a life aged 57 exact, with a

premium payable at the start of each year of 500 is (250, 150, 200).

Calculate the profit margin of the contract.

Basis:

Mortality

AM92 Ultimate

Lapses

None

Risk discount rate 12% per annum

In order to value the benefits in a final salary pension scheme as at 1 January 2008, a

s

salary scale, s x , has been defined so that x +t is the ratio of a members total

sx

earnings between ages x + t and x + t + 1 to the members total earnings between ages

x and x + 1. Salary increases take place on 1 July every year. One member, whose

date of birth is 1 April 1961, has an annual salary rate of 75,000 on the valuation

date.

Write down an expression for the members expected earnings during 2008.

[3]

[3]

Write down an alternative expression for each of the following statements. Use

notation as set out in the International Actuarial Notation section of the Formulae

and Tables for Examinations where appropriate and express your answer as concisely

as possible.

(i)

Probability[maximum{Tx, Ty} n]

[1]

(ii)

[1]

(iii)

Probability{n < Tx m}

[1]

(iv)

Limit dt 0

(v)

E[aminimum( n1, K

1

Probability[minimum{Tx , Ty } t + dt | Tx > t , Ty > t ]

dt

x)

+ 1]

[1]

[1]

[Total 5]

CT5 S20082

(i)

[2]

(ii)

Calculate s50:20 .

[3]

Basis:

Mortality:

Interest:

AM92 Ultimate

4% per annum

[Total 5]

A select life aged 62 exact purchases a 3-year endowment assurance with sum assured

100,000. Premiums of 30,000 are payable annually in advance throughout the term

of the policy or until earlier death. The death benefit is payable at the end of the

policy year of death.

Calculate the expected value of the present value of the profit or loss to the office on

the contract, using the following basis:

Interest

Expenses

Mortality

Ignore

1

q[ x t ]+t =

qx for all x and for t = 0, 1 or 2.

4t

q62 = 0.018, q63 = 0.02 and q64 = 0.022

[6]

(i)

Write down an expression for (aq)x in terms of the single decrement table

probabilities qx , qx , and qx , assuming each of the three modes of decrement

is uniformly distributed over the year of age x to x + 1 in the corresponding

single decrement table.

[2]

(ii)

while decrements and remain uniformly distributed. Derive a revised

expression for (aq )x in terms of the single decrement table probabilities

qx , qx , and qx .

CT5 S20083

[4]

[Total 6]

A life insurance company sells 1,000 whole life annuities on 1 January 2007 to

policyholders aged 65 exact. Each annuity is for 25,000 payable annually in arrear.

5 annuitants die during 2007.

The office holds reserves using the following basis:

Mortality

Interest

PFA92C20

4% per annum

(i)

Calculate the profit or loss from mortality for this group for the year ending

31 December 2007.

[4]

(ii)

[2]

[Total 6]

A new member aged 35 exact, expecting to earn 40,000 in the next 12 months, has

just joined a pension scheme. The scheme provides a pension on retirement for any

reason of 1/60th of final pensionable salary for each year of service, with fractions

counting proportionately. Final pensionable salary is defined as the average salary over

the three years prior to retirement.

Members contribute a percentage of salary, the rate depending on age. Those under

age 50 contribute 4% and those age 50 exact and over contribute 5%.

The employer contributes a constant multiple of members contributions to meet

exactly the expected cost of pension benefits.

Calculate the multiple needed to meet this new members benefits.

All elements of the valuation basis are contained in the Example Pension Scheme

Table in the Formulae and Tables for Examinations.

[6]

10

Calculate the variance of the present value of benefits under an annuity payable to a

life aged 35 exact. The annuity has payments of 1 per annum payable continuously

for life.

Basis:

Mortality

Interest

11

= 0.02 throughout

= 0.05

[7]

A life insurance company has reviewed its mortality experience. For each age, it has

pooled all the deaths and corresponding exposures from its entire portfolio over the

previous ten years, and derived a single mortality table.

List three types of selection which might be likely to produce heterogeneity in this

particular investigation. In each case, explain the nature of the heterogeneity and how it

could be caused, and state how the heterogeneity could be reduced.

[9]

CT5 S20084

12

a term of twenty years and initial sum assured of 100,000. Death benefits are payable

at the end of the policy year of death. Bonuses will vest at the end of each policy year.

The company is considering three different bonus structures:

(1)

(2)

(3)

bonus of 3% each year and all previous bonuses receive an additional

bonus of 6% each year.

(i)

(ii)

Calculate the expected value of benefits under structure (2) for an individual

aged 45 exact at the start, using the following basis:

Interest

Mortality

Expenses

[4]

8% per annum

AM92 Select

ignore

[4]

(iii)

Calculate the expected value of benefits, using the same policy and basis as in

(ii) but reflecting the following changes:

(a)

Bonuses vest at the start of each policy year (the death benefit is

payable at the end of the policy year of death).

(b)

end of each policy year).

(c)

continuously.

[3]

[Total 11]

CT5 S20085

13

Two lives, a female aged 60 exact and a male aged 65 exact, purchase a policy with

the following benefits:

(i)

an annuity deferred ten years, with 20,000 payable annually in advance for as

long as either of them is alive

(ii)

a lump sum of 100,000 payable at the end of the policy year of the first death,

should this occur during the deferred period

Level premiums are payable monthly in advance throughout the deferred period or

until earlier payment of the death benefit.

Calculate the monthly premium.

Basis:

Mortality

Female

Male

Interest

4% per annum

Expenses

Initial

Renewal

PFA92C20

PMA92C20

350

2.5% of each monthly premium excluding the first.

[14]

14

A life insurance company issues a decreasing term assurance policy to a life aged 55

exact. The death benefit, which is payable immediately on death, is 100,000 in the

first policy year, 90,000 in the second year thereafter reducing by 10,000 each year

until the benefit is 10,000 in the 10th year, with cover ceasing at age 65.

The policy is paid for by level annual premiums payable in advance for 10 years,

ceasing on earlier death.

The life office uses the following basis for calculating premiums and reserves:

Basis:

Mortality

AM92 Select

Interest

4% per annum

Expenses

Initial

Renewal

on each policy anniversary where t is the exact duration

of the policy on the anniversary

Claim

at death, measured in years with fractions counting

CT5 S20086

(i)

Write down the gross premium future loss random variable at the start of the

policy. Use P for the annual premium.

[4]

(ii)

(iii)

END OF PAPER

CT5 S20087

[10]

[2]

[Total 16]

Faculty of Actuaries

Institute of Actuaries

Core Technical

EXAMINERS REPORT

September 2008

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

November 2008

Faculty of Actuaries

Institute of Actuaries

Let t equal future lifetime. Lower quartile means that 25% of people have future

lifetime less than t.

t q25

= 0.25

l25+t

= 0.75

l25

l25+t

= 0.75 l25+t = 74, 098

98, 797

So 7325 = 48 is lower quartile future lifetime to nearest integer.

EPV profit = -250v + 150v2 + 200v3 = 38.72

EPV premiums = 500(1 + 1p57v + 2p57v2) = 500(1 + 0.8878125 + 0.7876546)

= 1,337.73

Profit margin = 38.72/1,337.37 = 2.89%

i.e. from age 46.25 to 47.25

2008 is the period from age 46.75 to 47.75

2008 expected earnings = 75, 000

s46.75

s46.25

(s46 + 3s47) is a satisfactory alternative to the numerator above and (3s46 + s47) a

satisfactory alternative for the denominator.

Alternative: 75, 000{0.5 + 0.5(

Page 2

s47.25

)}

s46.25

(i)

n q xy

(ii)

A1x:n

(iii)

n|m n q x

(iv)

x +t: y +t or x +t + y +t

(v)

ax:n

It is the accumulation of an n-year annuity due i.e. the expected fund per survivor

after n years, from a group of people, initially aged x, who each put 1 at the start of

each of the n years, if they are still alive, into a fund earning interest at rate i per

annum.

a50:20

s50:20 =

=

v 20 20 p50

1

v

20

20 p50

1

(17.444) 10.375 = 35.715

(0.45639)(0.82928)

6

x

62

63

64

q[x]

q[x-1]+1

q[x-2]+2

q[x-3]+3

0.009

0.01

0.011

0.018

0.02

0.022

0.006

0.0045

0.005 0.006667

0.0055 0.007333

qx

0.018

0.02

0.022

= 30,000{1 + v*(1 - 0.0045) + v2*(1 - 0.0045)*(1 - 0.006667)}

= (30,000)(2.781742) = 83,452.27

EPV benefits = 100,000{v*q[62] + v2*p[62]*q[62]+1 + v3*p[62]*p[62]+1*(q[62]+2

+ p[62]+2)} = 80,592.50

EPV profit

Page 3

Year

1

2

3

Premium

Interest

30,000.00

30,000.00

30,000.00

2,250.00

2,250.00

2,250.00

Death Cost

450.00

666.67

1,100.00

Maturity Cost

Profit Vector

Profit Signature

98,900.00

31,800.00

31,583.33

-67,750.00

31,800.00

31,441.21

66,995.49

NPV

29,581.40

27,207.10

53,928.73

2,859.77

(i)

(ii)

(aq)x

= t px t px t p x x +t dt

0

px = 1 t 2 qx t px x +t =

t p x = 2tq x

dt

(aq)x

t px t

px t

p x x +t dt

0

0

2

2

= qx {1 (qx + qx ) + (qx q x )}

3

4

(i)

[0 (payment due 31.12 + reserve @ 31.12] = - 25, 000a66

Expected DS =

q65 *1, 000* 25, 000a66 = (0.004681)(25, 000, 000)(14.494) = 1, 696,160

Actual DS = 5* 25, 000a66 = 1,811, 750

Profit = EDS ADS = -1,696,160 + 1,811,750 = 115,590 profit

(ii)

Page 4

We expected 4.681 deaths and had more than this with 5. There is no death

benefit, just a release of reserves on death, so more deaths than expected leads

to profit.

ra

ia

=

= 98, 730

EPV of benefits:

s

60

60

31,816

D35

PV of contribution:

s

40, 000

(0.04) N 35 + (0.01) N 50

s

D35

= 40, 000

= 27,345

31,816

contribution.

10

Variance of aT =

Ax ( Ax )2

2

Ax = e

t p x x +t dt = e

t t

dt = et (+ ) dt =

(e t ) =

(0 1)

0

+

+

0.02

=

=

+ 0.07

Similarly, A x = e 2t t px x +t dt = et et dt =

2

Variance of aT

0.02

=

+ 2 0.12

0.02 0.02 2

)

(

= 0.12 0.07

= 34.01

0.052

Alternatively

Variance of X = E[ X 2 ] {E[ X ]}2

Here X=

E[ X ] =

0

Tx |

1 e Tx

1 e t

1 et t

1

p

dt

=

e

dt

=

(et ) (e (+ )t )dt

t x x +t

= {(e

)(

)(e

)} = {(0 (1)) (

)(0 (1))}

0

0

+

1

1 +

1

1

)} = {

}=

= {1 (

=

= 14.2857

+

+

+ 0.07

t

( + )t

Page 5

1 e t 2

1 2et + e2t t

E[ X ] = (

) t px x +t dt = (

)e dt

2

2

(e

)(e(+ )t ) + (

)(e (2+ )t )}

0

0

0

2 +

+

)(0 (1)) + (

)(0 (1))}

= 2 {(0 (1)) 2(

2 +

+

1

2

1

0.04 0.02

)+(

)} =

{1

} = 238.0952

= 2 {1 (

+

2 +

0.07 0.12

+

0.052

{(e t ) (2)(

11

Class selection

People with same age definition will have different underlying mortality due to

particular permanent attributes, e.g. sex. The existence of such classes would be

certainly found in these data: e.g. male / female smoker / non-smoker, people having

different occupational and/or social backgrounds, etc.

Solution would be to subdivide the data according to the nature of the attribute.

Time selection

Where mortality is changing over calendar time, people of the same age could

experience different levels of mortality at different times. This might well be a

problem here, as data from as much as ten years apart are being combined.

Solution would be to subdivide the data into shorter time periods.

Temporary initial selection

policyholders with different durations into a single sample will cause heterogeneity.

Lives accepted for insurance have passed a medical screening process. The longer that

has elapsed since screening (i.e. since entry) the greater the proportion of lives who

may have developed impairments since the screening date and hence the higher the

mortality. Mortality rates would then be expected to rise with policy duration, and

hence result in heterogeneous data.

The solution would be to perform a select mortality investigation, that is one in which

the data are subdivided by policy duration as well as by age.

Page 6

Self selection

particular group. People expecting lighter than normal mortality might purchase

annuities and experience better mortality rates than, for example, term assurance

buyers.

The solution would be to subdivide the data by product type.

12

(i)

(ii)

(a)

(b)

100,000(1.0384615)20 = 212,720

(c)

6%

} = 210,357

100,000{1 + 0.03 s20

1

[45]:20

100, 000 A

1.08

1 = 4%

1.0384615

EPV death benefits:

100, 000 1

100, 000

A[45]:20 @ 4% =

( A[45]:20 A[45]:201 )

1.0384615

1.0384615

=

100, 000

(0.46982 0.41089)

1.0384615

EPV total benefits = 41,089 + 5,675 = 46,764

(iii)

(a)

1.0384615*5,675+41,089 = 46,982

(b)

(1.08)0.5*5,675+41,089 = 46,987

(c)

Page 7

13

(a)

A[45]:20| at 4%

(c)

1

A[45]:20| at 4% = A[45]:20| + A[45]:20|1 = {(1.04)0.5 A[45]:20|

} + A[45]:20|1

12 Pa(12)

65:60:10

= 350 + 0.025P(12a(12)

65:60:10

1

1) + 100, 000 AP

65:60:10

= 12.682 (0.67556)(0.87120)(0.95372)(8.357)

= 12.682 (0.56131)8.357 = 7.991

a(12)

65:60:10

11

(1 v10 10 p65 10 p60 )

24

= 7.991 (0.458)(1 0.56131)

= a65:60:10

1

AP

65:60:10

= 1

0.04

(7.991) 0.56131 = 0.13134

1.04

1 10|

AP

= A65:60 v10 10 p65 10 p60 A75:70 = 1 da65:60 v10 10 p65 10 p60 (1 da75:70 )

65:60

0.04

0.04

(12.682) (0.67556)(0.87120)(0.95372)(1

8.357

1.04

1.04

= 0.51223 0.38089 = 0.13134

= 1

or

65:60

10| a

= v10 10 p65 10 p60 a75:70 + v10 10 p65 (1 10 p60 )a75 + v10 (1 10 p65 ) 10 p60 a70

= v10 10 p65 10 p60 (a75 + a70 a75:70 ) + v10 10 p65 (1 10 p60 )a75 + v10 (1 10 p65 ) 10 p60 a70

= (0.67556)(0.87120)(0.95372)(9.456 + 12.934 8.357)

+(0.67556)(0.87120)(1 0.95372)(9.456)

+(0.67556)(1 0.87120)(0.95372)(12.934)

= 7.877 + 0.258 + 1.073 = 9.208

Page 8

or

65:60

10| a

= (a65 + a60 a65:60 ) (a65 v10 10 p65a75 + a60 v10 10 p60 a70 a65:60 v10 10 p65:60 a75:70

= 13.666 + 16.652 12.682

{13.666 (0.67556)(0.87120)(9.456)}

{16.652 (0.67556)(0.95372)(12.934)}

+{12.682 (0.67556)(0.87120)(0.95372)(8.357)

= 17.636 8.101 8.319 + 7.991 = 17.636 8.429 = 9.207

P(93.480 2.312) = 350 + 13,134 + 184,160

P(91.168) = 197, 644 P = 2,168 per month

14

(i)

GFLRV=

4%

300 + 0.25 P + 0.05 P * amin(

K

[55] ,9)

(ii)

T[55]

0%

+ 50* amin(

K

[55] ,9)

4%

P * amin(

K

[55] +1,10)

4%

4%

0%

P * a[55]:10

= 250 + 0.20 P + 0.05 P * a[55]:10

+ 50a[55]:10

+110, 000 A

[55]:10

4%

a[55]:10

= 8.228

0%

a[55]:10

= (1 + e[55] ) 10 p[55] (1 + e65 )

8,821.2612

= 26.037

17.645

9,545.9929

= 26.037 (0.92408)17.645

= 9.732

1

[55]:10

= (1.04)0.5 (0.68354 0.67556*0.92408)

= 0.06044

Page 9

= (1.04)0.5 [8.58908 0.67556*0.92408(10*0.52786 + 7.89442)]

= 0.37278

P *8.228

= 250 + 0.20 P + 0.05 P *8.228 + 50*9.732 + 110, 000*0.06044

10, 000*0.37278 + 200*(1 0.92408)

P *7.6166 = 250 + 486.60 + 6, 648.40 3, 727.80 + 15.18

P = 3, 672.38 / 7.6166 = 482.15

(iii)

9V

128.31 386.87 = 258.56

Page 10

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

24 April 2009 (am)

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.

4.

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

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

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 A2009

Faculty of Actuaries

Institute of Actuaries

Basis: AM92 Select

(i)

A40:20

[3]

(ii)

A40:20

[1]

Interest 4% per annum.

[4]

[Total 4]

salary per annum after a fixed deduction from salary of 5,000 per annum paid

continuously.

Determine an expression using commutation functions for the present value of the

future contributions by a member aged x with salary S in the previous 12 months.

[4]

Explain, in the context of the lapse rates of life insurance policies, what is meant

by:

(a)

(b)

(c)

class selection

temporary initial selection

time selection

1 1

A population is subject to two modes of decrement and where qx = + qx .

3 4

State clearly any assumptions you make.

[5]

[5]

The random variable Txy represents the time to failure of the joint-life status (x y).

(x) is subject to a constant force of mortality of 0.02 and (y) is subject to a

constant force of mortality of 0.03. (x) and (y) are independent with respect to

mortality.

Calculate the value of E[Txy].

CT5 A20092

[5]

A life insurance company issues a special annuity contract to a male life aged 70

exact and a female life aged 60 exact. Annuity payments are due on the first day

of the month.

Under the contract an annuity of 50,000 per annum is payable monthly to the female

life, provided that she survives at least 5 years longer than the male life. The annuity

commences on the monthly policy anniversary next following the fifth anniversary

of the death of the male life and is payable for the balance of the female's lifetime.

Calculate the single premium required for the contract.

Basis: Mortality: PMA92C20 for males, PFA92C20 for females

Interest: 4% per annum

Expenses: Nil

[5]

(i)

the scheme rules of a pension fund.

[3]

(ii)

[2]

[Total 5]

A life insurance company sells a policy with a 10 year term to a healthy life aged 55

exact. The policy provides the following benefits:

1,000 per annum payable continuously during illness

The company prices the policy using the following multiple state model:

Able (a)

Ill (i)

x

x

x

Dead (d)

Give a formula for the expected present value of the benefits under the policy.

CT5 A20093

[5]

10

A life insurance company issues a term assurance policy for a term of 10 years to two

lives whose ages are x and y, in return for the payment of a single premium. The

following benefits are payable under the contract:

In the event of either of the lives dying within 10 years, a sum assured of

100,000 is payable immediately on the first death if it is the life aged x or

50,000 if the life aged y.

In the event of the second death within the remainder of the 10 year term, a

further sum assured of twice the original claim previously paid is payable

immediately on the second death.

Basis: Mortality: x = 0.02 constant throughout life and y = 0.03 constant

throughout life

Interest: = 4% per annum

Expenses: Nil

[8]

11

or at the end of the policy year of death if earlier. Level premiums for this

contract are paid annually in advance.

payable in advance of 18,000.

On 1 January 2001, the company sold 5,000 endowment assurance policies and 2,500

temporary immediate annuity policies, all to lives aged 45 exact.

(i)

Calculate the death strain at risk for each type of policy during 2008.

Basis: Mortality: AM92 Select

Interest:

4% per annum

Expenses: Nil

[4]

During the first seven policy years, there were 65 deaths from the endowment

assurance policies and 30 deaths from the temporary immediate annuity policies.

During 2008, there were 10 deaths from the endowment assurance policies and 5

deaths from the temporary immediate annuity policies.

(ii)

Calculate the total mortality profit or loss to the company during 2008 using

the basis in (i) above.

[5]

[Total 9]

CT5 A20094

12

(i)

Explain the terms unit fund and non-unit fund in the context of a unitlinked life assurance contract.

[4]

(ii)

Explain why a life insurance company might need to set up reserves in order

to zeroise future expected negative cashflows in respect of a unit-linked life

assurance contract.

[2]

(iii)

aged 50 exact. The following non-unit fund cash flows, NUCFt, (t = 1, 2, 3, 4)

are obtained at the end of each year t per contract in force at the start of the

year t:

Year t

NUCFt

1

375.4

2

152.0

3

136.2

4

118.0

The rate of interest earned on non-unit reserves is 5.5% per annum and

mortality follows the AM92 Select table.

Calculate the reserves required at times t = 1, 2 and 3 in order to zeroise future

negative cash flows.

[4]

[Total 10]

13

A life insurance company issues a 3-year savings contract to unmarried male lives

that offers the following benefits:

on surrender.

compound interest at 4% per annum, payable immediately on marriage.

Calculate the level premium payable annually in advance for this contract for a life

aged 40 exact.

Basis: Independent rate of mortality

Independent rate of surrender

Independent rate of marriage

Interest

Expenses

AM92 Ultimate

10% per annum

5% per annum

5% per annum

0.5% of each premium

[12]

CT5 A20095

14

A life insurance company issues a 5-year with profits endowment assurance policy to

a life aged 60 exact. The policy has a basic sum assured of 10,000. Simple

reversionary bonuses are added at the start of each year, including the first. The sum

assured (together with any bonuses attaching) is payable at maturity or at the end of

year of death, if earlier. Level premiums are payable annually in advance throughout

the term of the policy.

(i)

Basis: Mortality:

Interest:

Initial expenses:

Renewal expenses:

Bonus Rates:

AM92 Select

6% per annum

60% of the first premium

5% of the second and subsequent premiums

A simple reversionary bonus will declared each

year at a rate of 4% per annum

[5]

The office holds net premium reserves using a rate of interest of 4% per annum and

AM92 Ultimate mortality.

In order to profit test this policy, the company assumes that it will earn interest at 7%

per annum on its funds, mortality follows the AM92 Ultimate table and expenses and

bonuses will follow the premium basis.

(ii)

Calculate the expected profit margin on this policy using a risk discount rate

of 9% per annum.

[14]

[Total 19]

END OF PAPER

CT5 A20096

Faculty of Actuaries

Institute of Actuaries

Core Technical

EXAMINERS REPORT

April 2009

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

June 2009

Comments

Where relevant, comments for individual questions are given after each of the solutions that

follow.

Faculty of Actuaries

Institute of Actuaries

510

q[40]+1 is the probability that a life now aged 41 exact and at the beginning of the

second year of selection will die between the ages of 46 and 56 both exact.

Value is:

= (9786.9534 9515.104) / 9846.5384

= 0.02761

lx = 110 x

dx = lx lx + 1

= (110 x) (110 x 1)

= 1 for all x

(i)

A1

40:20

19

= vt +1 * d 40 + t / l 40

19

= vt +1 / l 40

= a20 / l 40

= 13.5903 / (110 40)

= 0.19415

(ii)

A40:20 = A 1

40:20

+ v 20 * l60 / l40

= 0.52014

they are payable on average half-way through the year. The present value of

contributions in the year t to t + 1 is:

s

v x +t +0.5 l x +t +0.5

(0.04). S x +t 5000 .

.

lx

vx

s x 1

Page 2

Define the following parameters and commutation functions:

s x +t

represents the ratio of a members earnings in the year of age x+ t to x+t+1 to

sx

their earnings in the year x to x+1.

Dx +t = v x +t l x +t

D x +t = v x +t +0.5l x +t +0.5

s

Dx = s x 1v xl x

D x +t = s x +t v x +t +0.5lx +t +0.5

Nx =

s

t = NRA x 1

Nx =

D x +t

t =0

t = NRA x 1

D x +t

t =0

sN

Nx

x

5000

(0.04). S s

Dx

Dx

(a)

lapse rates for all major risk factors (age, duration, gender etc.) than other

classes. An example would be where a class of policyholders is defined as

those who purchased their policies through a particular sales outlet (e.g.

broker versus newspaper advertising).

(b)

Lapse rates may vary by policy duration as well as age for shorter durations.

At shorter durations lapse rates may be the result of misguided purchase

by policyholder whereas at longer durations the policy has become more

stable.

(c)

Lapse rates vary with calendar time for all major risk factors, e.g.

economic prosperity varies over time and this results in a similar variation in

lapse rates.

Other valid comments were credited. Many students ignored lapses altogether attempting to

answer the question from a mortality standpoint only. No credit was given for this.

Page 3

Assumptions

Uniform distribution of all decrements across year of age

Then

(aq)x

t

t ( ap ) x . x +t .

t

0

px

px

(ap) x

.dt = ( t px x +t ). t

px

.dt

t

px x +t = qx

t ( ap ) x

t px

= t px = 1 t.qx

Therefore:

1

0

qx

t2

1

t q x = q x 1 q x

2

0

2

( )

1

1 1 1 1 1

= + qx 1 qx = + qx qx

8

3 4 2 3 12

1

1

= qx 1 * 4* qx

3

2

5

= qx 2qx

3

This question was essentially course bookwork plus a substitution. To gain good credit it

was necessary to work though the solution as above.

Page 4

0

0

= 0.05 t.e.05t dt

0

Integrating by parts:

0

0)

= 20

Alternatively:

E[Txy ] =

tpx.tpydt

= e .02t e .03t dt

0

= e .05t dt

0

= 20

The alternative solution above in essence belongs to the Course CT4 but students who used

this were given full credit. The first solution is that which applies to the CT5 Course.

This would be

f

m

50000 vt +5 (1 t p70

) t +5 p60

dt

0

f

f

t

m

= 50000v5 5 p60

v (1 t p70 ) t p65dt

0

f

m f

= 50000v5 5 p60

(a65f a70:

65)

Page 5

m f

f

(12) f

= 50000v5 5 p60

(a65

a(12)70:65

)

m f

f

f

= 50000v5 5 p60

(a65

a70:65

) (note the monthly adjustment cancels out)

= 177236

Other methods were credited. Students who developed the formulae without recourse to

continuous functions were given full credit.

(i)

Final average salary salary averaged over a fixed period (usually 3 to 5

years) before retirement

Career average salary salary averaged over total service

.

s x +t

represents the ratio of a members earnings in the year of age x+ t to

sx

x+t+1 to their earnings in the year x to x+1.

(ii)

zx =

s x 1 + s x 2 + ..... + s x y

y

Other versions credited. Strictly speaking Final Salary is not an average but this caused no

confusion and was fully credited

10

aa

ai

25000 et ( t p55

55+t + t p55

55+t )dt

0

10

aa

ai

+ e t (0. t p55

+ 1000 t p55

)dt

0

where:

= the force of interest

aa

t p 55 = the probability that an able life age 55 is able at age 55 + t

t

Page 6

ai

p55

= the probability that an able life age 55 is ill at age 55 + t

10

If y dies in 10 years, then 50000 is paid if x is alive, 200000 if x is dead,

If x dies in 10 years, then 100000 is paid

So the expected present value =

10

dt

10

+100000 t p x . x +t .et dt

0

t px = e

0.02 dr

0

= e .02t

py = e

0.03dr

0

= e .03t

Therefore value =

10

.03t

10

0

10

= 6000 e

0

.07t

10

dt + 2000 e

0

.06t

10

dt 4500 e .09t dt

0

1 +

1

1

e

e

e

0.06

0.09

0.07

= 28,518

=

Page 7

11

(i)

Annual premium for endowment with 75,000 sum assured given by:

P =

a[45]:20

= 2556.15

13.785

for endowment with 75,000 sum assured is given by:

8V

for temporary annuity paying an annual benefit of 18,000 is given by:

8V

Endowment:

Immediate annuity

(ii)

DSAR = 171,000.00

For endowment assurance

= 4935 0.003152 51, 688.42 = 804, 019.58

ADS = 10 51, 688.42 = 516,884.20

mortality profit = 287,135.38

For immediate annuity

EDS = (2500 30) q52 171, 000.00

= 2470 0.003152 171, 000.00 = 1,331,310.24

ADS = 5 171, 000.00 = 855, 000.00

mortality profit = 476,310.24

Hence, total mortality profit = 287,135.38 476,310.24 = 189,174.86

(i.e. a mortality loss)

Page 8

12

(i)

the unit fund that belongs to the policyholder. This fund keeps track of the

premiums allocated to units and benefits payable from this fund to

policyholders are denominated in these units. This fund is normally subject to

unit fund charges.

the non-unit fund that belongs to the company. This fund keeps track of the

premiums paid by the policyholder which are not allocated to units together

with unit fund charges from the unit-fund. Company expenses will be charged

to this fund together with any non-unit benefits payable to policyholders.

(ii)

outset, a product should be self-supporting. However, some products can give

profit signatures which have more than one financing phase. In such cases,

reserves are required at earlier durations to eliminate future negative cash

flows, so that the office does not expect to have to input further money in the

future.

(iii)

Year t

1

2

3

4

q[50]+t1

0.001971

0.002732

0.003152

0.003539

p[50]+t1

0.998029

0.997268

0.996848

0.996461

118.0

= 111.85

1.055

3V

2V

1V

Page 9

13

etc. which assumes that the decrements in each single decrement table are uniformly

distributed over each year of age

x

40

41

42

q xd

qxs

0.0009370 0.10

0.0010140 0.10

0.0011040 0.10

qxm

0.05

0.05

0.05

(aq) dx

(aq) sx

(aq ) m

x

0.0008683 0.0974547 0.0474781

0.0009396 0.0974510 0.0474763

0.0010230 0.0974466 0.0474742

decrement table

X

40

41

42

43

(al ) x

1,000,000

854,198.9

729,599.6

623,119.0

(ad ) dx

868.3

802.6

746.4

(ad ) sx

97,454.7

83,242.5

71,097.0

(ad ) m

x

47,478.1

40,554.2

34,637.2

Then equation of value gives:

PV of premiums = PV of death benefits + PV of surrender benefits + PV of survival

benefits + PV of expenses

PV of premiums

729,599.6 2

854,198.9

= P 1 +

v0.05 +

v0.05

1, 000, 000

1, 000, 000

PV of death benefits

1

802.6

746.4

868.3

2

3

= 15, 000 (1.05) 2

v0.05 +

v0.05

+

v0.05

1, 000, 000

1, 000, 000

1, 000, 000

PV of withdrawal benefits =

1

83, 242.5 2

71, 097.0 3

97, 454.7

v0.05 + 2

v0.05 + 3

v0.05 1.05 2

= P 1

1, 000, 000

1, 000, 000

1, 000, 000

Page 10

PV of marriage benefits =

40,554.2

34, 637.2

47, 478.1 0.04

2

3 1.05

= P

s1 v0.05 +

s20.04 v0.05

+

s30.04 v0.05

1.04

1, 000, 000

1, 000, 000

1, 000, 000

PV of survival benefits =

5000

623,119.0 3

v0.05 = 2691.3681

1, 000, 000

2.475291P = 33.8103 + 0.4386408P + 0.2232694P + 2,691.3681 + 0.0123765P

=> P = 2725.1784/1.801004 = 1513.14

14

(i)

PV of premiums = PV of benefits + PV of expenses

i.e.

Pa[60]:5 = 10, 000 A[60]:5 + 400( IA)60:5 + 0.05 Pa[60]:5 + 0.55 P at

where ( IA)[60]:5 = ( IA)[60]

6%

l65

l

5

5

v0.06

( 5 A65 + ( IA)65 ) + 5 65 v0.06

l[60]

l[60]

and

l65 8821.2612

=

l[60] 9263.1422

P(0.95 4.398 0.55) = 10, 000 0.75104 + 400 3.684864

P=

8984.3456

= 2476.32

3.6281

Page 11

(ii)

1V60:5

a

3.722

= 10, 000 1 61:4 + 400 A61:4 = 10, 000 1

+ 400 0.85685 = 2162.52

a

4.550

60:5

a62:3

2.857

1

+ 800 A62:3 = 10, 000 1

2V60:5 = 10, 000

+ 800 0.89013 = 4432.98

a

4.550

60:5

a63:2

1.951

1

+ 1200 A63:2 = 10, 000 1

3V60:5 = 10, 000

+ 1200 0.92498 = 6822.06

a

4.550

60:5

a64:1

1.000

10,

000

V

=

1

+ 1600 A64:1 = 10, 000 1

4 60:5

+ 1600 0.96154 = 9340.66

a

4.550

60:5

Year t

1

2

3

4

5

Prem

Expense

2476.32

2476.32

2476.32

2476.32

2476.32

1485.79

123.82

123.82

123.82

123.82

Opening

reserve

0

2162.52

4432.98

6822.06

9340.66

Interest

69.34

316.05

474.98

642.22

818.52

Year t

t 1 p

Profit signature

1

2

3

4

5

1.0

0.991978

0.983041

0.973101

0.962062

1168.73

338.00

387.45

438.85

492.27

Death

Claim

83.43

97.30

113.25

131.59

152.59

Mat

Claim

0

0

0

0

11847.41

Discount

factor

.91743

.84168

.77218

.70843

.64993

Closing

reserve

2145.17

4393.04

6753.08

9234.20

0

NPV of profit

signature

1072.23

284.49

299.18

310.89

319.94

Year t

Premium

t 1 p

1

2

3

4

5

2476.32

2476.32

2476.32

2476.32

2476.32

1.0

0.991978

0.983041

0.973101

0.962062

Discount

factor

1

.91743

.84168

.77218

.70843

NPV of premium

Profit margin =

142.28

= 0.0138 i.e. 1.38%

10,327.34

Page 12

Profit

vector

1168.73

340.73

394.13

450.99

511.68

2476.32

2253.63

2048.92

1860.73

1687.74

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

5 October 2009 (am)

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.

4.

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

5.

Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this

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 S2009

Faculty of Actuaries

Institute of Actuaries

Evaluate

2

20 q[45]:[45]

[3]

critical illness assurance contract for a healthy life aged x for term of n years. [3]

Basis: PMA92Base

[3]

Age

40

41

42

Population

Number of deaths

121,376

134,292

133,277

104

127

132

(i)

[1]

(ii)

Calculate the standardised mortality ratio for this population using AM92

Ultimate.

[3]

[Total 4]

Derive an expression for the variance of the present value of a temporary annuitydue in terms of assurance functions for a life aged x with a term of n years.

[4]

A life insurance company sells annual premium whole life assurance policies with

benefits payable at the end of the year of death. Renewal expenses are incurred at the

start of each year, and claim expenses are nil.

(a)

successive durations, calculated on the premium basis. Define all symbols

used.

(b)

[4]

CT5 S20092

(a)

respect of a life insurance contract.

(b)

each.

[5]

(i)

[3]

(ii)

[Total 5]

(i)

prospective policyholders to ensure the probability of a profit is set at an

acceptable level.

(ii)

10

[5]

Explain why an insurance company might not use questions requesting genetic

information from prospective policyholders?

[3]

[Total 8]

A pension fund provides a pension from normal retirement age of 1,000 per annum

for each complete year of service. The pension is payable monthly in advance for 5

years certain and for the whole of life thereafter and is only paid if the life remains in

service to normal retirement age of 65.

Calculate the expected present value of the pension for a new entrant aged 62 exact.

Basis: Interest:

4% per annum

Mortality after retirement: PMA92C20

Independent decrement rates before retirement

Age x

q xd

qxw

62

63

64

0.005650

0.006352

0.007140

0.015672

0.078441

0.055654

[8]

CT5 S20093

11

A life insurance company offers special endowment contracts that mature at age 65.

Premiums are payable annually in advance on 1 January each year. The sum assured

payable at the end of year of death during the term is one half of the sum assured that

will be paid if the policyholder survives until maturity.

Details of these contracts in force on 31 December 2007 are:

Exact age

payable on maturity ()

60

12,250,000

440,000

The claims in 2008 were on policies with the following total sums assured and annual

premiums:

Total sums assured

payable on maturity ()

200,000

7,000

Calculate the mortality profit or loss in 2008 given that the company calculates

reserves for these contracts using the gross prospective method.

Basis: Mortality: AM92 Ultimate

Interest:

4% per annum

Expenses: Nil

[9]

12

(i)

(ii)

Calculate:

[3]

(a)

1000A30:40

(b)

The annual premium payable continuously until the 2nd death for the

above assurance in (a) with a sum assured of 1,000.

Basis: = .02 for a life aged 30 exact at entry level throughout their life

= .03 for a life aged 40 exact at entry level throughout their life

= .05 throughout

Expenses: Nil

[7]

(iii)

Outline the main deficiency of the above premium paying scheme and suggest

an alternative.

[3]

[Total 13]

CT5 S20094

13

A life insurance company issues a 35-year non profit endowment assurance policy to

a life aged 30 exact. Level premiums are payable monthly in advance throughout the

term of the policy. The sum assured of 75,000 is payable at maturity or at the end of

year of death of the life insured, if earlier.

(i)

Basis: Mortality:

Interest:

Initial expenses:

Renewal expenses:

Claims expense:

Inflation:

(ii)

AM92 Select

6% per annum

250 plus 50% of the gross annual premium

75 per annum, inflating at 1.92308% per

annum, at the start of the second and subsequent

policy years and 2.5% of the second and

subsequent monthly premiums

300 inflating at 1.92308% per annum

For renewal and claim expenses, the amounts

quoted are at outset, and the increases due to

inflation start immediately.

[7]

retrospective policy value, assuming the same basis as in (i) above.

Calculate the surrender value at the end of the 30th policy year immediately

before the premium then due.

[7]

[Total 14]

CT5 S20095

14

A life insurance company issues a special term assurance policy for a 3-year term.

Under the policy, a sum assured of 10,000 is paid at the end of the year of death. In

addition on survival to the end of the term 50% of total premiums paid are returned.

Basis: Initial expenses:

Renewal expenses:

Reserves:

Mortality experience:

Withdrawals:

Surrender Value:

Interest earned:

Risk discount rate:

5% of 2nd and 3rd years premiums

Net Premium using AM92 Ultimate at 4% interest

(allowing for return of 50% of net premiums paid on

survival)

80% AM92 Select

20% in year 1, 10% in year 2 (with all withdrawals

assumed to occur at end of year)

Nil

6% per annum

10% per annum

(i)

On the basis of the above information, calculate the level annual premium

payable in advance for a life aged 57 exact to achieve the required rate of

return.

[12]

(ii)

Discuss the effect of increased withdrawal rates on the rate of return to the

company from this policy.

[2]

Following comments from the marketing department, it has been decided to allow a

surrender value at the end of years 1 and 2 equal to 25% of total premiums paid.

(iii)

END OF PAPER

CT5 S20096

[3]

[Total 17]

Faculty of Actuaries

Institute of Actuaries

Core Technical

September 2009 Examinations

EXAMINERS REPORT

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

December 2009

Comments for individual questions are given with the solutions that follow.

Faculty of Actuaries

Institute of Actuaries

1

2

20 q[45]:[45]

1 / 2 * 20 q[45]:[45]

1 / 2 * (1

20 p[45] )

1 / 2 * (1

l65

l[45]

)2

1 / 2 * (1 8821.2612 / 9798.0837) 2

.00497

2

Define

k (ap) x =

the probability that a life aged x is alive and not diagnosed as critically ill at

time k

(aq)tx k = the probability that a life aged x + k is diagnosed as critically ill in the

following year

n 1

vk

t

k ( ap ) x .( aq ) x k

k 0

Students often failed to define symbols adequately. The continuous alternative was

also fully acceptable

3

For contant force of mortality at age 72:

p72

(1 q72 ) .969268 e

Hence

0.5 p72.25

0.5 q72.25

dt

ln(.969268) .031214

e

0.75

.031214 dt

0.25

.984514

1 .984504

.015486

Page 2

1

0

.015607

Generally well done. The alternative very quick answer of 1 ( p 72)1/2 was fully

acceptable

4

(i) Crude rate = (104+127+132)/(121376+134292+133277)=0.000933

(ii)

Age

Population

40

41

42

121,376

134,292

133,277

Expected

Number of

deaths

0.000937 114

0.001014 136

0.001104 147

qx

= (104+127+132) / (114+136+147) = 0.914

5

var amin( K x

1,n )

var

1 v min( K x

d

1,n )

1

var v min( K x 1,n )

2

d

1 2

Ax:n ( Ax:n )2 where 2 Ax:n is at rate (1 i )2 1

2

d

The Examiners were looking to see students knew how to derive the relationship.

Generally well done.

6

a. ( tV ' GP-et )(1 i )

Page 3

qx t S

px t ( t 1V ' )

where

tV

'

GP

et

office premium

renewal expenses incurred at time t

i

S

qx t

Sum Assured

probability life aged x t dies within one year on premium/valuation basis

px

plus interest equals outgo (death claims and closing reserve for

survivors) if assumptions are borne out.

Generally well done.

7

Direct expenses are those that vary with the amount of business written. Direct

expenses are divided into:

Initial expenses

Renewal expenses

Termination expenses

Examples of each:

Initial expenses those arising when the policy is issued e.g. initial commission

Renewal expenses those arising regularly during the policy term e.g. renewal

commission

Termination expenses those arising when the policy terminates as a result of an

insured contingency (e.g. death claim for a temporary life insurance policy)

Generally well done and other valid comments and examples were credited.

8

(i) Pensioners retiring at normal retirement age

Pensioners retiring before normal retirement age

Pensioners retiring before normal retirement age on the grounds of ill-health

(ii) Class selection ill-health pensioners will have different mortality to other

retirements.

Temporary initial selection the difference between these classes will

diminish with duration since retirement

Page 4

Anti-Selection and Time Selection were credited provided they were properly justified.

Generally well done.

9

(i) To set premium rates to ensure the probability of a profit is set at an

acceptable level then the insurer takes advantage of the Central Limit Theorem

while pooling risks which are independent and homogeneous.

Independence of risk usually follows naturally.

Homogeneity is ensured by careful underwriting. Risk groups are separated

by the use of risk factors, such as age and sex.

The life assurance company uses responses to questions to allocate prospective

customers to the appropriate risk group.

Enough questions should be asked to ensure that the variation between

categories is smaller than the random variation that remains but in practice

there will be limits on the number and type of questions that can be asked.

(ii) Equity insurance is about pooling of risks and the use of genetic information

reduces that pooling.

Ethics use of genetic information could create an underclass of lives who

are not able to obtain insurance products at an affordable price, given the

results of their genetic tests.

In some countries legislation may prohibit genetic testing or there might be

political or social reasons why it is avoided.

Generally part (i) was done poorly with students failing to appreciate the key points. Part (ii) was

done better but in this case also most students failed to obtain all the main valid points.

10

Pension at retirement = 3

1000 = 3000

Annuity at retirement

(12)

(12) v5 . 5 p 65 70

5

a5 .

i

d

(12)

(12)

v5 . 5 p 65 70

Use the formula

Page 5

9238.134

. 11.562 11

24

9647.797

13.28659

(aq) x

qx

qx

qx .qx

(aq)62= 0.021233, (aq)63= 0.084295, (aq)64= 0.062397

And 3(ap)62 = (1

= 29778

A large proportion of students whilst understanding how to approach this question failed

to calculate some or all of it correctly. In some cases certain parts were omitted or

calculated wrongly. Credit was given where parts of the solution were correct.

11

Let EDS and ADS denote the expected and actual death strain in 2008. Then

EDS

q60 Si

Si ( A61:4

l65 4

v ) Pa

i 61:4

l61

where S i is the death benefit per policy and the summation is over all policies in force

at start of the year i.e. (where figures are in 000s)

EDS

q60

Si

Si ( A61:4

0.008022

0.008022

6125 8623.75

l65 4

v )

l61

Pi a61:4

8821.2612

0.854804

9212.7143

440 3.722

20.045

The actual death strain is obtained by summation of the death strains at risk over the

policies that become claims. Therefore

ADS

Si

Si ( A61:4

claims

Si

claims

100

Si ( A61:4

claims

167.5333 26.054

l65 4

v ) Pa

i 61:4

l61

l65 4

v )

l61

Pi a61:4

claims

41.479

Page 6

This question was very poorly done. Students failed to properly identify the data and

the subtleties of a Pure Endowment contract.

12

(i) The expected present value of a continuous assurance for a sum assured of

1000 calculated at a force of interest on 2 lives aged x and y whereby the

sum is paid on the death of x only if life aged x dies after life aged y.

(ii) For both parts (a) and (b):

tp 30

t

0

rdr

t

0.02 dr

0

0.02t

tp 40

0.03t

_ 2

t

(a) 1000 A 30 : 40 1000 0 v tp30(1 tp 40)

1000 0 e

.05t

*e

1000 0 .02*(e

.02t

.07t

t dt

.03t

*(1 e

.1t

e

.07t

) *.02dt

)dt

.02 / .1* e

.1t

]0

85.714

____

(b) To calculate premium we need a30:40

____

a30:40

.05t

(e

[ e

(e

.07t

.07t

.02t

.08t

/ .07 e

.03t

1.t

e

.08t

.05t

)dt

)dt

/ .08 e

.1t

/ .1]0

16.786

So the required premium = 85.714 /16.786

5.11

(iii)If the life age 30 dies first the policy ceases without benefit yet the premium is

expected to be maintained by the life aged 40 so long as they survive. There is

no incentive to continue.

The sensible option would be to establish the premium paying period as

ceasing on the death of the life aged 30.

Page 7

In general terms this question was reasonably well done although a large number of

students failed to obtain all of the required numerical solutions (the main error being

failure to calculate the joint life last survivor annuity). In part (iii) a student who

suggested a joint life first death approach was given credit although this is an

expensive option.

13

(i) Let P be the monthly premium for the contract. Then:

EPV of premiums valued at rate i where i = 0.06 is:

12 Pa(12)

[30]:35

where v35

12 P(a[30]:35

l65

l[30]

12 P(15.152

0.13011

l

11

(1 v35 65 ))

24

l[30]

8821.2612

9923.7497

0.11566

11

(1 .11566)) 12 P 14.74668 176.9601P

24

75, 000 A[30]:35

EPV of expenses not subject to inflation and therefore valued at rate i where i

= 0.06 is:

0.025 12 Pa(12)

[30]:35

250 10.399 P

1.06

1 j

1.04 is:

1.0192308

75(a[30]:35 1) 300 A[30]:35 75 18.072 300 0.26647 1435.341

Equating EPV of premiums and EPV of benefits and expenses gives:

176.9601P = 10,675.5 + 250 + 10.399P + 1,435.341

=> P = 12,360.841/166.5611 = 74.21

(ii) Gross retrospective policy value is given by:

V retrospective

Page 8

(1 i )

1

12 P 0.975a(12) @ i % 0.025 P 12 0.5 P 250 75, 000 A[30]:30

@ i%

l

[30]:30

[30]

30

75(a@ j %

l60

[30]:30

1

1) 300 A[30]:30

@ j%

where,

l[30]

l60

9923.7497

1.06854

9287.2164

a(12)

[30]:30

1

A[30]:30

a[30]:30

A[30]:30

l

11

1 v30 60

24

l[30]

v30

l60

l[30]

14.437

11

(1 0.16294) 14.0533

24

a[30]:30

17.759

1

A[30]:30

A[30]:30

v30

l60

l[30]

V retrospective

6.13715 12, 201.876 1.8553 445.26 250 1, 491.75 1, 256.925 8.529

53,707.84

Generally part (i) was done well. Students did however often struggle to reproduce

part (ii) which is often the case with retrospective reserves.

In this case because the reserve basis matched the premium basis the retrospective

reserve equalled the prospective reserve. If the student realised this, fully stated the

fact and then calculated the prospective reserve full credit was given.

Minimal credit was however given if just a prospective reserve method was attempted

without proper explanation.

14

(i) First calculate net premium NP and reserve tV 57:3 for t = 1 and 2

Page 9

NPa57:3

10000( A57:3

NP 2.870 8896.3

1.5 NP

175.394

NP 112.29

(112.29

1V57:3

2V57:3

v3

l60

l

) 0.5 3 NP v3 60

l57

l57

0.889 9287.2164 / 9467.2906

NP 1.308

(1.04) 10000 q 57) /(1 q 57)

60.62

((112.29 60.62) (1.04) 10000 q 58) /(1 q 58)

(179.826 63.520) / 0.993648

117.05

The end 3rd year reserve needs to be 1.5 times the office premium to be

calculated so as to meet the return guarantee.

We can complete the following table (denoting the office premium by P).

Note as withdrawals are assumed at the end of the year the decrements of

mortality and withdrawal are not dependent.

Year 1 Age 57

80% AM92 q select

Withdrawal

In force factor

begin year

Premium

Expenses

Death Claims

Opening Reserve

Closing Reserve

Interest

Profit vector

Profit signature

Year 2 Age 58

0.0033368

.19933264

1

Year 3 Age 59

.004944

.0995056

.79733056

.005712

0

.7140497

0.2P

33.368

0

48.334

.048P

0.05P

49.440

60.62

104.824

.057P+3.6372

0.05P

57.120

117.05

1.4914P

.057P+7.023

.848P 81.702

.848P 81.702

1.007P 90.007

.8029P 71.7653

0.4844P+66.953

0.3459P+47.808

Alternatively the Closing Reserve at End Year 3 can be taken as zero and an

additional item termed Maturity Value can be shown in Year 3 only equal to

1.4914P.

To obtain 10% return the equation is:

P

+ 71.7653/(1.1)2 47.808/(1.1)3] = 0

Page 10

1.1746

(ii)

97.6659 = 0

P = 83.15 say 83

relationship between expenses, reserves and any surrender value. In this case

there is no surrender value, a substantial reserve for a maturity benefit and low

expenses.

In that scenario, increasing the lapse rates actually improves the return to the

company as it retains a substantial premium and reserve with low expected

death costs and returns nothing to the policyholder. This return comes earlier

also and benefits from the high risk discount rate.

(iii)

In this case a life who surrenders obtains 0.25P at the end of year1 and 0.5P

at the end of year 2.

On the same parameters the present value of these 2 cash flow items are:

P

[0.25

0.19933264/(1.1)+0.5

0.0995056

0.79733056/(1.1)2]

= 0.07809P

Hence from above with adjustment:

1.1746

P 97.6659

0.07809P = 0

P = 89.07 say 89

Most students found this a very daunting question and overall performance was lower

than expected. Certain comments are appropriate:

Because of the stated fact that withdrawals happened at the end of the year

calculating dependent decrements was not necessary. Many students wasted

much time attempting to perform this.

Many students did not know how to calculate a net premium for this contract.

The reserve process was very straightforward if done on a recursive basis (see

question 6)

Once these facts were realised the question was then a relatively simple

manipulation of cash flows.

Credit was given to students who gave some reasonable verbal explanation of what

needed to be done even if calculations were incomplete.

Page 11

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