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Institute of Actuaries

EXAMINATION

26 April 2010 (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 A2010

Faculty of Actuaries

Institute of Actuaries

(a)

l[ x ]+ r

(b)

n|m q x

(c)

dx

[3]

Calculate the standardised mortality ratio for the population of Urbania using the

following data:

Age

60

61

62

Standard Population

Population

Deaths

2,500,000

26,170

2,400,000

29,531

2,200,000

32,542

[3]

Urbania

Population

Deaths

10,000

130

12,000

145

11,000

173

[3]

A life insurance company offers an increasing term assurance that provides a benefit

payable at the end of the year of death of 10,000 in the first year, increasing by 100 on

each policy anniversary.

Calculate the single premium for a five year policy issued to a life aged 50 exact.

Basis:

Rate of interest

Mortality

Expenses

4% per annum

AM92 Select

Nil

[4]

Calculate the probability that a life now aged 20 exact:

(i)

(ii)

CT5 A20102

[2]

[3]

[Total 5]

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

x

50

51

52

lx

99,813

97,702

95,046

[5]

A company is about to establish a pension scheme that will provide an age retirement

benefit of n/60ths of final pensionable salary where n is total number of years of

service. Final pensionable salary is the average salary in the three years before

retirement.

An employee who will become a member of the pension scheme is currently aged 55

exact has and will be granted exactly 20 years of past service. The employees salary

in the year before the valuation date was 40,000.

(i)

(ii)

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

service).

[3]

future salaries.

[3]

Basis:

Pension Scheme from the Formulae and Tables for Actuarial Examinations

[Total 6]

100 graduates aged 21 exact decide to place the sum of 1 per week into a fund to be

shared on their retirement at age 66 exact.

(i)

Show that each surviving member can expect to receive on retirement a fund

of approximately 7,240.

[4]

Basis:

Rate of interest

Mortality

4% per annum

AM92 Ultimate

One of the survivors uses the accumulated fund to buy a weekly annuity payable for

10 years certain. After 10 years the annuity is payable at two-thirds of the initial level

for the rest of life.

(ii)

Calculate the weekly amount of the annuity on the basis used in part (i).

[2]

[Total 6]

CT5 A20103

A life insurance company models the experience of its pension scheme contracts

using the following three-state model:

Active(A)

x

10

x

Dead (D)

Retired (R)

x

(i)

Derive the dependent probability of a life currently Active and aged x retiring

in the year of age x to (x + 1) in terms of the transition intensities.

[2]

(ii)

Derive a formula for the independent probability of a life currently Active and

aged x retiring in the year of age x to (x + 1) using the dependent probabilities.

[4]

[Total 6]

The decrement table extract below is based on the historical experience of a very large

multinational companys workforce.

Age (x)

Number of employees

(al ) x

40

41

42

10,000

9,855

9,684

Deaths

(ad ) dx

25

27

Withdrawals

(ad ) wx

120

144

Recent changes in working conditions have resulted in an estimate that the annual

independent rate of withdrawal is now 75% of that previously used.

Calculate a revised table assuming no changes to the independent death rates, stating

your results to one decimal place.

[7]

11

Thieles differential equation for the policy value at duration t (t > 0), tVx , of an

immediate life annuity payable continuously at a rate of 1 per annum from age x is:

t V x = x +t t V x 1 + t V x

t

(i)

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

(ii)

CT5 A20104

[5]

[3]

[Total 8]

12

On 1 January 2005, a life insurance company issued 1,000 10-year term assurance

policies to lives aged 55 exact. For each policy, the sum assured is 50,000 for the

first five years and 25,000 thereafter. The sum assured is payable immediately on

death and level annual premiums are payable in advance throughout the term of this

policy or until earlier death.

The company uses the following basis for calculating premiums and reserves:

Mortality

Interest

Expenses

AM92 Select

4% per annum

Nil

(i)

2009.

[6]

(ii)

(a)

(b)

this policy.

(c)

remove this disadvantage.

[3]

There were, in total, 20 deaths during the years 2005 to 2008 inclusive and a further 8

deaths in 2009.

(iii)

CT5 A20105

Calculate the total mortality profit or loss to the company during 2009.

[3]

[Total 12]

13

male life aged 45 exact.

Level premiums of 4,000 per annum are payable yearly in advance throughout the

term of the policy or until earlier death. 95% of the premium is allocated to units in

the first policy year, 100% in the second and 105% in the third. A policy fee of 50 is

deducted from the bid value of units at the start of each year. The units are subject to

a bid-offer spread of 5% on purchase. An annual management charge of 1.75% of the

bid value of units is deducted at the end of each policy year.

Management charges are deducted from the unit fund before death, surrender and

maturity benefits are paid.

If the policyholder dies during the term of the policy, the death benefit of 125% of the

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

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

The policyholder may surrender the policy only at the end of the first and second

policy years. On surrender, the bid value of the units less a surrender penalty is

payable at the end of the policy year of exit. The surrender penalty is 1,000 at the

end of the first policy year and 500 at the end of the second policy year.

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

contract:

Rate of growth on assets in the unit fund

5.25% per annum in year 2

5.0% per annum in year 3

Rate of interest on non-unit fund cash flows 4.0% per annum

Mortality

AM92 Select

Initial expenses

200

Renewal expenses

50 per annum on the second and third

premium dates

Initial commission

15% of first premium

Renewal commission

2.0% of the second and third years

premiums

Rate of expense inflation

2.0% per annum

Risk discount rate

7.0% per annum

For renewal expenses, the amount quoted is at outset and the increases due to inflation

start immediately. In addition, you should assume that at the end of the first and

second policy years, 12% and 6% respectively of all policies still in force then

surrender immediately.

(i)

(ii)

Calculate the expected present value of profit for the policy if the company

assumed that there were no surrenders at the end of each of the first and

second policy years.

[3]

[Total 16]

CT5 A20106

[13]

14

A life insurance company issues a 30-year with profits endowment assurance policy

to a life aged 35 exact. The sum assured of 100,000 plus declared reversionary

bonuses are payable on survival to the end of the term or immediately on death if

earlier.

(i)

Show that the quarterly premium payable in advance throughout the term of

the policy or until earlier death is approximately 616.

Pricing basis:

Mortality:

Interest:

Initial commission:

Initial expenses:

Renewal commission:

AM92 Select

6% per annum

100% of the first quarterly premium

250 paid at policy commencement date

2.5% of each quarterly premium from the start of the

second policy year

Renewal expenses:

45 at the start of the second and subsequent policy

years

Claim expense:

500 on death; 250 on maturity

Future reversionary bonus: 1.92308% of the sum assured, compounded and vesting

at the end of each policy year (i.e. the death benefit does

not include any bonus relating to the policy year of

death)

[10]

At the end of the 25th policy year, the actual past bonus additions to the policy have

been 145,000.

(ii)

Calculate the gross prospective policy reserve at the end of that policy year

immediately before the premium then due.

Mortality:

Interest:

Bonus loading:

Renewal commission:

Renewal expenses:

Claim expense:

AM92 Ultimate

4% per annum

4% of the sum assured and attaching bonuses,

compounded and vesting at the end of each policy year

2.5% of each quarterly premium

90 at the start of each policy year

1,000 on death; 500 on maturity

[6]

[Total 16]

END OF PAPER

CT5 A20107

Faculty of Actuaries

Institute of Actuaries

EXAMINERS REPORT

April 2010 Examinations

Core Technical

Introduction

The attached subject report has been written by the Principal Examiner with the aim of

helping candidates. The questions and comments are based around Core Reading as the

interpretation of the syllabus to which the examiners are working. They have however given

credit for any alternative approach or interpretation which they consider to be reasonable.

R D Muckart

Chairman of the Board of Examiners

July 2010

Comments

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

Faculty of Actuaries

Institute of Actuaries

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

(i)

The number of lives still alive at age x + r out of lx lives alive at age x subject

to select mortality.

(ii)

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

(iii)

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

Spurious selection occurs when mortality differences ascribed to groups are formed

by factors which are not the true causes of these differences.

For example mortality differences by region may be put down to the actual class

structure of the region itself whereas a differing varying mix of occupations region by

region could be having a major effect. So Region is spurious and being confounded

with occupation.

Another example might be in a company pension scheme which might be showing a

significant change in mortality experience which could be viewed as change over

time. However withdrawers from the scheme may be having an effect as their

mortality could be different. To that degree Time Selection may be spurious.

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

The Standardised mortality ratio is the ratio of actual deaths in the population divided

by the expected number of deaths in the population if the population experienced

standard mortality.

Actual number of deaths for Urbania = 130+145+173 = 448

Mortality rates in standard population are:

Age 60: 26,170 / 2,500,000 = 0.0104680

Age 61: 29,531 / 2,400,000 = 0.0123046

Age 62: 32,542 / 2,200,000 = 0.0147918

Expected number of deaths for Urbania

= 0.010468 10,000 + 0.0123046 12,000 + 0.0147918 11,000 = 415

SMR = 448/415 = 107.95%

Page 2

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

1

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

+ 100( IA)1[50]:5

= 9,900(0.32868 v5

9557.8179

*0.38950)

9706.0977

9557.8179

+100* 8.5639 v5

(5*0.38950 + 8.57976)

9706.0977

= 132.96 + 4.34

= 137.30

Many students answered the question well. The most common error was the use of 10,000 as

the multiplier before the temporary assurance function rather then 9,900.

px = exp(

x +t

x +t

x

s ds )

= exp(

= exp(

x +t 0.0002 S

x +t

e

ds +

ds )

x

x

(e0.0002 S 1)ds )

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

+t

= exp

0.0002

(i)

Probability =

e0.0002 x 70 e0.0002 x 20

= exp

+ 50

0.0002

= 0.6362

Page 3

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

(ii)

Probability =

This is the probability that the life survives to 60 and then dies between 60 and

70

40 p20 (1 10 p60 )

e0.0002 x 60 e0.0002 x 20

e0.0002 x 70 e0.0002 x 60

= exp

+ (60 20) . 1 exp

+ (70 60)

0.0002

0.0002

= 0.0889

This question was answered poorly overall. It was an unusual representation of the x

function but other than that was a straight forward probability and integration question.

p51 = 95,046 / 97,702 = 0.972815

Uniform distribution of deaths

p50 0.25 p51 p50 (1 0.25(1 p51 )) 0.978850 * (1 0.25* (1 0.972815))

=

=

= 0.982588

(1 0.5(1 p50 ))

(1 0.5* (1 0.978850))

0.5 p50

t = ln(pt)

50 = ln(0.978850) = 0.021377

51= ln(0.972815) = 0.027561

0.5 p50 * 0.25 p51

=e

0.5*0.021377

Generally answered well. A limited number of students used the Balducci Assumption as one

of their answers. This is not in the CT5 Course whilst the above 2 methods clearly are. This

method was however credited solution not published as not in CT5

(i)

z

ra

ra

(20 z M 55

+ R55 )

1

40, 000

60

s54 D55

Page 4

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

=

1

(20 *128,026 + 963,869)

40,000

60

9.745*1,389

= 173,584

(ii)

Contributions

s

K 40, 000.

N 55

s54 D55

= K .40,000 x

88,615

9.745*1,389

= 261,868K

Most students answered reasonably well. Most common error was the wrong sx function.

Also some students included early retirement calculations which were not asked for.

Also students often did not include the past service benefits in the final contribution rate

believing the final result would have been too high (the question however was quite specific

on providing past benefits).

(i)

Fund = 52*

1.04(6621) a21:45

45 p21

1

1

8695.6199

a21:45 = a21:45 *(1 v 45 * l66 / l21 ) = a21:45 * 1 0.17120*

2

2

9976.3909

= a21:45 0.42539

8821.2612

= 21.202

9976.3909

a21:45 = 20.777

therefore fund =

52*1.0445 (20.777)

= 7, 240

8695.6199

9976.3909

Page 5

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

(ii)

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

3

(1 v10 )

6589.9258

(8.169 0.5)

= 52 P

+ 2 * 0.675564 *

3

8695.6199

ln(1.04)

= 52 P [8.272 + 2.618]]

= 566.26P

7, 240 = 566.26P

P = 12.79

Many students struggled with this question and indeed a large number did not attempt it. As

will be seen from the solution above the actuarial mathematics involved are relatively

straightforward.

Note that 52.18 (i.e. 365.25/7) would have been an acceptable alternative to 52 as the

multiplier which will of course have adjusted the answer slightly.

(i)

Use the Kolmogorov equations (assuming the transition intensities are

constant across a year age):

r

( + )t

t ( aq ) x = e

t

(aq) rx =

(1 e( + ) )

( + )

(ii)

Similarly

(aq) dx =

(1 e (+ ) )

( + )

Note that:

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

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

Page 6

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

So

(aq ) rx =

( log(1 ((aq ) rx

+ (aq ) dx )))

((aq ) rx + (aq ) dx )

=

(aq ) rx

(aq ) rx

+ (aq ) dx

Given that:

qxr = 1 e ,

then

qxr

= 1 1 ((aq) rx

+ (aq) dx )

( aq ) rx

(( aq )rx + ( aq )dx )

In general this was poorly answered with most students making a limited inroad to the

question.

However, the question did not specify that constant forces must be assumed. So, a valid

alternative to part (i) is:

t

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

0

0

0

(aq ) rx

This makes no assumptions and provides an answer in the form asked for in the question, and

so would merit full marks. If constant forces are assumed, the above expression will turn into

the answer in the above solution.

For part (ii) a solution is only possible if some assumption is made. The following

alternatives could be valid:

(1)

Assume dependent decrements are uniformly distributed over the year of age

qxr

(al ) x

(aq) rx

1 12 (aq) dx

(2)

Assume independent decrements are uniformly distributed over the year of age

Page 7

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

This leads to two simultaneous equations:

q xd =

(aq ) dx

and

1 q xr

q xr =

(aq ) rx

1 q xd

which results in a quadratic equation in qxr . (This is covered by the Core Reading Unit 8

Section 10.1.6.)

Whilst a full description has been given above to assist students, in reality those who

successfully attempted this question did assume constant forces.

10

Age (x)

40

41

42

Number of

employees

(al ) x

10,000

9,855

9,684

(aq) dx

(aq ) wx

.00250

.00274

.01200

.01461

1

1

qxd = (aq) dx / (1 *(aq) wx ) and qxw = (aq ) wx / (1 *(aq ) dx )

2

2

d

w

Calculate qx and qx

d

d

q40

=.00250/(1.006) = .00252 and q41

= .00274/(1.00731) = .00276

w

w

q40

=.01200/(1.00125) = .01201 and q41

= .01461/(1.00137) = .01463

1 3

2 4

1 3

2 4

3 1

w

(aq ) 40

= .01201* * 1 *.00252 = .00900

4 2

3 1

w

(aq ) 41

= .01463* * 1 *.00276 = .01096

4 2

Page 8

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

Using the above data the Table can now be reconstructed

Age (x)

Number of

employees

(al ) x

40

41

42

10,000

9,884.9

9749.5

Deaths

Withdrawals

(ad ) dx

(ad ) wx

(10000*.00251)=25.1 10000*.00900=90.0

(9,884.9*.00274)=27.1 9,884.9*.01096=108.3

It should be noted that if more decimal places are used in the aq factors then the deaths at 40

become 25.0 so full credit was given for this answer also.

Because of the limited effect on the answer from the original table students were asked to

show the result to 1 decimal place. Many failed to do so and were penalised accordingly.

11

(i)

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

tVx

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

0

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

t

t

t

t

1

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

t

t

s p x +t t

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

t

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

t

0

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

0

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

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

Page 9

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

= x +t t Vx 1 + t Vx

(ii)

t + dtV

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

where

(t, t + dt)

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

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

12

(i)

P =

1

1

25, 000 A[55]:10

+ 25, 000 A[55]:5

a[55]:10

where

1

1

25, 000 A[55]:10

+ 25, 000 A[55]:5

8821.2612

= 25,000 1.019804

9545.9929

Therefore

P =

2118.39

= 257.46

8.228

Page 10

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

Net Premium Retrospective Reserves at the end of the fifth policy year is

given by:

(1 + i )5

= 1.21665

l[55]

l60

9545.9929

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

9287.2164

= 41.71

(ii)

Explanation more cover provided in the first 5 years than is paid for by the

premiums in those years. Hence policyholder in debt at time 5, with size of

debt equal to negative reserve.

Disadvantage if policy lapsed during the first 5 years (and possibly longer),

the company will suffer a loss which is not possible to recover from the

policyholder.

Possible alterations to policy structure

premiums larger in earlier years, smaller in later years

Change the pattern of benefits to reduce benefits in first 5 years and increase

them in last 5 years.

(iii)

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

= 980 0.00714 50, 042 = 350,154

ADS = 8 50, 042 = 400,336

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

In (i) it should be noted that in this case the retrospective and prospective reserves are equal.

If the student recognised this, explicitly stated so and then did the easier prospective

calculation full marks were given. No credit was given for a prospective calculation without

explanation.

Page 11

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

13

Annual premium

Risk discount rate

Interest on investments (1st yr)

Interest on investments (2nd yr)

Interest on investments (3rd yr)

4000.00

7.0%

5.5%

5.25%

5.0%

4.0%

Interest on non-unit funds

Death benefit (% of bid value of units) 125%

Initial expense

Renewal expense

Expense inflation

(i)

200

50

2.0%

Allocation % (2nd yr)

Allocation % (3rd yr)

B/O spread

Management charge

95.0%

100.0%

105.0%

5.0%

1.75%

Surrender penalty (2nd yr)

1000

500

Policy Fee

50

% prem

15.0%

2.0%

x

45

46

47

q xd

0.001201

0.001557

0.001802

qxs

0.12

0.06

0.00

x

45

46

47

(aq) dx

0.001201

0.001557

0.001802

(aq) sx

0.11986

0.05991

0.00000

(ap)

0.878943

0.938536

0.998198

t 1 ( ap )

1.000000

0.878943

0.824920

value of units at start of year

Alloc

B/O

policy fee

Interest

management charge

value of units at year end

yr 1

0.000

3800.000

190.000

50.000

195.800

65.727

3690.074

yr 2

3690.074

4000.000

200.000

50.000

390.604

137.037

7693.641

yr 3

7693.641

4200.000

210.000

50.000

581.682

213.768

12001.554

Page 12

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

Cash flows (per policy at start of year)

unallocated premium + pol fee

B/O spread

expenses

Interest

man charge

extra death benefit

surrender penalty

end of year cashflow

yr 1

250.000

190.000

800.000

14.400

65.727

1.108

119.856

189.926

probability in force

discount factor

1

0.934579

0.878943

0.873439

yr 3

150.000

210.000

132.020

2.881

213.768

5.407

0.000

133.461

0.824920

0.816298

133.280

premium signature

4000.000

profit

Margin

(ii)

yr 2

50.000

200.000

131.000

4.760

137.037

2.995

29.953

287.755

3285.769

2882.069

10167.837

1.31%

Revised profit signature (309.781, 257.492, 133.093)

Revised PVFNP = 289.515 + 224.904+ 108.643 = 44.032

Again most well prepared students made a good attempt at this question. The most common

error was to ignore dependent decrements.

Substantial credit was given to students who showed how they would tackle this question even

if they did not complete all the arithmetical calculations involved.

14

(i)

EPV of premiums:

4 Pa(4)

[35]:30

@ 6% = 56.1408 P

where

(4)

a[35]:30

= a[35]:30

3

1 30 p[35]v 30

8

)

Page 13

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

3 8821.2612

= 14.352 1

0.17411

8 9892.9151

= 14.0352

EPV of benefits:

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

1

29

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

where b = 0.0192308

=

1

29

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

100, 000

1

@ i + 100, 000v30 30 p[35] @ i

(1.06)0.5 A[35]:30

(1 + b)

8821.2612

0.32187 0.30832

(1 + b)

9892.9151

8821.2612

9892.9151

where

i =

1.06

1 = 0.04

1+ b

(4)

(4)

= P + 250 + 0.025 4 Pa[35]:30

0.025 4 Pa[35]:1

+ 45 a[35]:30 1

1

+500 A[35]:30

+ 250v30 30 p[35]

Page 14

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

8821.2612

8821.2612

+ 250 0.17411

9892.9151

9892.9151

= 2.30566 P + 906.322

where

a(4)

[35]:1

= a[35]:1

3

1 p[35]v

8

3 9887.2069

= 1 1

0.9434 = 0.97857

8 9892.9151

P=

(ii)

33,141.028

= 615.60

53.8351

V prospective =

245,000

(1 + i )1/2 A 1 @ i + 245,000 v 5 5 p60 @ i + 0.025 4 Pa(4) + 90a60:5 4 Pa(4)

60:5

60:5

(1 + b)

60:5

+1000 A160:5 + 500v5 5 p60

245, 000

(1.04)

0.5

1

A60:5

@ i + 245, 000 v5

l65

@ i + 90a60:5 0.975 4 Pa(4)

60:5

l60

l

l

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

l60

l60

l

3

3

8821.2612

where a(4) = a60:5 1 v5 65 = 4.55 1 0.82193

= 4.4678

60:5

8

l60

8

9287.2164

4

1.04

1 = 0

and i =

1.04

=

245, 000

(1.04)0.5

A160:5

@ i =

d60+t

0

l60

465.9551

= 0.05017

9287.2164

Page 15

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

= 12, 052.954 + 232, 708.35 + 409.5 10, 726.473 + 45.177 + 390.345 = 234,880

Part (i) answered reasonably well. Students had more problems with (ii)

Page 16

Faculty of Actuaries

Institute of Actuaries

EXAMINATION

6 October 2010 (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 S2010

Faculty of Actuaries

Institute of Actuaries

Calculate:

(a)

20|10 q[45]

(b)

30 p[45]:[50]

[3]

Basis: AM92 Ultimate

[3]

12,000 per annum payable monthly in arrear to a female life currently aged 55 exact

on the death of a male life currently aged 50 exact. No payment is made after 20

years from the date of purchase.

Basis:

Rate of interest

Mortality of male life

Mortality of female life

Expenses

4% per annum

PMA92C20

PFA92C20

Nil

[4]

A gymnasium offers membership for a three-year period at a fixed fee of 240 per

annum payable monthly in advance. The contract may only be cancelled at a renewal

anniversary. Monthly premiums cease immediately on the death of the member.

Calculate the expected present value of membership fees if the gymnasium sells 120

memberships:

Basis:

Rate of interest

Rate of mortality

Probability of renewal

Expenses

6% per annum

1% per annum

80% at each anniversary

Nil

[5]

CT5 S20102

salary where n is total number of years of service. Final pensionable salary is the

average salary in the three years before retirement. Normal retirement age is 65 and

age retirement is only permitted between ages 60 and 65 exact.

A member of the pension scheme currently aged 45 exact has 12 years of service and

their salary in the year before the valuation date was 25,000.

Give a formula for the expected cashflows between the 66th and 67th birthdays as a

result of entitlement from this past service.

[5]

Calculate:

(a)

A30:40

(b)

a30:40:20

Basis:

= 0.02 throughout for the life aged 40 now

= 4% per annum

[6]

A life insurance company issues a 10-year term assurance policy to a life aged 55

exact. The sum assured which is payable immediately on death is given by the

formula:

50, 000 (1 + 0.1t )

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

where t denotes the curtate duration in years since the inception of the policy.

Level premiums are payable monthly in advance throughout the term of the policy or

until earlier death.

Calculate the monthly premium for this policy using the following basis:

Mortality

Interest

Expenses

AM92 Select

4% per annum

Nil

[6]

Describe the causal factors that explain observed differences in mortality and

morbidity.

CT5 S20103

[6]

The actuary advising a pension scheme has decided that the independent mortality in

the standard table for pension schemes (PEN) from page 142 of the Formulae and

Tables for Actuarial Examinations is no longer appropriate for that pension scheme.

Calculate the revised row of the service table for age 61, assuming that the revised

independent mortality rate at that age is 80% of the previous independent mortality

rate.

[7]

10

Define the following terms, giving formulae and defining all notation used:

(a)

(b)

Indirectly standardised mortality rate

[7]

11

A life insurance company issues a four-year unit-linked policy to a male life. The

following non-unit cash flows, NUCFt (t = 1,2,3,4), are obtained at the end of each

year t per policy in force at the start of the year t:

Year t

NUCFt

50.2

43.1

32.1

145.5

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

(i)

[3]

The company sets up reserves in order to zeroise future negative cash flows. The rate

of interest earned on non-unit reserves is 2.5% per annum.

(ii)

(iii)

Calculate the net present value of the profits after zeroisation using a risk

discount rate of 6% per annum.

Comment on the results obtained in (i) and (ii) above.

CT5 S20104

[3]

[1]

[Total 7]

12

A life insurance company issued a with profits whole life policy to a life aged 40

exact on 1 January 2000. Under the policy, the basic sum assured of 50,000 and

attaching bonuses are payable immediately on death. Level premiums are payable

annually in advance under the policy until age 65 or earlier death.

The company declares simple reversionary bonuses at the start of each year including

the first year and the bonus entitlement on the policy is earned immediately the bonus

is declared.

(i)

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

at the outset, defining symbols where necessary.

[4]

(ii)

Mortality

Interest

Bonus loading

Initial expenses

Renewal expenses

Claim expenses

AM92 Select

6% per annum

2.5% per annum simple

300

25 at the start of the second and subsequent policy

years while the policy is in force

250

[4]

On 31 December 2009, the policy is still in force. Bonuses declared to date total

13,750.

(iii)

31 December 2009 using the following assumptions:

Mortality

Interest

Bonus loading

Renewal expenses

Claim expenses

CT5 S20105

AM92 Ultimate

4% per annum

3% per annum simple

35 at the start of each policy year while the policy is in

force

250

[4]

[Total 12]

13

On 1 January 2009, a life insurance company issued 10,000 joint life whole life

assurance policies to couples. Each couple comprised one male life aged 60 exact and

one female life aged 55 exact when the policy commenced. Under each policy, a sum

assured of 100,000 is payable immediately on the death of the second of the lives to

die.

Premiums under each policy are payable annually in advance while at least one of the

lives is alive.

The life insurance company uses the following basis for calculating premiums and net

premium reserves:

Mortality

Interest

Expenses

(i)

PFA92C20 for the female

4% per annum

Nil

[4]

During the calendar year 2009, there was one claim for death benefit, in respect of a

policy where both the male and the female life died during the year. In addition, there

were 20 males and 10 females who died during the year.

(ii)

Calculate the mortality profit or loss for the group of 10,000 policies for the

calendar year 2009.

[10]

[Total 14]

CT5 S20106

14

policies to male lives aged 56 exact. The sum assured is 21,500 payable on maturity

or at the end of the year of death if earlier. Premiums of 5,000 are payable annually

in advance throughout the term of the policy.

The company holds net premium reserves for these policies, calculated using AM92

Ultimate mortality and interest of 4% per annum.

Surrenders occur only at the end of a year immediately before a premium is paid. The

surrender value is 70% of the net premium reserve calculated at the time the surrender

value is payable.

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

contract:

Rate of interest on cash flows 4% per annum

Mortality

AM92 Select

Surrenders

10% of all policies still in force at the end of each of

the first, second and third policy years

Initial expenses

600

Renewal expenses

45 per annum on the second and subsequent

premium dates

Risk discount rate

6% per annum

Calculate the expected profit margin for this contract.

END OF PAPER

CT5 S20107

[15]

EXAMINERS REPORT

September 2010 examinations

Core Technical

Introduction

The attached subject report has been written by the Principal Examiner with the aim of

helping candidates. The questions and comments are based around Core Reading as the

interpretation of the syllabus to which the examiners are working. They have however given

credit for any alternative approach or interpretation which they consider to be reasonable.

T J Birse

Chairman of the Board of Examiners

December 2010

20|10 q[45]

(a)

(b)

30 p[45]:[50]

l75 l80

6,879.1673 5, 266.4604

=

= 0.380951

l[45] l[50] 9, 798.0837 9, 706.0977

.5 p45.75

= .000367 by UDD

= .25* q46 = .25*.001622 = .000406

.25 q45.75

.25 q46

Hence

.5 p45.75

In general question done well. However many students did not appreciate the split in line 1

above and attempted to apply formula directly.

(

)

= 12,000 ( ( 13 ) v

p ( 13 ) (

13 ) v

24

24

24

8784.955

10.933 13 )

= 12,000 (18.210 13 ) v

(

24

24

9917.623

55:20

50:55:20

20

55

20 55

75

50:55

20

20 p50:55

70:75

13

20

8784.955 9238.134

8.792 13

16.909 13

v 20

24

24

9917.623 9941.923

= 2,388

Many students struggled with how to break down the monthly annuity functions into those

which could then utilise the Tables. However question generally done well by well prepared

students.

Page 2

))

24

(12) = x(12) v. px x(12)

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

x:1

Where x:1 = 1

Therefore

x:1

Year 1 = 1

Year 2 = 0.99*0.8 = 0.792

Year 3 = 0.792 * 0.792 = 0.6273

The value is therefore

= 64,388

This question was overall done very poorly with few students realising that the key

element to the calculation involved a one year annuity due payable monthly.

12 z65 r65 ( rl )66

25000

+ 25000

80 s44 l45 ( rl )65

t =15 80 s44

Question done very poorly. Many students attempted to use annuity functions

whereas the question sought was a pure cash flow one.

Page 3

(a)

0

30:40

0

0

*e

*e

=

*e

.06

.07

.05

0

= (1/ 5 + 1/ 3 3 / 7) = .10476

a30:40:20 =

(b)

20 .04t

e

0

* e.01t * e .02t dt

20 .07t

e

dt

0

20

1 .07t

=

e

.07

0

Question generally done well.

Let P be the monthly premium. Then equating expected present value of premiums

and benefits gives:

12 Pa(12)

[55]:10

1

= 45000 A[55]:10

+ 5000( IA)1[55]:10

where

a(12)

[55]:10

= a[55]:10

11

8821.2612

= 8.056

24

9545.9929

1

A[55]:10

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

( IA)1[55]:10 = 1.040.5

(( IA)

[55]

45000 0.06044 + 5000 0.3728

12 P =

= 568.99

8.056

P = 47.42

In general question done well by well prepared students.

Page 4

directly affected. Occupations may also have health barriers to entry, e.g. airline

pilots

Nutrition poor quality nutrition increases morbidity and hence mortality

Housing standard of housing (reflecting poverty) increases morbidity

Climate climate can influence morbidity and may also be linked to natural disaster

Education linked to occupation but better education can reduce morbidity, e.g. by

reducing smoking

Genetics there is genetic evidence of a predisposition to contracting certain

illnesses, even if this has no predictive capability

A straightforward bookwork question generally done well although not all students captured

the full range. All valid examples not shown above were credited.

Students who misunderstood the question and tried to answer using Class, Time, Temporary

Initial Selection were given no credit.

q x =

(aq )x

(1 0.5((aq )

x ))

q xd

q ix

q xr

(aq ) dx

(1 0.5((aq ) x d ))

(50 / 6548)

= 0.00809

(1 0.5*((219 + 516) / 6548))

(aq )ix

(219 / 6548)

= 0.03496

(1 0.5*((50 + 516) / 6548))

(aq ) rx

(516 / 6548)

= 0.080455

(1 0.5*((50 + 219) / 6548))

(1 0.5((aq )x i ))

(1 0.5((aq ) x r ))

then use the formula

1

1

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

2

3

Page 5

to derive dependent probabilities:

1

1

(aq)dx = qxd (1 (qix + qxr ) + (qix .qxr )) = 0.0061046

2

3

1

1

(aq)ix = qix (1 (qxd + qxr ) + (qxd .qxr )) = 0.0334465

2

3

1

1

(aq) rx = qxr (1 ( qxd + qix ) + ( qxd .qix )) = 0.0787948

2

3

The resulting service table is:

lx

dx

ix

rx

6,548

40

219

516

This question was done poorly. Many students appeared not to remember the derivation

process for multiple decrements etc. Some students wrote down the final table without

showing intermediate working. This gained only a proportion of the marks.

10

(a)

Exc,t mx,t

x

Exc,t

x

where

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

(b)

s Exc,t s mx,t

x

s Exc,t

x

Exc,t s mx,t

x

Exc,t mx,t

x

Page 6

s c

Ex,t

s

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

This question generally done well. Other symbol notation was accepted provided it was

consistent and properly defined.

11

Year t

qx

px

t 1 p x

NUCFt

Profit Signature

1

2

3

4

0.01

0.01

0.01

0.01

0.99

0.99

0.99

0.99

1

0.99

0.9801

0.9703

50.2

43.1

32.1

145.5

50.2

42.7

31.5

141.2

(i)

PV of profit @ 6%

= 50.2v 42.7v 2 31.5v3 + 141.2v 4

= 47.4 38.0 26.4 + 111.8

= 0.0 IRR = 6%

(ii)

2V

1V

32.1

= 31.3

1.025

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

(iii)

the non- unit cash flow losses have been accelerated and the risk discount rate

is greater than the accumulation rate.

Parts (i) and (iii) done well generally. In Part (ii) many students failed to develop the

formulae properly although they realised the effect in (iii).

Page 7

12

(i)

40 +1

+ fvT40 Pamin( K

40 +1,25)

where b

I

e

is the initial expense

is the annual renewal expense payable in the 2nd and

subsequent years

f

is the claim expense

P

is the gross annual premium

K40(T40) is the curtate (complete) random future lifetime of a life

currently aged 40

(ii)

Pa[40]:25 = 50, 250 A[ 40] + 1, 250 ( IA )

+ 300 + 25(a[40] 1)

[ 40]

P 13.29 = 50, 250 1.060.5 0.12296 + 1, 250 1.060.5 3.85489

+300 + 25(15.494 1)

13.29 P = 6361.402 + 4961.065 + 300 + 362.35

P = 901.79

(iii)

64, 000 A50 + 1,500 ( IA )

50

+35 17.444 901.79 11.253

= 25, 033.32

In general question done well by well prepared students. In (i) credit also given if the

formulae included a limited term on the expense element although in reality this is unlikely.

Page 8

13

(i)

premiums and benefits gives:

Pa

60m :55 f

where a

60m :55 f

= 100000 A

60m :55 f

60m :55 f

= 1.040.5 A

60m :55 f

= 1.040.5 (1 d a

60m :55 f

P 19.086 = 100000 * 0.2711804

P = 1, 420.83 .

(ii)

a m f

100000 1.040.5 1 61 :56

a m f

60 :55

= 100000 1.040.5 1

= 1448.01

15.632 + 18.210 14.756

100000 A61m Pa61m

0.04

100000 1.040.5 1

15.254 1420.83 15.254 = 20475.94

1.04

100000 A56 f Pa56 f

0.04

100000 1.040.5 1

17.917 1420.83 17.917 = 6247.12

1.04

Page 9

Mortality Profit = Expected Death Strain Actual Death Strain

(a)

Mortality Profit

) (

(b)

Males only die during 2009 = 20 actual deaths (and therefore we need

to change reserve from joint life to female only surviving).

Mortality Profit

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

(c)

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

Mortality Profit

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

i.e. a mortality loss

Part (i) generally done well. Part (ii) was challenging and few students realised the full

implications of reserve change on 1st death. Only limited partial credit was given if

students used only joint life situations.

Page 10

14

0V56:4

= 1

a56:4

1V56:4

= 1

a57:3

2V56:4

= 1

3V56:4

= 1

a56:4

a56:4

a58:2

a56:4

a59:1

a56:4

=0

= 1

2.870

= 0.23364

3.745

= 1

1.955

= 0.47797

3.745

= 1

1.0

= 0.73298

3.745

T

d

q[56]

+ t 1

1

2

3

4

0.003742

0.005507

0.006352

0.007140

s

q[56]

+ t 1

(aq) d[56]+t 1

(aq) s[56]+t 1

(ap)[56]+t 1

t 1 ( ap )[56]

0.1

0.1

0.1

0.0

0.003742

0.005507

0.006352

0.007140

0.09963

0.09945

0.09936

0.0

0.896632

0.895044

0.894283

0.992860

1.000000

0.896632

0.802525

0.717685

d

s

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

+t 1 ) (1 q[56]+t 1 )

The calculations of the profit vector, profit signature and NPV are set out in the table

below:

Policy

year Premium

1

2

3

4

5000

5000

5000

5000

Expenses

Interest

Death

claim

Maturity

claim

Surrender

claim

In force

cash flow

600.00

45.00

45.00

45.00

176.00

198.20

198.20

198.20

80.45

118.40

136.57

153.51

0.00

0.00

0.00

21346.49

350.31

715.38

1096.1613

0.00

4145.23

4319.42

3920.475

16346.80

Policy

year

Increase in

reserves

Interest on

reserves

Profit vector

Cum probability

of survival

Discount

factor

NPV

profit

1

2

3

4

4504.02

4174.53

3816.72

15759.07

0.00

200.93

411.05

630.36

358.78

345.82

514.84

42.63

1.00000

0.89663

0.80253

0.71768

0.943396

0.890000

0.839619

0.792094

338.47

275.96

346.91

24.24

Total NPV =

308.63

Page 11

The calculations of the premium signature and profit margin are set out in the table

below:

Policy year

Premium

probability in force

discount factor

1

5000.00

1.00000

1.00000

5000.000

p.v. of premium signature

=> expected p.v. of premiums 15813.53

profit margin =

2.0%

5000.00

5000.00

5000.00

0.89663

0.80253

0.71768

0.943396

0.890000

0.839619

4229.40

3571.22

3012.91

Many well prepared students were able to outline the process required without being totally

accurate on the calculation. Significant credit was awarded in such situation.

Many students failed to appreciate the multiple decrement element.

Page 12

EXAMINATION

26 April 2011 (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 A2011

Give a different example of selection shown by each of the following mortality tables:

(a)

(b)

(c)

ELT15

PMA92

AM92

[3]

Calculate:

(a)

(b)

10|5 q60

(c)

s65:10

23 p65

Basis:

Mortality

Rate of interest

PMA92C20

4% per annum

[4]

Calculate ( Ia ) x

Basis: x = 0.02 for all x

= 4% per annum

[4]

Outline the benefits that are usually provided by a pension scheme on retirement due

to ill health.

[5]

A pension scheme uses the following model to calculate probabilities, where the

transition intensities are = 0.05 and = 0.08.

Active

Retired

Dead

Calculate:

(a)

(b)

the independent probability of death from active service

CT5 A20112

[5]

(i)

[2]

(ii)

[4]

Basis:

Mortality

ELT15(Males)

[Total 6]

[6]

A life insurance company issues a with profits whole life assurance policy to a life

aged 40 exact. The sum assured of 100,000 plus declared reversionary bonuses are

payable immediately on death. Level premiums are payable annually in advance to

age 65 or until earlier death.

A simple bonus, expressed as a percentage of the sum assured, is added to the policy

at the start of each year (i.e. the death benefit includes the bonus relating to the policy

year of death).

The following basis is used to price this policy:

Mortality

AM92 Select

Rate of Interest

4% per annum

Initial expenses

policy commencement date

Renewal commission

year

Claim expense

Using the principle of equivalence, calculate the level simple bonus rate that can be

supported each year on this policy if the annual premium is 3,212.

[6]

CT5 A20113

A male life aged 52 exact and a female life aged 50 exact take out a whole life

assurance policy. The policy pays a sum assured of 100,000 immediately on first

death. Premiums are payable for a period of five years, monthly in advance.

Calculate the monthly premium payable.

Basis:

Mortality

PMA92C20 (male life), PFA92C20 (female life)

Rate of interest 4% per annum

Expenses

Nil

10

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

endowment assurance of 1 payable at the end of the year of death for a life aged 40

exact, with a term of 15 years.

Basis:

Mortality

Rate of interest

Expenses

11

[7]

AM92 Select

4% per annum

Nil

[8]

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

61 exact under which level premiums of 2,500 are payable yearly in advance

throughout the term of the policy or until earlier death. In the first policy year 40% of

the premium is allocated to units, while in the second and subsequent policy years

110% of the premium is allocated to units. The unit prices are subject to a bid-offer

spread of 5%.

If the policyholder dies during the term of the policy, the death benefit of 10,000 or

the bid value of the units, whichever is higher, is payable at the end of the policy year

of death.

The policyholder may surrender the policy, in which case a value equal to a fixed

percentage of the total premiums paid on the policy is payable at the end of the policy

year of surrender. The percentage is based on the policy year of surrender as follows:

Policy year

as a surrender value

1

2

3

4

0

25

50

75

An annual management charge of 0.5% of the bid value of units is deducted at the end

of each policy year before death, surrender and maturity benefits are paid.

CT5 A20114

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

contract:

Rate of growth on assets in the unit fund

AM92 Select

6% per annum

Initial expenses

325

Renewal expenses

and subsequent premium dates

Initial commission

Renewal commission

subsequent years premiums

(i)

Construct a multiple decrement table for this policy assuming that there is a

uniform distribution of both decrements over each year of age in the single

decrement table.

[3]

(ii)

Construct tables showing the growth of the unit fund and the non-unit fund.

Include all commissions in the non-unit fund.

[7]

(iii)

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

does not zeroise future expected negative cashflows.

[3]

[Total 13]

CT5 A20115

12

On 1 April 1988, a life insurance company issued a 25-year term assurance policy to a

life then aged 40 exact. The initial sum assured was 75,000 which increased by 4%

per annum compound at the beginning of the second and each subsequent policy year.

The sum assured is payable immediately on death and level monthly premiums are

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

The company uses the following basis for calculating premiums and reserves:

Mortality

AM92 Select

Rate of interest

4% per annum

Initial commission

Initial expenses

Renewal commission

year

Renewal expenses

start of the second and subsequent policy years (the renewal

expense quoted is as at the start of the policy and the

increases due to inflation start immediately)

Claim expense

duration of the policy)

(i)

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

(ii)

[6]

[Total 16]

CT5 A20116

[10]

13

(i)

Explain, including formulae, the following expressions assuming that the sum

assured is payable at the end of the year of death:

(ii)

expected death strain

actual death strain

[6]

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

The death benefit under each type of policy is payable at the end of year of

death.

On 1 January 2000, the company sold 10,000 term assurance policies to male

lives then aged 40 exact and 20,000 endowment assurance policies to male

lives then aged 35 exact. For each type of policy, premiums are payable

annually in advance.

During the first ten years, there were 145 actual deaths from the term

assurance policies written and 232 actual deaths from the endowment

assurance policies written.

(a)

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

During 2010, there were 22 actual deaths from the term assurance policies and

36 actual deaths from the endowment assurance policies.

Assume that there were no lapses/withdrawals on each type of policy during

the first eleven years.

(b)

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

(c)

Basis:

Mortality

AM92 Ultimate

Rate of interest 4% per annum

Expenses

Nil

[11]

[Total 17]

END OF PAPER

CT5 A20117

EXAMINERS REPORT

April 2011 examinations

Core Technical

Introduction

The attached subject report has been written by the Principal Examiner with the aim of

helping candidates. The questions and comments are based around Core Reading as the

interpretation of the syllabus to which the examiners are working. They have however given

credit for any alternative approach or interpretation which they consider to be reasonable.

T J Birse

Chairman of the Board of Examiners

July 2011

(a)

(b)

(c)

Class selection applies only to male pensioners

Temporary initial selection as there are select rates

This question was generally done well. However some students did not supply different

selection types for each part and this was penalised.

l88 3534.054

=

= 0.366307

l65 9647.797

(l l ) (9238.134 8405.160)

= 70 75 =

= 0.084771

l60

9826.131

(a)

23 p65

(b)

10|5 q60

(c)

s65:10 =

(1 + i )10 a65:10

10 p65

10 p65

9, 647.797

) 9.456)

= 13.764

This question was generally done well for parts (a) and (b) but students struggled more with

part (c).

3

1

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

0

Now vp x = e

.04

*e

1

.02

=e

.06

throughout.

Hence

( Ia ) x = (1 + 2e 0.06 + 3( e .06 )2 + 4( e .06 )3 + .........)a 1 at force of interest 6%

= (1/(1 e .06 ))2 ((1 e .06 ) / .06)

= 294.8662 0.970591

= 286.19

This question was not done well. The majority of students failed to realise that the increasing

function I was not continuous, although the payment is continuous. Instead most attempted

0

Page 2

pension benefit after a minimum length of scheme service.

Benefits are usually related to salary at the date of ill-health retirement in similar ways

to age retirement benefits.

However, pensionable service is usually more generous than under age retirement

with years beyond those served in the scheme being credited to the member e.g. actual

pensionable service subject to a minimum of 20 years, or pensionable service that

would have been completed by normal retirement age.

A lump sum may be payable on retirement and a spouse pension on death after

retirement.

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

r

(+)t

t (aq ) x = e

t

d

(+)t

t (aq ) x = e

t

For the case where t = 1 the solution for the dependent probability of retirement is:

( aq) rx =

(1 e (+ ) )

+

0.08

(1 e (0.05+0.08) )

0.08 + 0.05

= 0.07502

(aq) rx =

qxd = 1 e

Hence the independent probability of death is:

qxd = 1 e 0.05 = 0.04877

Generally this question was completed satisfactorily by well prepared students.

Page 3

(i)

(alternatively t px x +t is constant).

(ii)

We have

1.25 p65.5

= (1 ((0.5 0.02447) / (1 0.5 0.02447)))

= 0.98761

0.5 p65.5

0.75 p66

= 0.97967

Hence

1.25 p65.5

= 0.03247

Education includes formal and informal processes, such as public health awareness

campaigns.

Shows in:

Increased income

Better diet

Increased exercise

Better health care

Reduced alcohol and tobacco consumption

Lower levels of illicit drug use

Safer sexual practices

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

Students generally scored on a range of points but in most cases did not write enough of them

to gain all the marks.

Students who mentioned over indulgence risks for the better educated were given credit.

Page 4

Let b be the simple bonus rate (expressed as a percentage of the sum assured). Then

the equation of value at 4% p.a. interest is (where P = 3,212):

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

P(.975 15.887 + 0.025) =

(100, 000 + 350) (1.04 )

0.5

0.5

24,348.0756

= 3.00

b=

8,115.9564

i.e. a simple bonus rate of 3% per annum

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

100,000 A52:50 = 100,000 (1.04)1/2 A52:50

= 100,000 (1.04)1/2 (1 (0.04 / 1.04) a52:50 )

= 101,980.4 (1 0.0384615 17.295)

= 34,143.89

Value of monthly premium of P

12 P (12)

52:50:5

(12) 5 l57:55

(12)

= 12 P 52:50

v

l52:50 57:55

(12)

52:50

= 52:50 11/ 24 = 17.295 0.458 = 16.837

(12)

57:55

= 57:55 11/ 24 = 15.558 0.458 = 15.100

v5 l57:55

= (0.82193 9,880.196 9,917.623) / (9,930.244 9,952.697)

l

52:50

= 0.81491

Hence 12 P (12)

52:50:5

Therefore:

P = 34,143.89 / 54.3823 = 627.85

There was an anomaly in this question in that it was not fully clear that the premium paying

period ceased on 1st death within the 5 year period. Even though the vast majority of students

who completed this question used the above solution a small minority used 12Pa5(12) i.e.

ignoring the joint life contingency. This was credited.

Page 5

None the less many students struggled with this question

10

1

A [40]:15 = A[40]:15

+ A[40]:115

9,557.8179

9,557.8179

= 0.23041 0.55526

0.38950 + 0.55526

9,854.3036

9,854.3036

= 0.55919

Variance

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

2

1

A [40]:15 = 2 A[40]:15

+ 2 A[40]:115

9,557.8179

9,557.8179

= 0.06775 0.30832

0.17785 + 0.30832

9,854.3036

9,854.3036

= 0.31361

Note answers are sensitive to number of decimal places used.

Question done well by well prepared students. Many students failed to realise that the

endowment function needed to be split into the term and pure endowment portions.

Page 6

11

Summary of assumptions:

Annual premium

Risk discount rate

Interest on investments

Interest on sterling provisions

Minimum death benefit

2,500.00

5.5%

4.25%

3.5%

10,000.00

325

74

Initial expense

Renewal expense

(i)

(ii)

Allocation % (2nd yr +)

Man charge

B/O spread

40%

110%

0.5%

5.0%

Maturity benefit

105%

% prm

10.0%

2.5%

Total

575

136.5

x

qxd

qxs

61

62

63

64

0.006433

0.009696

0.011344

0.012716

0.06

0.06

0.06

0.06

(aq) dx

(aq) sx

(ap)

t 1 ( ap )

61

62

63

64

0.006240

0.009405

0.011004

0.012335

0.05981

0.05971

0.05966

0.05962

0.933953

0.930886

0.929337

0.928047

1.000000

0.933953

0.869404

0.807969

alloc

B/O

interest

management charge

value of units at year end

yr 1

yr 2

yr 3

yr 4

0.00

1,000.00

50.00

40.37

4.95

985.42

985.42

2,750.00

137.50

152.91

18.75

3,732.08

3,732.08

2,750.00

137.50

269.65

33.07

6,581.15

6,581.15

2,750.00

137.50

390.73

47.92

9,536.46

Page 7

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

yr 1

yr 2

yr 3

yr 4

unallocated premium

B/O spread

expenses/commission

interest

man charge

extra death benefit

extra surrender benefit

extra maturity benefit

end of year cashflow

1,500.00

50.00

575.00

34.12

4.95

56.25

58.94

0.00

1,016.76

250.00

137.50

136.50

8.72

18.75

58.95

148.20

0.00

149.71

250.00

137.50

136.50

8.72

33.07

37.62

168.91

0.00

93.36

250.00

137.50

136.50

8.72

47.92

5.72

121.41

442.51

536.62

probability in force

discount factor

1

0.947867

0.933953

0.898452

0.869404

0.851614

0.807969

0.807217

2,213.16

1,952.79

1,720.19

(iii)

419.03

premium signature

expected p.v. of

premiums

profit

margin

2,500.00

8,386.15

5.00%

Credit was given to students who showed good understanding of the processes involved even

if the calculations were not correct. Generally well prepared students did this question quite

well.

12

(i)

EPV of premiums:

12 Pa(12)

[40]:25

@ 4% = 186.996 P

where

(12)

a[40]:25

= a[40]:25

= 15.887

= 15.583

Page 8

11

1 25 p[40]v 25

24

11 8821.2612

0.37512

1

24 9854.3036

EPV of benefits:

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

1

24

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

where b = 0.04

=

75, 000 (1 + i )0.5

1

A[40] 25 p [40] v 25 A65 @ i /

A[40]:25

@ i/ =

(1 + b)

(1 + b)

1

1 1

0.5

(1.04)

9854.3036

= 7709.6880

where

i/ =

1.04

1 = 0.00 i.e. i / = 0%

1+ b

(12)

(12)

@0%

= 0.5 12 P + 400 + 0.025 12 Pa[40]:25

0.025 12 Pa[40]:1

+ 75 a[40]:25

1

1

+300 A[40]:25

+300 0.05422

= 6 P + 400 + 4.6749 P 0.2946 P + 1745.6558 + 16.266

= 10.3803P + 2161.9218

where

11

1 p[40]v

[40]:1

24

11 9846.5384

= 1 1

0.96154 = 0.982025

24 9854.3036

a(12) = a[40]:1

@0%

1 =

a[40]:25

= 39.071

1

l[40]

(l

[40]+1

l64

e64

l[40]

8934.8771

17.421 = 23.27541

9854.3036

Page 9

l

1

1

= 1.040.5 A[40]:25

= 1.040.5 A[40]:25 v 25 65

A[40]:25

l[40]

8821.2612

= 0.05422

9854.3036

186.996 P = 7709.6880 + 10.3803P + 2161.9218

9871.6098

P=

= 55.89

176.6157

Gross prospective policy value at t = 23 (calculated at 4%) is given by:

(ii)

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

63:2

+75 (1.04)

23

[1 + (1.04) p63v ]

12 Pa(12)

63:2

+300 0.98058 [ 0.011344 + 0.988656 0.012716 0.96154] + 0.025 12 55.89 1.90629

+184.854 [1 + (1.04) 0.988656 0.96154] 12 55.89 1.90629

63:2

11

11

8821.2612

2 l65

1 v = 1.951 1 0.92456

= 1.90629

24

24

9037.3973

l63

= 3, 463.02

This question was generally not done well especially part (ii). In part (i) although it was

commonly recognised that a resultant rate of interest of 0% emerged students did not often

seem to know how to progress from there.

13

(i)

The death strain at risk for a policy for year t + 1 (t = 0, 1, 2) is the excess of

the sum assured (i.e. the present value at time t + 1 of all benefits payable on

death during the year t + 1) over the end of year provision.

i.e. DSAR for year t + 1 = S t +1V

The expected death strain for year t + 1 (t = 0, 1, 2) is the amount that the

life insurance company expects to pay extra to the end of year provision for

the policy.

i.e. EDS for year t + 1 = q ( S t +1V )

Page 10

The actual death strain for year t + 1 (t = 0, 1, 2) is the observed value at

t+1 of the death strain random variable

i.e. ADS for year t + 1 = ( S t +1V ) if the life died in the year t to t+1

= 0 if the life survived to t + 1

Note: Full credit given if definition of death strain is given for a block of

policies rather than for a single policy as per above.

(ii)

(a)

given by:

P EA =

100, 000

100, 000

A35:25 =

0.38359 = 2,393.40

a35:25

16.027

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

by:

P

TA

1

200,000 A40:25

a40:25

1

where A40:25

= A40:25 v 25 25 p40

= 0.38907 0.37512

PTA =

8,821.2612

= 0.38907 0.33573 = 0.05334

9,856.2863

200,000 0.05334

= 671.62

15.884

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

11V

EA

= 58,393.0 25,891.8 = 32,501.2

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

Page 11

11V

TA

1

= 200, 000 A51:14

PTA a51:14

1

where A51:14

= A51:14 v14 14 p51

= 0.58884 0.57748

11V

TA

8,821.2612

= 0.58884 0.52583 = 0.06301

9, 687.7149

Endowment assurance: DSAR = 100,000 32,501.2 = 67,498.8

Term assurance:

(b)

For endowment assurance

EDS = 19768 q45 67, 498.8 = 19768 0.001465 67, 498.8 = 1,954, 773.3

ADS = 36 67, 498.8 = 2, 429,956.8

For term assurance

ADS = 22 194,577.6 = 4, 280,707.2

mortality profit = 528,538.9

Hence, total mortality profit = 528,538.9 475,183.5 = 53,355.4

(c)

of deaths for the endowment assurances is approximately 25% higher

than expected, which is a concern. Further investigation would be

required to determine reasons for poor mortality experience for the

endowment assurances, e.g. there may have been limited underwriting

requirements applied to this type of contract when they were written.

Generally (a) was done well. The most common error in (b) was to assume reserves at 10

years rather than 11. On the whole well prepared students coped with (b) well. Many

students did not attempt (c) or at best gave a somewhat sketchy answer.

Page 12

EXAMINATION

4 October 2011 (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 S2011

Calculate:

(a)

10|1 q[50]

(b)

10 p[60]+1

a(12)

[40]:20

(c)

Basis:

Mortality

Rate of interest

Calculate

0.5 q75.25

Basis:

Mortality

AM92

6% per annum

AM92

[3]

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

relationships are true for all ages:

0.5 q[ x ]

= 0.25qx

0.5 q[ x ]+ 0.5

= 0.45qx

[3]

[3]

immediately on death to a life now aged 30 exact.

Calculate the expected value and variance of this contract.

Basis:

Mortality

Rate of interest

AM92 Ultimate

4% per annum

(a)

(b)

[4]

y = 0.03 for all y

= 4% per annum

CT5 S20112

[5]

Explain why it is necessary to have different mortality tables for different classes of

lives.

[6]

A special joint life last survivor annuity of 10,000 per annum is payable

continuously in respect of a male and female life each aged 60 exact. Payments

commence on the first death and continue for 5 years after the second death.

Calculate the expected present value of this annuity.

Basis:

Mortality

PMA92C20 (male life), PFA92C20 (female life)

Rate of interest 4% per annum

Expenses

Nil

Age

2029

3039

4049

5064

[6]

All Professions

Population Deaths

120,000

178,000

156,000

123,000

256

458

502

600

Profession A

Population Deaths

12,500

15,000

16,000

14,000

30

40

50

60

(a)

Calculate the area comparability factor for Profession A using the data for All

Professions as the standard population.

(b)

Hence or otherwise derive the standardised mortality ratio and the indirectly

standardised mortality rate.

[6]

(a)

ELT15(Males)

(b)

exact increasing by 0.005 for each additional year of age (so the ill-health

independent decrement at age 53 exact is 0.025)

(c)

Age retirement - with an independent decrement rate of 0.2 at each age from

60 to 64 all exact.

Age retirements are assumed to take place on the attainment of the exact age, whilst

other decrements act uniformly across the year of age.

Calculate the probability that a member currently aged 59 exact will retire at age 62

exact.

[6]

CT5 S20113

10

(i)

Five years ago a with profits whole life assurance policy was sold to a life then

aged 30 exact.

The sum assured is 150,000 payable at the end of year of death and

premiums are payable annually in advance throughout life. The super

compound method of adding bonuses to the policy is used as follows:

simple bonus relating to that policy year)

Assume that bonuses vest at the start of each policy year and that the actual

past bonus additions have followed the assumptions stated above.

Calculate the net premium policy value just before payment of the 6th

premium.

Basis:

Mortality

AM92 Select

Rate of interest 4% per annum

(b)

11

[5]

Suggest two reasons why a life insurance company might use the super

compound method of adding bonuses to with profits policies, as opposed to

the compound method.

[2]

[Total 7]

for each completed year of pensionable service. On retirement due to ill-health,

pensionable service is calculated as service that would have been completed by the

normal retirement age of 65. Final pensionable salary is defined as the average salary

in the last three years before retirement.

Derive an expression, without using commutation functions, for the present value of

the benefits for a new member age 30 with salary of 20,000 in the year after entry to

the scheme. Define all symbols used.

[8]

CT5 S20114

12

(i)

[4]

exact has the following profit vector:

(1525.89, 334.08, 292.05, 933.82)

(ii)

Determine the net present value of the profits of this policy, assuming that the

company sets up reserves in order to zeroise future negative expected cash

flows on the policy.

Basis:

Mortality

Rate of interest on non-unit fund cash flows

Risk discount rate

13

AM92 Ultimate

4.5% per annum

7.5% per annum

[5]

[Total 9]

A life insurance company issues a 3-year without profits endowment assurance policy

to a male life aged 57 exact for a sum assured of 15,000 payable on maturity or at

the end of the year of death if earlier. Premiums of 4,700 are payable annually in

advance throughout the term of the policy.

The office holds net premium reserves for these policies, calculated using AM92

Ultimate mortality and interest of 4% per annum.

Surrenders occur only at the end of a year immediately before a premium is paid. The

surrender value payable is 75% of total premiums paid on the contract at the time the

surrender value is payable. Assume that at the end of the first and second policy

years, 10% and 5% respectively of all policies still in force at that time then surrender.

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

contract:

Rate of interest on cash flows

and Reserves

Mortality

Initial expenses

Renewal expenses

Risk discount rate

5% per annum

AM92 Select

10% of the annual premium

65 per annum on the second and subsequent

premium dates

7% per annum

(i)

(ii)

[10]

[2]

The company weakens the reserving basis by assuming that net premium reserves for

these policies are now calculated using AM92 Ultimate mortality and interest of 6%

per annum.

(iii)

Calculate the revised net present value of profits and comment on your

answer.

[4]

[Total 16]

CT5 S20115

14

assurance policies that pay 100,000 at maturity, or 50,000 at the end of the year of

earlier death to lives then aged 35 exact. Premiums are payable annually in advance.

The company uses the following basis for calculating premiums and reserves:

Mortality

Interest

Initial commission

Initial expenses

Renewal expenses

AM92 Select

4% per annum

50% of the premium payable in the first policy year

300 paid at policy commencement date

2.5% of each premium from the start of the second policy year

(i)

Write down the recursive relationship between the gross premium reserves at

successive durations of these policies, defining all symbols used.

[4]

(ii)

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

[4]

There were 385 policies in force on 1 January 2010. During 2010, there were three

actual deaths, actual interest earned by the company was 5% and expenses were as

expected.

(iii)

Calculate the profit or loss made by the company from both mortality and

interest in respect of these policies for the year 2010 based on the formula

stated in (i) above.

[10]

[Total 18]

END OF PAPER

CT5 S20116

EXAMINERS REPORT

September 2011 examinations

Core Technical

Purpose of Examiners Reports

The Examiners Report is written by the Principal Examiner with the aim of helping

candidates, both those who are sitting the examination for the first time and who are using

past papers as a revision aid, and also those who have previously failed the subject. The

Examiners are charged by Council with examining the published syllabus. Although

Examiners have access to the Core Reading, which is designed to interpret the syllabus, the

Examiners are not required to examine the content of Core Reading. Notwithstanding that,

the questions set, and the following comments, will generally be based on Core Reading.

For numerical questions the Examiners preferred approach to the solution is reproduced in

this report. Other valid approaches are always given appropriate credit; where there is a

commonly used alternative approach, this is also noted in the report. For essay-style

questions, and particularly the open-ended questions in the later subjects, this report contains

all the points for which the Examiners awarded marks. This is much more than a model

solution it would be impossible to write down all the points in the report in the time allowed

for the question.

T J Birse

Chairman of the Board of Examiners

December 2011

General comments on Subject CT5

CT5 introduces the fundamental building blocks that stand behind all life insurance and

pensions actuarial work.

Credit is given to students who produce alternative viable numerical solutions. In the case of

descriptive answers credit is also given where appropriate to different valid points made

which do not appear in the solutions below.

In questions where definitions of symbols and then formulae are requested, a different

notation system produced by a student to that used by examiners is acceptable provided it is

used consistently, is relevant and is properly defined and used in the answer.

Comments on the September 2011 paper

The general performance was slightly worse than in April 2011 but well-prepared candidates

scored well across the whole paper. Questions that were done less well were 7, 9, 10, 11 and

14(iii) and here more commentary is given to students to assist with further revision.

Most of the short questions were very straightforward where an answer could be produced

quickly and this is where many successful candidates scored particularly well. Students

should note that for long questions a reasonable level of credit is given if they can describe

the right procedures although to score well reasonable accurate numerical calculation is

necessary.

Page 2

d 60

= 74.5020

(a)

10|1 q[50]

(b)

10 p[60]+1

= l71

(c)

a(12)

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

[40];20

l[50]

l[60]+1

9, 706.0977

= 7,854.4508

= 0.00768

9, 209.6568

= 0.85285

v 20l60

))

l[40]

= 11.676

Straightforward question generally done well.

We have:

1 p75

= e where is the constant force

75.75

Hence

0.04296dt

75.25

0.5 p75.25 = e

= e 0.02148 = 0.97875

Hence

0.5 q75.25

Again done well. Credit was given to those students who jumped straight to the solution of

(1 ( 1 p75 )0.5 ) .

p[ x ]

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

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

line 1.

30:20

This equals

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

= (0.16023 (0.45639 (9,712.0728 / 9,925.2094) 0.32907)) 1.019804

= 0.01353

The variance equals

2 1

A30:20

2

( A1

30:20

)2

2

20 2

2

1

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

= 0.008997

This question was done reasonably well. The most common error was to forget to use

continuous functions which was penalised as one of the key attributes being tested was to see

if students could work out the 1.04 factor for the variance.

(a)

viTx if Tx Ty

Z =

if Tx > Ty

0

where i is the valuation rate of interest.

1

(b)

A x: y

= e .04t t p x +t dt

0

xy

= 0.02 / 0.09

= 0.22222

In part(a)many students did not appreciate what a random variable form was. Part (b) was

generally well done.

Part (a) comes directly from Core Reading but there is some debate about the situation

where Tx = Ty i.e .a simultaneous death where it could be argued either that Z =0 or is

undefined. The examiners decided to accept all these alternative situations.

Page 4

a homogeneous group of lives i.e. all the lives to whom the table applies follow

the same stochastic model of mortality represented by the rates in the table. This

means that the table can be used to model the mortality experience of a

homogeneous group of lives which is suspected to have a similar experience.

experience will depend on the exact mixture of lives with different experiences

that has been used to construct the table. Such a table could only be used to model

mortality in a group with the same mixture. It would have very restricted uses.

For this reason separate mortality tables are usually constructed for groups which

are expected to be heterogeneous. This can manifest itself as class selection e.g.

separate tables for males and females, whole life and term assurance

policyholders, annuitants and pensioners, or as time selection e.g. separate tables

for males in England and Wales in 198082 (ELT14) and 199092 (ELT15).

Sometimes only parts of the mortality experience are heterogeneous e.g. the

experience during the initial select period for life assurance policyholders, and the

remainder are homogeneous e.g. the experience after the end of the select period

for life assurance policyholders. In such cases the tables are separate (different)

during the select period, but combined after the end of the select period. In fact

there are separate (homogeneous) mortality tables for each age at selection, but

they are tabulated in an efficient (space saving) way.

Well prepared students answered this question well. However many did not get to the heart

of the homogeneity discussion and went off on tangents regarding various forms of selection.

EPV is

10, 000(a60:60 a60:60 ) + 10, 000 a5 A60:60

f

m

a60:60 = a60

+ a60

a60:60 = (15.632 0.5) + (16.652 0.5) (14.090 0.5) = 17.694

Therefore

(1 v5 )

0.30603

EPV = 10, 000 (17.694 (14.090 0.5)) + 10, 000

= 41,040 + 13,894

= 54,934

Many students struggled here with the second term in the equation in the 2nd line and did not

appreciate how to mix a continuous assurance factor with an annuity.

8

Age

2029

3039

4049

5064

Total

(a)

All professions

Population Deaths

120,000

178,000

156,000

123,000

577,000

256

458

502

600

1,816

12,500

15,000

16,000

14,000

57,500

26.667

38.595

51.487

68.293

185.042

1,816

185.042

= 0.978

577, 000 57,500

Indirectly standardised mortality rate =

1,816

185.042

= 0.003062

577, 000

180

Page 6

30

40

50

60

180

Area comparability factor =

(b)

Population

Profession A

Deaths

Expected

deaths

The following rates are required:

Age

q xd

59

60

61

0.01243

0.01392

0.01560

qix

0.055

0.06

0.065

(aq )x = qx (1 0.5qx )

Age

(aq) dx

(aq)ix

59

60

61

0.012088

0.013502

0.015093

0.054658

0.059582

0.064493

Probability of retiring at age 60 = 0.2 * 0.933254 = 0.186651

Probability of reaching 61 = 0.8 * 0.933254 * (1 0.013502-0.059582) = 0.692038

Probability of retiring at age 61 = 0.2 * 0.692038 = 0.138408

Probability of reaching 62 = 0.8 * 0.692038 * (1-0.015093 0.064493) = 0.509569

Probability of retiring at age 62 = 0.2 * 0.509569 = 0.101914

Overall required probability thus 10.19%

This question was not done well overall. Students struggled to follow through the logical

sequences. In fact this question can be solved with the same answer without using multiple

decrements and the few students who realised this were given credit.

10

(a)

Year

SA

b1

b2

0

1

2

3

4

5

150,000

150,000

150,000

150,000

150,000

150,000

3,750

3,750

3,750

3,750

3,750

187.50

384.38

591.09

808.15

3,750.00

7,687.50

11,821.88

16,162.97

20,721.12

If net premium denoted by P then

P=

a[30]

= 1099.81

21.837

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

5V

(b)

= 170,721.12 0.19219 1,099.81 21.003

= 32,810.89 23,099.31 = 9,711.58

The sum assured and bonuses increase more slowly than under other

methods for the same ultimate benefit, enabling the office to retain

surplus for longer.

This method rewards longer standing policyholders and discourages

surrenders, relative to other methods.

This question was also done poorly overall. A very large number of students attempted to

construct a complex net premium from the existing bonus flow where the question was only

seeking the normal net premium method. Part (b) was done better.

11

65 30 1

*

*

0.01 20,000 tz30 + t + 0.5r30 + t v t + 0.5a30

+ (65 30) z65r65v 35a65

/ s30l30

t

+

+

0.5

t =0

65 30 1

t =0

Page 8

*

z30+ t + 0.5i30+ t v t + 0.5a30

+ t + 0.5 / s30l30

Where

a*x

sx

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

year beginning age x + 1 to salary in the year beginning age x

zx

Other schemes were accepted but overall very few students managed to derive a full answer

in this question.

12

(i)

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

Each investment fund is divided into units, which are priced regularly

(usually daily)

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

profit

Charges are made from the unit account periodically to cover expenses and

benefits (i.e. fund management charge) and may be varied after notice of

change given.

benefit)

contracts

(ii)

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

the end of year cashflow figures):

p58 = 0.99365 p57 = 0.99435 p56 = 0.99497

933.82

= 893.61

1.045

3V

2V

1V

1,525.89 p56 1,394.13 = 138.77

Revised profit vector becomes (138.77, 0, 0, 0) and

Net present value of profits = 138.77/(1.075) = 129.09

This question was generally done well.

13

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

0V57:3

= 1

a57:3

1V57:3

= 1

a58:2

2V57:3

= 1

a59:1

a57:3

a57:3

a57:3

=0

= 1

1.955

= 0.318815

2.870

= 1

1.0

= 0.651568

2.870

T

d

q[57]

+ t 1

s

q[57]

+ t 1

( aq ) d[57]+t 1

( aq ) s[57]+t 1

(ap)[57]+t 1

t 1 (ap)[57]

1

2

3

0.004171

0.006180

0.007140

0.10

0.05

0.00

0.004171

0.006180

0.007140

0.099583

0.049691

0.000000

0.896246

0.944129

0.992860

1.000000

0.896246

0.846172

d

s

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

+t 1 ) (1 q[56]+t 1 )

Page 10

The calculations of the profit vector, profit signature and NPV are set out in

the table below:

Policy

Year

Premium

Expenses

1

2

3

4700

4700

4700

470.00

65.00

65.00

Policy year

Increase

in reserves

Interest

on reserves

1

2

3

4286.05

4445.24

9773.52

0.00

239.11

488.68

Interest

211.50

231.75

231.75

Profit

vector

258.15

217.60

128.95

Death

claim

Maturity

claim

62.57

92.70

107.10

0.00

0.00

14892.90

Surrender

claim

351.03

350.02

0.00

In force

cash flow

4027.91

4423.73

10133.25

Cum probability

of survival

Discount

factor

NPV

Profit

1.00000

0.89625

0.84617

0.93458

0.87344

0.81630

241.26

170.34

89.07

(ii)

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

If i = 0.13 then LHS of equation = 0.10

If i = 0.14 then LHS of equation = 2.74

Therefore IRR is 13%

(iii)

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

0V57:3

= 1

1V57:3 = 1

2V57:3 = 1

a57:3

a57:3

a58:2

a57:3

a59:1

a57:3

=0

= 1

1.937

= 0.312389

2.817

= 1

1.0

= 0.645012

2.817

And the revised cashflows become:

Policy

year

1

2

3

Increase

in reserves

Interest

on reserves

Revised

Profit vector

Cum probability

of survival

Discount

factor

NPV

profit

4199.66

4448.78

9675.18

0.00

234.29

483.76

171.76

209.24

25.69

1.00000

0.89625

0.84617

0.93458

0.87344

0.81630

160.52

163.79

17.74

The NPV of profit increases slightly if the reserving basis is weakened, as a

result of the surplus emerging being brought forward and the fact that the risk

discount rate is greater than the interest rate being earned on reserves.

In general well prepared students made a reasonable attempt with this question. Credit was

given to students who showed they understood the processes even if not all the arithmetical

calculations were correct.

Note that it is possible to solve (ii) using a quadratic equation process.

14

(i)

Formula is

(t V + P e) (1 + i ) = qx +t S + px +t t +1V

Definitions:

tV

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

premium/valuation basis

P

= office premium

Page 12

(ii)

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

1

Pa[35]:30 = 50, 000 A[35]:30

+ 100, 000v30 30 p[35] + 300 + 0.5 P + 0.025 P a[35]:30 1

where

1

A[35]:30

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

8,821.2612

= 0.32187 0.27492 = 0.04695

9,892.9151

a[35]:30 = 17.6313

17.6313P = 50, 000 0.04695 + 100, 000 0.27492 + 300 + 0.5 P + 0.025P 16.6313

P=

30,139.5

= 1,803.08

16.71552

(iii)

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

9V

PRO

where

8,821.2612

= 0.45258 0.39443 = 0.05815

9,814.3359

a44:21 = 14.2329

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

10 V

PRO

where

8,821.2612

= 0.46998 0.41075 = 0.05923

9,801.3123

a45:20 = 13.7805

Combined mortality and interest profit =

= 7, 715,929.05 150, 000 7,567,549.88

= 1, 620.83

i.e. a combined mortality and interest loss of 1,620.83 which can be split between mortality

profit and interest profit separately as follows:

EDS = 385 q44 DSAR = 385 0.001327 30,189.66 = 15, 423.75

ADS = 3 DSAR = 3 30,189.66 = 90,568.98

Therefore

Mortality profit = EDS ADS = 15,423.75 90,568.98 = 75,145.23 (i.e. a mortality loss)

Interest profit = 385 (17,329.02 + 0.975 1,803.08) (0.05 0.04) = 73,489.04

Alternatively: Interest profit = 75,145.23 1,620.83 = 73,524.40 (the small discrepancy

with the figure for interest profit above is due to figures being used from the Actuarial

Tables with only a limited number of decimal places)

Part (i) and (ii) were done well. In part (iii) most well prepared students were able to derive

the mortality profit but most struggled with the interest portion.

If a student got the combined total correct but then did not split up the content it was decided

to give full credit.

Page 14

EXAMINATION

23 April 2012 (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 15 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 A2012

(a)

Define

4 5 q[60]+1

in words.

(b)

Basis:

Mortality

AM92

[3]

Under a policy issued by a life insurance company, the death benefit payable at the

end of year of death is a return of premiums paid without interest. A level premium

of 3,000 is payable annually in advance throughout the term of the policy.

For a policy in force at the start of the 12th policy year, you are given the following

information:

Reserve at the start of the policy year

Reserve at the end of the policy year per survivor

Probability of death during the policy year

Expenses incurred at the start of the policy year

Rate of interest earned

25,130

28,950

0.03

90

4% per annum

Reserves given above are immediately before payment of the premium due.

Calculate the profit/loss expected to emerge at the end of the 12th policy year per

policy in force at the start of that year.

[3]

Calculate:

(a)

a50:15

(b)

1

( IA)50:15

Basis:

Mortality

Rate of interest

AM92

6% per annum

[4]

immediately on the second death of two lives, a male life currently aged 60 exact and

a female life currently aged 55 exact.

Calculate the expected present value of the contract.

Basis:

Mortality

Rate of interest

Expenses

4% per annum

Nil

[4]

CT5 A20122

(40, 12, 6, 1, 5, 4, 8, 20, 25, 30)

Determine the revised profit vector if reserves are set up to zeroise future negative

cash flows on the following basis:

Mortality

Interest

2.5% per annum

[4]

(a)

and 68 exact.

(b)

Calculate the value of 0.5 q67.25 using the assumption of a constant force of

mortality and the value derived in (a) above.

Basis: AM92 Ultimate

[4]

Describe the benefits typically provided by a salary-related pension scheme for active

members on age retirement.

[6]

(i)

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

(ii)

Give one example of each category in part (i) and indicate the manner in

which it is usually allowed for in the calculation of premiums.

[4]

[Total 6]

10

[6]

An insurance company writes policies that provides benefits of 1,000 in the event of

becoming disabled due to accident and 10,000 on death.

(a)

(b)

Give a formula for the expected present value of the benefits.

[6]

CT5 A20123

11

(i)

State the advantages and disadvantages of using crude mortality rates and

directly standardised mortality rates as the comparison measure of mortality in

two or more different populations

[4]

You are given the following data in respect of a sub-population:

Age

Population

50

55

60

100,000

95,000

80,000

(ii)

12

1,250

mortality rate for the standard population.

[3]

[Total 7]

100,000 immediately on death and a sum of 50,000 on survival for 10 years.

Calculate the expected present value and variance of this contract.

Basis:

Mortality

Rate of interest

13

x = 0.03 throughout

5% per annum

[8]

A life insurance company issues a 40-year with profit endowment assurance policy to

a life aged 20 exact. The sum assured of 85,000 plus declared reversionary bonuses

is payable on survival to the end of the term or immediately on death if earlier.

The company assumes that future annual bonuses will be declared at a rate of

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

(i.e. the death benefit does not include any bonus relating to the policy year of death).

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

Basis:

Mortality

Interest

Initial commission

Initial expenses

Renewal commission

Renewal expenses

CT5 A20124

AM92 Select

6% per annum

480% of the first monthly premium

325

2.5% of each monthly premium excluding the first

75 per annum at the start of the second and subsequent

policy years. The renewal expense is assumed to increase

by 5 per annum from the start of the third policy year.

[10]

14

A life insurance company issues 20-year decreasing term assurance policies to single

lives aged 40 exact. The death benefit, which is payable at the end of the year of

death, is 200,000 in the first policy year, 190,000 in the second policy year

thereafter reducing by 10,000 each year until the benefit is 10,000 in the twentieth

and final policy year. Premiums on the policies are payable annually in advance for

20 years or until earlier death.

The company calculates its reserves on a net premium basis and negative reserves are

permitted.

(i)

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

204 using the basis below.

[4]

625 policies were in force at the start of the 10th policy year and 3 policyholders died

during that policy year.

(ii)

Calculate the mortality profit or loss to the life insurance company during the

10th policy year using the basis below.

[6]

(iii)

[2]

Basis:

Mortality

Interest

Expenses

AM92 Ultimate

4% per annum

Nil

[Total 12]

CT5 A20125

15

A life insurance company issues a three-year term assurance policy to a male life aged

57 exact under which level premiums are payable annually in advance throughout the

term of the policy or until earlier death. The sum assured is 150,000 payable at the

end of year of death.

The company uses the following assumptions to calculate the premium for this policy:

Rate of interest on cash flows

Mortality

Initial expenses

Renewal expenses

Initial commission

Renewal commission

Risk discount rate

6% per annum

AM92 Select

350

50 per annum on the second and third premium

dates

15% of first premium

2.5% of the second and third years premiums

6% per annum

(i)

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

[5]

(ii)

Calculate the office premium using assurance and annuity functions, setting

the expected value of the gross future loss random variable to zero.

[4]

(iii)

Derive the office premium using a discounted cash flow projection, assuming

no withdrawals and using the same profit criterion as in part (ii).

[6]

(iv)

(a)

(b)

having set up the reserves in part (a), increasing the risk discount rate

to 8% per annum.

[2]

[Total 17]

END OF PAPER

CT5 A20126

EXAMINERS REPORT

April 2012 examinations

Core Technical

Introduction

The Examiners Report is written by the Principal Examiner with the aim of helping

candidates, both those who are sitting the examination for the first time and who are using

past papers as a revision aid, and also those who have previously failed the subject. The

Examiners are charged by Council with examining the published syllabus. Although

Examiners have access to the Core Reading, which is designed to interpret the syllabus, the

Examiners are not required to examine the content of Core Reading. Notwithstanding that,

the questions set, and the following comments, will generally be based on Core Reading.

For numerical questions the Examiners preferred approach to the solution is reproduced in

this report. Other valid approaches are always given appropriate credit; where there is a

commonly used alternative approach, this is also noted in the report. For essay-style

questions, and particularly the open-ended questions in the later subjects, this report contains

all the points for which the Examiners awarded marks. This is much more than a model

solution it would be impossible to write down all the points in the report in the time allowed

for the question.

T J Birse

Chairman of the Board of Examiners

July 2012

CT5 introduces the fundamental building blocks that stand behind all life insurance and

pensions actuarial work.

Credit is given to students who produce alternative viable numerical solutions. In the case of

descriptive answers credit is also given where appropriate to different valid points made

which do not appear in the solutions below.

In questions where definitions of symbols and then formulae are requested, a different

notation system produced by a student to that used by examiners is acceptable provided it is

used consistently, is relevant and is properly defined and used in the answer.

Comments on the April 2012 paper

The general performance was better this session than in recent diets and many students scored

well with a very pleasing increase in the number passing. Questions that were done less well

were 2, 10, 12, 13 and 15(i) and (iii) and here more commentary is given to students to assist

with further revision.

Most of the short questions were very straightforward where an answer could be produced

quickly and this is where many successful candidates scored particularly well. Students

should note that for long questions a reasonable level of credit is given if they can describe

the right procedures although to score well reasonable accurate numerical calculation is

necessary.

Page 2

(a)

4|5 q[60]+1 is the probability that a life now aged 61 exact who entered the

selection period 1 year ago will die between the ages of 65 and 70 both exact

(b)

= 0.0833

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

= (25,130 + 3, 000 90) 1.04 36, 000 0.03 (1 0.03) 28,950 = 0.10

This question overall caused problems and students sometimes had only a vague recall of the

iterative formula in line 3. The most common error was to forget expenses and the survival

factor before the closing reserve. It was also not on many occasions appreciated that the

accumulation minus the benefit costs gave the profit.

(a)

l 65

a 50:15 = a 50 v15

( a 65)

l

50

= (14.044 1) 0.41727

8,821.2612

(10.569 1)

9, 712.0728

= 9.417

(b)

( IA) 1

50:15

l

= ( IA)50 v15 65 (( IA)65 + 15 A65 )

l 50

8,821.2612

= 4.84555 0.41727

(5.50985 + 15 0.40177)

9,712.0728

= 0.47329

In (a) a surprising number of students thought that the required function could be derived

from the a due function for the same term minus 1 which is, of course, wholly incorrect.

Otherwise the question was generally well done.

Page 3

JJJJJK where 60 relates to the male life and 55 the female life.

The value is 100000A60:55

JJJJJK = 100000 ( A + A A

100000 A60:55

60

55

60:55 )

= 100000 (1 ln(1.04)([a60 1 / 2] + [a55 1 / 2] [a60:55 1 / 2]))

= 100000 (1 0.039221 (15.632 + 18.210 14.756 0.5))

= 27104

Generally well done. Other methods such as multiplying non continuous functions by

(1.04)1/2 to obtain the continuous one were quite acceptable.

4

= 3.902

1.025

1

= 0.976

3V =

1.025

1

(6 + .995 3V ) = 6.801

2V =

1.025

1

(12 + .995 2V ) = 18.309

1V =

1.025

5V

Revised cash flow in policy year 1 = 40 0.995 1V = 58.218

=> revised profit vector: (58.22, 0, 0, 0, 1.12, 0, 8, 20, 25, 30)

Generally well done by well prepared students who were able to recall the techniques

involved.

Page 4

(a)

p67 = exp(

68

67

= 0.017985

(b)

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

67.75

67.25 dx)

= 0.008952

Generally well done. However some students ignored the instruction to use (a) to get (b)

choosing the more direct route. The examiners penalised this approach, although some

credit was given.

Age retirement benefits may be provided on early or late retirement.

Pension usually depends on pensionable service at retirement, as defined in the

scheme rules, e.g. complete years of membership.

Pension for each year of service is usually related to pensionable salary, for example

1/80ths of pensionable salary for each year of service. 1/80 is described as the accrual

rate.

Pensionable salary can be defined as:

1. Salary at retirement (final salary)

2. Annual salary averaged over a few years before retirement (final average salary)

3. Annual salary averaged the whole of service (career average salary)

Pensions are commonly increased in payment to offset the effect of inflation.

Some benefit may be in the form of cash, sometimes by converting pension to cash.

There can be a spouses pension for married pensioners which is often a percentage of

the main pension on the members prior death.

Pensions may also be paid for an initial guarantee period like 5 years.

Other relevant comments were credited. No credit was given for any discussion on ill-health

retirement as this was not required from the question.

Many students scored reasonable marks.

Page 5

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

Occupation determines a persons environment for 40 or more hours each week. The

environment may be rural or urban, the occupation may involve exposure to harmful

substances e.g. chemicals, or to potentially dangerous situations e.g. working at

heights. Much of this is moderated by health and safety at work regulations.

Some occupations are more healthy by their very nature e.g. bus drivers have a

sedentary and stressful occupation while bus conductors are more active and less

stressed. Some work environments e.g. publicans, give exposure to a less healthy

lifestyle.

Some occupations by their very nature attract more healthy or unhealthy workers.

This may be accentuated by health checks made on appointment or by the need to

pass regular health checks e.g. airline pilots. However, this effect can be produced

without formal checks, e.g. former miners who have left the mining industry as a

result of ill-health and then chosen to sell newspapers. This will inflate the mortality

rates of newspaper sellers.

A persons occupation largely determines their income, and this permits them to adopt

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

can be positive and negative e.g. over indulgence.

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

(i)

Initial Expense

Renewal Expense

Claim Expense

Overhead Expense

(ii)

Initial Expense

Underwriting (allowed for on a per policy basis although medical expenses

might be sum assured related) or;

Processing proposal and issuing policy (allowed for on a per policy basis) or;

Commission (allowed for directly and usually premium related) or;

Marketing (allowed for on a per policy basis on estimated volumes)

Renewal Expense

Administration (allowed for on a per policy per annum basis with allowance

for inflation) or;

Commission (allowed for directly and usually premium related) or;

Investment Expense (charged as a deduction from investment funds).

Claim Expense

Calculation and payment of benefit (allowed for on a per policy per annum

basis with allowance for inflation)

Page 6

Overhead Expense

Central services e.g. premises, IT, legal (allowed for on a per policy per

annum basis with allowance for inflation)

Many students did not give a full answer referring only to direct and indirect expenses for

which only partial credit was given, Also many did not give the full number of distinctly

different examples. Other relevant examples were credited however.

10

x

a = able

i = disabled

x

d = dead

0

0

Generally the diagram was completed satisfactorily. Many students took the view that

returning to the able state from the disabled one was impossible and thus omitted the return

arrow. This was accepted so long as the assumptions were stated.

The resultant formulae were, however, on the whole poorly done.

11

(i)

Advantage do not need population and deaths split by age

Disadvantage differences in age structure between populations will be

confounded

Directly Standardised Mortality Rate

Advantage only reflects differences in mortality rates

Page 7

population

(ii)

Expected deaths = 100000*0.00464+95000*0.00797+80000*0.01392 = 2335

SMR = 1250 / 2335 = 0.535

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

struggled to find the distinctive advantages and disadvantage given above.

12

1

x :n

Ax1:n =

10

0

= 0.03

=

1

x:n

10

0

10

exp( 0.07879t )

exp( 0.07879t )dt = 0.03

0.07879

0.03

[1 exp( 0.7879)] =0.20759

0.07879

= exp(0.7879) = 0.45480

For the variance the rate used is (1.05)21=10.25% and ln(1.1025)=0.09758.

Hence:

2 1

Ax:n

= 0.03

=

1

x:n

10

0

10

exp(0.12758t )

exp(0.12758t )dt = 0.03

0.12758

0.03

[1 exp(1.2758)] =0.16949

0.12758

= exp(1.2758) = 0.27921

2

The part relating to the expected value was generally done well. However by contrast the

part relating to the variance was done poorly. Many students failed to realise that the

integration process was the same as for the expected value with the exception of building in

the 10.25% interest rate.

Page 8

13

EPV of premiums:

12 Pa(12)

[20]:40

@ 6% = 184.6092 P

where

11

1 v 40 40 p[20] )

(

24

11

9287.2164

= 15.801 1 0.09722

= 15.801 0.4169 = 15.3841

24

9980.2432

(12)

a[20]:40

= a[20]:40

EPV of benefits:

1

39

where b = 0.0192308

= 85, 000

(1.06)0.5

q[20] (1 + b)v + q[20] (1 + b) 2 v 2 + ... + q[20] (1 + b) 40 v 40

1

39

(1 + b)

+85, 000(1 + b) 40 v 40 40 p[20]

85, 000

1

(1.06)0.5 A[20]:40

@ i + 85, 000v 40 40 p[20] @ i

(1 + b)

where

i =

and

1.06

1 = 0.04

1+ b

1

A[20]:40

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

= 0.21746 0.20829

9287.2164

= 0.21746 0.19383 = 0.02363

9980.2432

EPV of benefits

=

0.02363 + 85, 000 0.19383

(1 + b)

= 2, 028.911 + 16, 475.550 = 18, 504.461

Page 9

EPV of expenses

(12)

= 4.8P + 325 + 0.025 12 Pa[20]:40

where

( Ia)[20]:40 = ( Ia)[20] v 40 40 p[20] 40a60 + ( Ia)60

= 262.666 0.09722

9287.2164

[ 40 11.891 + 113.516]

9980.2432

Equation of value gives

P=

20,833.356

= 118.90

175.219

The difficult part of this question was related to the EPV of Expenses and most students failed

to complete this complex part. The rest of the question was however generally reasonably

done by well prepared students.

14

(i)

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

P =

1

210, 000 A40:20

10, 000( IA)140:20

a40:20

1

= A40:20 v 20 20 p40

where A40:20

= 0.46433 0.45639

and

9287.2164

= 0.46433 0.43004 = 0.03429

9856.2863

= 7.95699 0.43004 [ 20 0.45640 + 8.36234 ] = 0.43544

Page 10

P =

(ii)

= 204.39

13.927

10V

1

= 110, 000 A50:10

10, 000( IA)150:10 P a50:10

where

1

A50:10

= A50:10 v10 10 p50

= 0.68024 0.67556

9287.2164

= 0.68024 0.64601 = 0.03423

9712.0728

and

= 8.55929 0.64601 [10 0.45640 + 8.36234 ] = 0.20875

10V

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

Therefore, sum at risk per policy in the 10th policy year is:

DSAR = 110,000 (21.50 ) = 110,021.50

Mortality profit = EDS ADS

EDS = 625 q49 110, 021.50 = 625 0.002241110, 021.50 = 154, 098.86

ADS = 3 110, 021.50 = 330, 064.50

i.e. mortality profit = 175,965.36 (i.e. a loss)

Page 11

(iii)

The death strain at risk per policy in the 10th policy year for this decreasing

term assurance is very large (approximately equal to the sum assured payable

in the event of death).

The actual number of deaths during the 10th policy year (at 3) is approximately

double that expected (at 1.4) which accounts for the mortality loss.

However, a mortality experience investigation would need to consider a longer

time period and ideally, a larger number of policies to determine whether

actual mortality experience is heavier than expected.

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

of its type.

15

(i)

150, 000v

K[57] +1

+ 350 + 50aK

[57]

P(0.975aK

[57] +1)

(ii)

1

150, 000 A[57]:3

+ 350 + 50 a[57]:3 1 = P 0.975a[57]:3 0.125

9287.2164

= 0.84036 0.82502 = 0.01534

9451.5938

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

P=

= 1, 044.77

2.6245

(iii)

Mortality table:

x

57

58

59

Page 12

t

1

2

3

q[ x ]+t 1

p[ x]+t 1

t 1 p[ x ]

0.004171

0.006180

0.007140

0.995829

0.993820

0.992860

1.000000

0.995829

0.989675

Cash flows (per policy at start of year) assuming annual premium is denoted

by P:

Year

Premium

Expenses

Interest

Claim

Profit vector

Cumulative probability

of survival

Profit signature

Discount factor

NPV of profit

1

P

0.15P + 350

0.051P 21

625.65

0.901P 996.65

2

P

0.025P + 50

0.0585P 3

927.00

1.0335P980.00

3

P

0.025P + 50

0.0585P 3

1071.00

1.0335P1124.00

1.000000

0.9010P 996.650

0.94340

0.85P 940.240

0.995829

1.0292P 975.912

0.890000

0.9160P 868.562

0.989675

1.0228P 1112.395

0.83962

0.8588P 933.989

Therefore:

3

1

2742.791

= 1, 044.95

2.6248

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

rounding)

(iv)

(a)

profit is deferred but as the earned interest rate is equal to the risk

discount rate, there is no change to the NPV or premium

(b)

profit is deferred and because the risk discount rate is greater than the

earned interest rate, NPV falls. Therefore, the premium would need to

be increased to satisfy the same profit criterion.

Most students struggled with part (i) but well prepared ones completed parts (ii) and (iv)

satisfactorily. Part (iii) caused students great difficulties as often occurs with this approach

and many even failed to realise that the answers to (ii) and (iii) should numerically be the

same within rounding.

Page 13

EXAMINATION

2 October 2012 (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 15 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 S2012

Calculate:

(a)

12 p43

(b)

10|5 q55

(c)

a45:10

Basis:

Mortality

Rate of interest

AM92

6% per annum

[3]

Give three different forms of selection that would be expected in a group of lives

purchasing immediate annuities with an example of each.

[3]

[4]

Basis:

Mortality

ELT15 (Females)

[4]

s Exc,t s mx,t

x

Exc,t s mx,t

x

Exc,t

Exc,t

x

(a)

(b)

the ratio of the numerator to the denominator.

[4]

A life insurance company issues a with profit whole life assurance policy to a life

aged 40 exact, under which the sum assured S and any attaching bonuses, are payable

immediately on death. Compound bonuses are added annually in advance. Premiums

are payable annually in advance ceasing at exact age 85 or on earlier death.

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

policy defining all symbols that are used.

[4]

CT5 S20122

On 1 January 2007, a life insurance company sold a large number of 30-year pure

endowment policies to lives then aged 35 exact. The sum assured under each policy

is 125,000 payable on maturity. Premiums are payable annually in advance

throughout the term of the policy.

There were 3521 pure endowment policies still in force on 1 January 2011 and 8

policyholders died during 2011.

Calculate the total mortality profit or loss to the life insurance company during 2011

assuming the company calculates net premium reserves on the following basis:

Mortality

Interest

Expenses

AM92 Select

4% per annum

Nil

[4]

Examine the column of dx shown in the English Life Table No. 15 (Males) in the

Formulae and Tables for Examinations (Pages 6869).

Describe the key characteristics of this mortality table using the data to illustrate your

points.

[6]

(i)

policies:

(a)

(b)

(ii)

10

gross premium retrospective reserve

[4]

State the conditions necessary for gross premium prospective and gross

premium retrospective reserves to be equal.

[3]

[Total 7]

age 65 equal to one months pensionable salary for each complete year of service.

Pensionable salary is defined as average annual salary in the last two years before

retirement.

Calculate the cost of this benefit as a percentage of salary for a new member of the

scheme aged 35 exact, with salary in the next year of 20,000.

Basis:

Pension Scheme tables in the Formulae and Tables for Examinations

Interest 4% per annum

[8]

CT5 S20123

11

A special joint life annuity of 500 per week is payable in arrear in respect of a male

life aged 65 exact and a female life aged 62 exact. The annuity has the following

features:

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

week.

At the end of the guarantee period if both lives are still surviving the annuity

continues at the same level until one life dies at which time it reduces to twothirds of the initial level and continues at this reduced level until the second life

dies.

At the end of the guarantee period if only one life has survived the annuity

reduces to two-thirds of the initial level and continues at this reduced level until

the second life dies.

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

annuity ceases.

Basis:

Mortality

Rate of interest

Expenses

12

4% per annum

Nil

[8]

A life insurance company issues a special endowment assurance policy for a 25 year

term to two lives x and y. Under this policy, a sum assured of 100,000 is paid

immediately on the second death within the 25 year term. At the end of 25 years a

sum of 50,000 is paid to each survivor.

Calculate the annual premium paid continuously under this policy assuming this is

paid throughout the term or until the second death if earlier.

Basis:

Mortality

Life y: y = 0.03 for all y

Force of interest

5% per annum

Expenses

Nil

CT5 S20124

[10]

13

A life insurance company issues a with profit whole life assurance policy to a life

aged 55 exact. The sum assured is 75,000 together with any attaching bonuses and

is payable immediately on death. Level premiums are payable monthly in advance

ceasing on the policyholders death or on reaching age 85 if earlier.

Simple annual bonuses are added at the end of each policy year (i.e. the death benefit

does not include any bonus relating to the policy year of death).

The company calculates the premium on the following basis:

Mortality

AM92 Select

Interest

4% per annum

Expenses

Initial

Renewal

Claim

Commission

Initial

Renewal

Bonuses

275

65 at the start of the second and subsequent policy years and

payable until death

200 on death

75% of the total premium payable in the first policy year

2.5% of the second and subsequent monthly premiums

Simple bonus of 2.0% of basic sum assured per annum

(i)

[6]

(ii)

Calculate the gross prospective policy value at the end of the 30th policy year

given that the total actual past bonus additions to the policy have followed the

assumptions stated in the premium basis above (including the bonus just

vested).

Mortality

AM92 Ultimate

Interest

4% per annum

Expenses

Renewal

Claim

250 on death

Commission

Renewal

Bonuses

[4]

[Total 10]

CT5 S20125

14

A life insurance company issues a four-year policy to a male life aged 30 exact that

offers the following benefits:

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

of 60,000.

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

paid.

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

paid.

Premiums of 14,000 are payable annually in advance throughout the term of the

policy or until earlier claim. The death, surrender and redundancy benefits are

payable immediately on claim. The contract ceases on payment of any claim.

The company uses the following basis to profit test this contract:

Interest earned on cash flows

Expenses

Reserves

3% per annum

5% of each premium paid

Ignore

The company has also calculated the following dependent rates of mortality, surrender

and redundancy which are used to profit test this contract:

Year t

d

(aq )[30]

+t 1

s

(aq)30

+t 1

r

(aq)30

+t 1

1

2

3

4

.000447

.000548

.000602

.000636

.098727

.049361

.024680

0

.023744

.024368

.024680

0

Calculate the expected profit margin to the company on this policy using a risk

discount rate of 5% per annum.

15

[10]

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

Premiums:

throughout the term of the policy or until earlier death

Allocation rates:

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

Policy fee:

of each policy year

Death benefit:

of the policy year of death

Maturity benefit:

CT5 S20126

Bid-offer spread:

5%

Annual management charge: 1.5% of the bid value of units is deducted at the end of

each policy year (management charges are deducted

from the unit fund before death and maturity benefits

are paid).

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

contract:

Rate of growth on assets in the unit fund

4.5% per annum in year 2

4.0% per annum in year 3

Mortality

Withdrawals

Initial expenses

Renewal expenses

AM92 Select

None

275

80 per annum on the second and

subsequent premium dates

20% of first premium

2.5% of the second and subsequent

years premiums

2.0% per annum

6.5% per annum

Initial commission

Renewal commission

Rate of expense inflation

Risk discount rate

For renewal expenses, the amount quoted is at outset, and the increases due to

inflation start immediately.

(i)

Calculate the non-unit fund cash flows in each year of the contract and hence

the expected present value of profit assuming that the policyholder dies in the

third year of the contract.

[9]

(ii)

Calculate the expected present value of profit for the policy if the policyholder

dies in the:

(a)

(b)

second year of the contract.

[4]

(iii)

Hence calculate the expected present value of the contract allowing for the

possibility that the policyholder survives to the end of the contract.

[2]

[Total 15]

END OF PAPER

CT5 S20127

EXAMINERS REPORT

September 2012 examinations

Core Technical

Introduction

The Examiners Report is written by the Principal Examiner with the aim of helping

candidates, both those who are sitting the examination for the first time and using past papers

as a revision aid and also those who have previously failed the subject.

The Examiners are charged by Council with examining the published syllabus. The

Examiners have access to the Core Reading, which is designed to interpret the syllabus, and

will generally base questions around it but are not required to examine the content of Core

Reading specifically or exclusively.

For numerical questions the Examiners preferred approach to the solution is reproduced in

this report; other valid approaches are given appropriate credit. For essay-style questions,

particularly the open-ended questions in the later subjects, the report may contain more points

than the Examiners will expect from a solution that scores full marks.

D C Bowie

Chairman of the Board of Examiners

December 2012

CT5 introduces the fundamental building blocks that stand behind all life insurance and

pensions actuarial work.

Credit is given to students who produce alternative viable numerical solutions. In the case of

descriptive answers credit is also given to alternative valid points which do not appear in the

solutions below.

In questions where definitions of symbols and then formulae are requested, a different

notation system produced by a student to that used by examiners is acceptable provided it is

used consistently, is relevant and is properly defined and used in the answer.

Comments on the September 2012 paper

The general performance was lower than average this session. Questions that were done less

well were 6, 11, 12, and 15(ii) and (iii); more commentary on these questions is given in this

report to assist candidates with further revision.

However most of the short questions were very straightforward and this is where many

successful candidates scored particularly well. Students should note that for long questions a

reasonable level of credit is given if they can describe the right procedures; however, to score

well reasonable, accurate numerical calculation is necessary.

Page 2

l55 9557.8179

=

= 0.97269

l43 9826.2060

(a)

12 p43

(b)

10|5 q55

(c)

l

a45:10 = a45 v10 55 a55 at 6%

l45

=

= 0.08027

l55

9557.8179

9557.8179

= 14.850 0.55839

13.057

9801.3123

= 7.740

Generally well done

characteristics.

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

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

purchase an annuity

Nutrition has an important influence on morbidity and in the longer term on mortality.

Poor quality nutrition can increase the risk of contracting many diseases and hinder

recovery from sickness.

Excessive or inappropriate (e.g. too much fat) eating can lead to obesity and an

increased risk of associated diseases (e.g. heart disease, hypertension) leading to

increased morbidity and mortality.

Inappropriate nutrition may be the result of economic factors e.g. lack of income to

buy appropriate foods or the result of a lack of health and personal education resulting

in poor nutritional choices.

Also, social and cultural factors encourage or discourage the eating of certain foods

e.g. alcohol consumption.

Many candidates gave a reasonable answer but there was a tendency to overlook the obesity

risk in the second paragraph.

Page 3

3 p55.75

p58

0.25 0.00475

= 1

0.99469 0.99408 (1 0.75 0.00660)

1 0.75 0.00475

= 0.99881 0.99469 0.99408 0.99505

= 0.98274

Generally well done.

(a)

Exc,t

Exc,t

Central rate of mortality either observed or from a life table in population

being studied for ages x to x + t.

Central exposed to risk for a standard population between x and x + t.

m x ,t

mx,t

(b)

The area comparability factor (F) is the ratio of the mortality rates in the

standard population weighted by the age structure distribution of the standard

population to the mortality rates in the standard population weighted by the

age structure distribution of the observed population.

F is therefore is a measure of variation between population age structures.

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

answer.

S (1 + b) K 40 +1 v

b

P

K40

T40

T40

Pamin( K

40 +1,45)

= annual net premium

= curtate future lifetime of a life aged 40 exact

= complete future lifetime of a life aged 40 exact

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

random variable expressions.

Page 4

5V

8821.2612

P 15.884

9856.2863

P=

a[35]:30

17.631

8821.2612

9892.9151 = 1949.13

DSAR = 0

5V

= 11,006.02

ADS = 8 11,006.02 = 88,048.16

Profit = EDS ADS=54,333.75

Generally done fine by well-prepared candidates

Mortality then falls dramatically during the first few years of life and is at lowest

around ages 810.

There is a distinct hump in the deaths at ages around 1825. This is often

attributed to a rise in accidental deaths during young adulthood, and is called the

accident hump.

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

about age 80.

The number of deaths at higher ages falls again (even though the mortality rate qx

continues to increase) since the probabilities of surviving to these ages are small.

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

Page 5

(i)

(ii)

(a)

value of future benefits (including declared bonus and an allowance for

future bonus if applicable) and future expenses less the expected

present value of future gross premiums.

(b)

accumulation of past gross premiums received, less expected expenses

and benefits including bonuses included in past claims.

the mortality and interest rate basis used is the same as used to determine

the gross premium at the date of issue of the policy; and

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

gross premium; and

interest, expenses) using the equivalence principle

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

10

Value of benefit:

r65 ( 6535)

1

v

20, 000 ( 65 35 )

l35

12

s63 + s64

2

s35

3757 ( 6535)

1

=

v

20, 000 ( 65 35 )

18866

12

11.151 + 11.328

2

6.655

= 5185

Assume value of contributions is K% of salary

Value of contributions of K% of salary

20, 000.K %.

N 35

D35

= 20, 000.K %.

502,836

= 316, 090.K %

31,816

Therefore K = 1.64

This question was generally poorly answered despite being a relatively straightforward

question. The main issue was in understanding how the benefit value arose.

Page 6

11

continuous annuity functions.

Working initially for a unit annualised payment:

PV = a5 + v5

+v5

m

l70

m

l65

f

l67

2

__________ 1

70(

f

3

l62 3

f

f

m

m

l67

l70

2

5 l70 l67 2

a

+

v

1 f 70( m)

1 m f a67( f ) at 4%

m

l65 l62 3

l65 l62 3

m

l70

m

l65

9238.134

=

= 0.95754,

9647.797

f

l67

f

l62

9605.483

= 0.97973

9804.173

__________

a70(

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

1

2

3

3

2

+0.82193 0.95754 0.02027 11.062

3

2

+0.82193 0.04246 0.97973 13.611

3

= 4.5403+10.1816+0.1176+0.3103

= 15.1498

The annualised benefit is 500 52.18 = 26090 p.a. (NB 52 acceptable)

So PV = 26090 15.1498 = 395,258

The key to this question is to break down carefully the component parts of the annuity. Once

this is done the question is then a relatively simple calculation of annuity functions. The

question was generally done poorly and many candidates failed to realise that a weekly

annuity could be closely approximated by a continuous one.

Page 7

12

25

0

= 100000

25

0

25

25

.07t 25

.05e .1t

0.03e.08t

0.02e

= 100000

+

.07

.08

.1

0

0

= 100000 +

+

8

2

7 8 2 7

= 100000{(0.28571 + 0.375 0.5) (.04965 + .05075 .04104)}

= 10135

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

= 50000e1.75 + 50000e2

= 8688.7 + 6766.8 = 15456 say

P

25 .05t .02t

e

{e

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

0

= P

25

0

e

e

e

= P

+

0.07 0 0.08 0 0.1 0

1

1 1 e 1.75 e2 e 2.5

= P

+

+

.07

.07

.08

.1

.08

.1

= 13.432P

Page 8

So P =

10135 + 15456

= 1905.23

13.432

Many well prepared candidates made a very good attempt at this difficult question but in

general terms it was done quite poorly. As in Question 11 the key is to organise the

component parts logically.

13

(i)

If the monthly premium and sum assured are denoted by P and S respectively

then:

0.975 12 Pa(12)

[55]:30

+ 0.025 P

0.975 12 Pa(12)

[55]:30

+ 0.025 P

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

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

where

a(12)

[55]:30

(12)

(12)

= a[55]

v 3030 p[55]a85

11

11

24

24

11

3385.2479

11

= 15.891 .30832

5.333

24

9545.9929

24

(0.975 12 14.9 + 0.025)P

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

165.355 P = 42, 360.046 + 275 + 967.915 P = 263.69

Page 9

(ii)

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

V prospective = (1.04)0.5 {( 0.975 75, 000 + 45, 000 + 250 ) A85 + 0.025 75, 000( IA)85 } + 80a85

= (1.04)0.5 (118,375 0.7949 + 1,875 4.40856) + 80 5.333

= 104,389.51 + 426.64 = 104,816.15

Generally part (i) was done well. Very few candidates successfully completed part (ii) as is often the

case with prospective reserve calculations.

14

We have the following multiple decrement table:

Year t

d

(aq )[30]

+ t 1

s

(aq)30

+t 1

r

(aq)30

+t 1

(ap)[ x ]+t 1

1

2

3

4

.000447

.000548

.000602

.000636

.098727

.049361

.024680

0

.023744

.024368

.024680

0

.877082

.925723

.950038

.999364

t 1

(ap)[30]

1.000000

.877082

.811935

.771370

Cash flows:

Year

t

1

2

3

4

P

E

on P-E

14000.00 700.00

399.00

14000.00 700.00

399.00

14000.00 700.00

399.00

14000.00 700.00

399.00

Claim

Claim

Claim

27.22

701.38

337.37

33.37

701.34

692.46

36.66

526.00

1051.99

38.73

0

0

Maturity

Claim

0

0

0

59961.84

Profit

Vector

12633.04

12271.82

12084.35

-46301.57

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

Year t

Profit

Vector

1

2

3

4

12633.04

12271.82

12084.35

-46301.57

=>

Cum

probability

of survival

1.0

.877082

.811935

.771370

Profit

signature

Discount

factor

12633.04

10763.40

9811.71

-35715.60

.952381

.907029

.863838

.822702

NPV of

Profit signature

12031.46

9762.72

8475.72

-29383.31

= 45,333.44

Page 10

Credit was given for correct data items and many well prepared candidates scored a

reasonable proportion of the marks available. Very few got to the final answer however.

15

Annual premium

Risk discount rate

Interest on investments (1st yr)

Interest on investments (2nd yr)

Interest on investments (3rd yr)

Interest on non-unit funds

Death benefit (% of bid value of units)

Initial expense

Renewal expense

Expense inflation

3000.00

6.5%

5.0%

4.5%

4.0%

3.0%

150%

% premium

275

80

2.0%

20.0%

2.5%

Allocation % (2nd yr)

Allocation % (3rd yr)

B/O spread

Management charge

Policy Fee

75.0%

100.0%

105.0%

5.0%

1.5%

35

Mortality table:

X

q[ x ]+t 1

p[ x]+t 1

t 1 p[ x ]

45

46

47

0.001201

0.001557

0.001802

0.998799

0.998443

0.998198

1.000000

0.998799

0.997244

yr 1

value of units at start of year

Alloc

B/O

policy fee

interest

management charge

value of units at year end

0.000

2250.000

112.50

35.000

105.125

33.114

2174.511

yr 2

2174.511

3000.000

150.000

35.000

224.528

78.211

5135.828

yr 3

5135.828

3150.000

157.500

35.000

323.733

126.256

8290.805

Page 11

yr 1

unallocated premium + pol fee

b/o spread

expenses

interest

man charge

extra death benefit

profit vector

(i)

785.000

112.500

875.000

0.675

33.114

1.306

54.984

yr 2

35.000

150.000

156.600

0.852

78.211

3.998

103.464

yr 3

115.000

157.500

158.232

3.472

126.256

7.470

0.418

If policyholder dies in the 3rd year of contract, non unit cash flows at end of each year

are:

yr 1 = ( 785 + 112.5 875 + 0.675 + 33.114 ) = 56.289

yr 2 = ( 35 + 150 156.6 + 0.852 + 78.211) = 107.463

yr 3 = ( 115 + 157.5 158.232 3.472 + 126.256 0.5 8290.805 ) = 4138.351

(ii)

(a)

If policyholder dies in the 1st year of contract, non unit cash flow at end of 1st

year is:

yr 1 = ( 785 + 112.5 875 + 0.675 + 33.114 0.5 2174.511) = 1030.967

(b)

If policyholder dies in the 2nd year of contract, non unit cash flows at end of

each year are:

yr 1 == 56.289 (derived above)

yr 2 = ( 35 + 150 156.6 + 0.852 + 78.211 0.5 5135.828 ) = 2460.451

Page 12

(iii)

If policyholder survives until end of contract, non unit cash flows at end of each year

are:

yr 1 == 56.289 (derived above)

yr 2 = 107.463 (derived above)

yr 3 = ( 115 + 157.5 158.232 3.472 + 126.256 ) = 7.052

Expected present value of policy is therefore = 1.163 3.291 5.891 + 152.737

= 142.39

Candidates generally found this question difficult particularly parts (ii) and (ii). Part credit

was given in (i) for correctly calculating the data items and well prepared candidates scored

a fair proportion of the marks here.

Page 13

EXAMINATION

19 April 2013 (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 from the approved list.

CT5 A2013

Calculate:

(a)

10|5 q40

(b)

a65

(c)

15 p[46]

Basis:

Mortality

Interest

AM92

4% per annum

[3]

Calculate (aq )x .

Basis:

Mortality: x = 0.1 and x = 0.2 for all x

, are independent decrements

[3]

[3]

Describe the use of terminal bonus within the reversionary bonus system.

[3]

pensionable salary for each year of service. Final pensionable salary is average salary

received in the three years before retirement. Normal retirement age is 65 exact. The

same level of pension is payable on retirement on the grounds of ill-health or

otherwise prior to age 65.

Calculate the expected present value of past and future benefits for a life currently

aged 30 exact with 10 years of past service and salary in the previous year of 40,000.

Basis:

PEN Tables in Formulae and Tables for Actuarial Examination.

[4]

CT5 A20132

which provides a sum assured given by the formula:

[50,000 + 1,500t] t = 1, 2, ..., 20

where t denotes the policy year.

The sum assured is payable on maturity at age 50 exact or at the end of year of death

if earlier. Premiums on the policy are payable annually in advance.

Write down an expression for:

(a)

(b)

the net premium prospective policy reserve for the policy immediately before

the tenth premium is paid.

[4]

Explain why it is necessary to have different mortality tables for different classes of

lives.

[6]

(i)

Define the measures of crude mortality rate and directly standardised mortality

rate. You should include a definition of all symbols used.

[5]

The data in the table below is for a sub-population for the year 2012.

(ii)

CT5 A20133

Age

Number of lives

Number of deaths

65

66

67

125,000

130,000

140,000

2,937

3,301

3,756

Calculate the standardised mortality ratio for this sub-population using ELT15

(Males) as the standard population.

[2]

[Total 7]

A male life currently aged 65 exact purchases a special joint life annuity of 10,000

per annum payable monthly in advance together with additional benefits detailed

below.

On the death of the male life, the annuity reduces to 5,000 per annum payable

monthly in advance to a female life until her death, assuming she survives him. The

female life is currently aged 62 exact.

The policy additionally provides benefits of:

An annuity certain (extra to the above and not dependent on the survival status of

each life) of 10,000 per annum payable monthly in advance and paid only for ten

years, and

10,000 payable immediately on the death of each life.

Calculate the expected present value of the total benefits.

Basis:

Mortality

Male life

Female life

PMA92C20

PFA92C20

Interest

4% per annum

Expenses

Nil

[7]

10

A special whole life assurance policy issued to a life aged 40 exact provides a benefit

of 1,000 on death within 20 years of inception, 2,000 on death between 20 and 40

years from inception and 3,000 on death thereafter. Benefits are payable at the end

of the year of death.

Calculate the expected present value and variance of the present value of this policy.

Basis:

Mortality AM92 Ultimate

Interest 4% per annum

[8]

CT5 A20134

11

Calculate:

(i)

[1]

(ii)

year payable annually in advance so long as both lives survive.

[3]

(iii)

payable immediately on the second death.

[5]

Basis:

Mortality x = 0.05 for all x for both lives

Interest 4% per annum

[Total 9]

12

A life insurance company issues whole life assurance policies to lives aged 50 exact

for a sum assured of 75,000 payable at the end of the year of death. Premiums are

payable annually in advance.

(i)

Calculate the annual gross premium for each policy using the basis below. [4]

(ii)

Calculate the minimum annual gross premium that the company should charge

in order that the probability of making a loss on any one policy would be 10%

or less.

[6]

Basis:

Mortality

AM92 Select

Interest

6% per annum

Initial commission

Initial expenses

325

Renewal commission 2.5% of each annual gross premium excluding the first

Renewal expenses

CT5 A20135

years

[Total 10]

13

A life insurance company issues 5,000 four-year decreasing term assurance policies

on 1 January 2012 to a group of male lives aged 56 exact at that date.

Premiums are payable annually in advance on each policy. The initial annual gross

premium P reduces to .75P, .5P and .25P at the beginning of the second, third and

fourth policy year respectively.

The sum assured on each policy is payable at the end of year of death and is given by

the formula:

100,000 [1 0.25t] t = 0, 1, 2, 3

where t denotes the curtate duration in years since the inception of the policy.

(i)

Calculate the initial annual gross premium P for each policy using the basis

below.

[7]

(ii)

Determine the prospective gross premium reserve for each policy in force at

the end of the first policy year using the same basis.

[5]

(iii)

Calculate the mortality profit or loss for this portfolio of business for the

calendar year 2012 given that 27 policyholders died during that year.

[2]

Actual expenses incurred and interest earned by the company on this portfolio of

business during 2012 was the same as that assumed in the premium basis.

(iv)

Derive the mortality profit or loss for the calendar year 2012 using the

recursive relationship between the opening and closing prospective reserves in

the first policy year.

[2]

Basis:

Mortality

AM92 Ultimate

Interest

6% per annum

Initial commission

Initial expenses

125

Renewal expenses

CT5 A20136

years. The renewal expense is assumed to increase by

1.92308% compound per annum from inception of the policy.

[Total 16]

14

to a life aged 67 exact. Level premiums are payable yearly in advance throughout the

term of the policy or until earlier death. In the first year, 50% of the premium is

allocated to units and 110% 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 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 immediately before a premium is

paid. 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 carrying out profit tests of this

contract:

4% per annum

3% per annum

Mortality

Surrenders

second year based on policies in force

at that time.

Initial expenses

235

Renewal expenses

premium dates

Initial commission

Renewal commission

premiums

Claim expense

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

10% of the annual premium, using a risk discount rate of 6% per annum.

(i)

Calculate the premium for the policy on the assumption that the company does

not zeroise future expected negative cash flows.

[12]

(ii)

Calculate the net present value of the profit on the policy on the assumption

that the company does set up reserves in order to zeroise future expected

negative cash flows.

[5]

[Total 17]

END OF PAPER

CT5 A20137

EXAMINERS REPORT

April 2013 examinations

Core Technical

Introduction

The Examiners Report is written by the Principal Examiner with the aim of helping

candidates, both those who are sitting the examination for the first time and using past papers

as a revision aid and also those who have previously failed the subject.

The Examiners are charged by Council with examining the published syllabus. The

Examiners have access to the Core Reading, which is designed to interpret the syllabus, and

will generally base questions around it but are not required to examine the content of Core

Reading specifically or exclusively.

For numerical questions the Examiners preferred approach to the solution is reproduced in

this report; other valid approaches are given appropriate credit. For essay-style questions,

particularly the open-ended questions in the later subjects, the report may contain more points

than the Examiners will expect from a solution that scores full marks.

The report is written based on the legislative and regulatory context pertaining to the date that

the examination was set. Candidates should take into account the possibility that

circumstances may have changed if using these reports for revision.

D C Bowie

Chairman of the Board of Examiners

July 2013

CT5 introduces the fundamental building blocks that stand behind all life insurance and

pensions actuarial work.

Credit is given to students who produce alternative viable numerical solutions. In the case of

descriptive answers credit is also given where appropriate to different valid points made

which do not appear in the solutions below.

In questions where definitions of symbols and then formulae are requested, a different

notation system produced by a student to that used by examiners is acceptable provided it is

used consistently, is relevant and is properly defined and used in the answer.

Comments on the April 2013 paper

The general performance was similar this session to previous ones although it was felt that

this paper was a little easier than some previous ones. Questions that were done less well

were 9, 10 (variance), 11, 12(b) and 14(ii). The examiners hope that the detailed solutions

given below will assist students with further revision.

However most of the short questions were very straightforward where an answer could be

produced quickly and this is where many successful candidates scored particularly well.

Students should note that for long questions some credit is given if they can describe the right

procedures although to score well reasonably accurate numerical calculation is necessary.

Page 2

(a)

10|5 q40

= 0.01565

(b)

(c)

15 p[46]

The constant force of decrement is consistent with the Kolmogorov equations where

the transition intensities are constant.

Thus:

(aq)x =

=

( + )

(1 e )

( + )

0.1

(1 e 0.3 ) = 0.086394

0.3

Climate and geographical location are closely linked. Levels and patterns of rainfall

and temperature lead to an environment which is amicable to certain kinds of diseases

e.g. those associated with tropical regions.

Effects can also be observed within these broad categories e.g. the differences

between rural and urban areas in a geographical region. Some effects may be

accentuated or mitigated depending upon the development of an area e.g. industry

leading to better roads and communications.

Natural disasters (such as tidal waves and famines) will also affect mortality and

morbidity rates, and may be correlated to particular climates and geographical

locations.

result of the death of the life assured.

Terminal bonuses are usually allocated as a percentage of the basic sum assured

and the bonuses allocated prior to a claim.

Page 3

The terminal bonus percentage rate will vary with the term of the policy at the

date of payment.

Because the policy is being terminated, the terminal bonus rate is usually chosen

so as to distribute all the surplus available to the policy based on asset share.

surplus and may allow the insurer to choose investments that are more volatile in

the short term but are expected to be more profitable in the long term.

Generally question done well. Other valid points given credit. In particular comments about

effects on lapse rates were an important extra point.

Past Service:

Value is

ra

ia

( z M 30

+ z M 30

) 1

10

128026 + 64061

* 40000*

= * 40000*

= 32585.5

60

s29 D30

6

4.991*7874

Future Service:

Value is

ra

ia

( z R30

) 1

+ z R30

1

4164521 + 1502811

* 40000*

= * 40000*

= 96140.1

60

60

4.991*7874

s29 D30

Generally question done well. It was not necessary to give the total in the last line for full

credit.

The death benefit in policy year 10 is 65,000 which increases by 1,500 each year

and the maturity value is 80,000. Therefore:

(a)

1

1

20 l50

50, 000 A30:20 + 1,500( IA)30:20 + 80, 000 v

l30

P=

a30:20

(b)

9V

Pr o

1

1

= 63,500 A39:11

+ 1,500( IA)39:11

+ 80, 000 v11

l50

Pa39:11

l39

Well prepared students scored good marks but many made elementary mistakes the most

common of which was 48500 as the 1st factor in the numerator of the first formula above.

The alternative solution for the numerator in (a) is:

50000 A30:20 + 1500( IA)30:20

Page 4

V = 63500 A39:11 + 1500( IA)39:11 Pa39:11

homogeneous group of lives i.e. all the lives to whom the table applies follow the

same stochastic model of mortality represented by the rates in the table. This means

that the table can be used to model the mortality experience of a homogeneous group

of lives which is suspected to have a similar experience.

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

will depend on the exact mixture of lives with different experiences that has been used

to construct the table. Such a table could only be used to model mortality in a group

with the same mixture. It would have very restricted uses.

For this reason separate mortality tables are usually constructed for groups which are

expected to be heterogeneous. This can manifest itself as class selection e.g. separate

tables for males and females, whole life and term assurance policyholders, annuitants

and pensioners, or as time selection e.g. separate tables for males in England and

Wales in 198082 (ELT14) and 199092 (ELT15).

Sometimes only parts of the mortality experience are heterogeneous e.g. the

experience during the initial select period for life assurance policyholders, and the

remainder are homogeneous e.g. the experience after the end of the select period for

life assurance policyholders. In such cases the tables are separate (different) during

the select period, but combined after the end of the select period. In fact there are

separate (homogeneous) mortality tables for each age at selection, but they are

tabulated in an efficient (space saving) way.

(i)

Exc,t mx,t

x

Exc,t

actual deaths

total exposed to risk

E xc,t

x + t.

mx,t

population being studied for ages x to x + t.

Page 5

s Exc,t mx,t

x

s Exc,t

x

s c

Ex,t

(ii)

Age

Lives

Deaths

ELT15

M rate

Expected

Deaths

65

66

67

125000

130000

140000

2937

3301

3756

0.02447

0.02711

0.02997

3058.8

3524.3

4195.8

9994

10778.9

Generally question done well. It was not necessary to make the weighted average remarks in

line 3 and 7 above to obtain full marks.

(12)

(12)

PV=10000a(12) + 5000*(a65:62

+ a65

) + 10000*( A65 + A62 )

10

10000a(12) = 10000*(i / d (12) ) * a10 = 1021537 *8.1109 = 82855.85

10

11

11

11

11

(12)

a65:62

= a65 + a62 a65:62 = 13.666 + 15.963 12.427

24

24

24

24

= 16.744

11

11

(12)

a65

= a65 = 13.666

= 13.208

24

24

10000 A62 = 10000*(1 ln(1.04) *(15.963 .5)) = 3935.30

Page 6

= 241387 rounded

Well prepared students completed this question satisfactory but others had problems with the

joint life portion. A very few students concluded that the question wording could be taken to

mean that for the joint part the annuity ceases altogether on the female life death and

examiners agreed that this was a potential ambiguity and the alternative approach was

allowable.Thisalternative approach gave an answer of 228,994.

10

1000(A40 + v 20

l60

l

A60 + v 40 80 A80 )

l40

l40

= 1000*(0.23056 + (0.45639*

9287.2164

5266.4604

*0.45640) + (0.20829*

*0.73775))

9856.2863

9856.2863

= 509 to nearer

To get the variance we calculate the second moment by defining the benefit as three

temporary assurances, two of which are deferred, thus:

Benefit from age 4060

(1000) 2 *[ 2 A40 v 20

l60 2

A60 ] (v at 8.16%)

l40

9287.2164

*0.23723)

9856.2863

Benefit from age 6080

(2000) 2 *v 20

l60 2

l

*[ A60 v 20 80 2 A80 ] (v at 8.16%)

l40

l60

= (2000) 2 *0.20829*

9287.2164

5266.4604

(0.23723 0.20829*

*0.56432)

9856.2863

9287.2164

Page 7

(3000)2 *v 40

l80 2

* A80 (v at 8.16%)

l40

= (3000)2 *0.04338*

5266.4604

*0.56432

9856.2863

Second moment:

= 21,361 + 133,911 + 117,735

= 273,007

Variance = 273,007 (509)2

= 13,926

= (118)2

The calculation for the mean was generally well done but the calculation for the variance

was poorly done overall.

11

(i)

(ii)

The value is

= 1000*(1/ (1 (1.03 /1.04)e.1 )) = 1000 / 0.10386 = 9628

(iii)

The value is

20

= 10000

20

0

20

= 10000

20

0

(e

.089221t

.139221t

e .089221t e .139221t

)dt = 10000

+

.089221 .139221 0

e 1.78442 e 2.78442

1

1

= 10000*

+

+

Page 8

= 25872

Parts (ii) and (iii) were poorly done. In (ii) many students failed to realise that the

expression needed was a geometric series rather than an integral.

12

(a)

Let P be the annual premium for the policy. Then (functions at 6%):

EPV of premiums:

Pa[50] = 14.051P

EPV of benefits:

75, 000 A[50]

EPV of expenses:

Equation of value gives:

Pa[50] = 75, 000 A[50] + 325 + P + ( 0.025 P + 75 ) a[50]

P 14.051 = 75, 000 0.20463 + 325 + P + ( 0.025 P + 75 ) 13.051

P=

(b)

16, 651.075

= 1,308.56

12.724725

The insurers loss random variable for this policy is given by (where K and T

denote the curtate and complete future lifetime of a policyholder):

L = 75, 000v

K[50] +1

+ 325 + P + 0.025 P + 75 aK

[50]

P aK

[50] +1

Using AM92 Select, we require:

l[50]+t

0.9 l[50]+t 0.9l[50] = 0.9 9706.0977 = 8735.488

l[50]

Page 9

As l65 = 8821.2612 and l66 = 8695.6199 then t lies between 15 and 16 so K[50]

= 15.

We therefore need the minimum premium such that

P =

30,577.169

= 3, 229.03

9.46944765

Part (a) was done well. However very few students completed part (b).

13

(i)

EPV of premiums

l

l

l

= P 1 56 + 0.75 57 v + 0.5 58 v 2 + 0.25 59 v3

l56

l56

l56

l56

P

[9515.104 + 0.75 9467.2906 0.9434 + 0.5 9413.8004 .89 + 0.25 9354.004 .83962]

9515.104

= 2.350603P

EPV of benefits

= 100, 000 q56 v + 0.75 p56 q57 v 2 + 0.5 2 p56 q58 v3 + 0.25 3 p56 q59 v 4

= 100, 000

= 1252.116

i/

= 35 a@

1 = 35 2.745 = 96.075

56:4

where i / =

Page 10

1.06

1 = 0.04

1.0192308

125 + 0.25 P + 0.03 ( EPV of premiums 1)

= 125 + 0.25 P + 0.040518 P

Equation of value gives:

2.350603P = 1252.116 + 96.075 + 125 + 0.25P + 0.040518P

P = 715.11

(ii)

Prospective gross premium policy reserve at the end of the 1st policy year

given by:

1V

EPV of premiums

l

l

l

= P 0.75 57 + 0.5 58 v + 0.25 59 v 2

l57

l57

l57

715.11

=

[0.75 9467.2906 + 0.5 9413.8004 .9434 + 0.25 9354.004 .89] = 1028.952

9467.2906

EPV of benefits

= 100, 000 0.75 q57 v + 0.5 p57 q58 v 2 + 0.25 2 p57 q59 v3

= 100, 000

= 828.911

/

i

= 35 1.0192308 a@

= 35.673 2.870 = 102.382

57:3

= 0.03 EPV of premiums = 30.867

Therefore 1V = 828.911 + 102.382 + 30.867 1028.952 = 66.79

Page 11

(iii)

Therefore, sum at risk per policy in the 1st policy year is:

DSAR = 100,000 ( 66.79) = 100,066.79

Mortality profit = EDS ADS

EDS = 5000 q56 100, 066.79 = 5000 0.005025 100, 066.79 = 2,514,178.1

ADS = 27 100, 066.79 = 2, 701,803.3

Mortality profit =

= 5000 (0 + 715.11 0.25 715.11 125) 1.06 100, 000 27 (66.79) 4973

= 187, 791.1

i.e. approximately the same figure as derived in (c) above

Reasonably well done by well prepared students. Partial credit was given in (b) for showing

understanding of the processes involved.

14

(i)

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

Multiple decrement table although deaths can be assumed to be uniformly

distributed over the year, surrenders occur only at the year end. Therefore:

(aq ) dx = q xd and (aq ) wx = q xw (1 qxd )

x

qxd

q xw

( aq )dx

( aq )wx

67

68

69

0.016042

0.017922

0.020003

0.08

0.04

0.00

0.016042

0.017922

0.020003

0.07872

0.03928

0.0

( ap ) x

t 1 ( ap ) x

0.905242 1

0.942795 0.905242

0.979997 0.853458

Allocation

Bid/offer

Interest

Management charge

Value of units at end of year

Page 12

Year 1

0

0.5P

0.025P

0.019P

0.003705P

0.490295P

Year 2

0.490295P

1.1P

0.055P

0.061412P

0.011975P

1.584731P

Year 3

1.584731P

1.1P

0.055P

0.105189P

0.020512P

2.714408P

Unallocated premium

Bid/offer

Expenses

Interest

Management charge

Claim expense

End of year cashflows

Probability in force

Discount factor

Expected present value

of profit

Year 1

0.5P

0.025P

0.125P+235

0.012P7.05

0.003705P

7.10715

0.415705P249.15715

Year 2

0.1P

0.055P

0.025P+45

0.0021P1.35

0.011975P

4.29015

0.060125P50.64015

Year 3

0.1P

0.055P

0.025P+45

0.0021P1.35

0.020512P

1.500225

0.051588P47.850225

1

0.943396

0.905242

0.889996

0.853458

0.839619

0.392174P235.0539

0.048440P40.7987

0.036967P34.2886

(i.e. NPV of profit = 150.0)

(ii)

In order to set up reserves in order to zeroise future expected negative cash

flows, we require:

125.232

= 121.584

1.03

1V 1.03 ( ap )68 2V = 140.827 1V = 248.016

2V

and NPV of profit = 149.887/1.06 = 141.402

Again reasonably well done by well prepared students for part (i). Part (ii) caused more

difficulties however. As before partial credit was given for showing understanding of the

processes involved.

Page 13

EXAMINATION

27 September 2013 (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.

Graph paper is NOT required for this paper.

AT THE END OF THE EXAMINATION

Hand in BOTH your answer booklet, with any additional booklets 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 S2013

11

Calculate:

(a)

10 q63

(b)

(2)

a63

(c)

s55:10

Basis:

Mortality

Interest

PFA92C20

4% per annum

[2]

12

[2]

13

A whole life assurance policy was issued to a life aged x exact for a sum assured of S

payable at the end of year of death. A premium of P is payable annually in advance

until death. The following expense assumptions were used to derive the gross

premium payable on the policy:

Initial commission

Initial expenses

Renewal expenses

years

Claim expenses

Write down an equation linking the gross premium reserve at the beginning and the

end of:

(a)

(b)

[3]

14

Calculate

2.25 p90.25

Basis:

Mortality

CT5 S20132

AM92

[3]

15

exact. The profit signature for this policy, calculated using AM92 Select mortality and

making no allowance for surrenders, is:

(209.80, 253.55, 109.85)

It is now assumed for the cash flows for this policy that 15% of all policies in force at

the end of the first policy year are surrendered at that time. The surrender value

payable at that time is the bid value of units at the end of the policy year less a

surrender penalty of 500. There are no other changes to the policy.

16

(a)

(b)

Comment on the impact on the profit signature in the second and third policy

years.

[4]

1,200 per annum. This annuity increases on each policy anniversary by 100 per

annum, the last increase being at the beginning of the tenth policy year. All annuity

payments are annual in advance.

Calculate the expected present value of the annuity benefits.

Basis:

Mortality

Interest

Expenses

AM92 Ultimate

6% per annum

Nil

[4]

17

Calculate ( IA)20 (the present value of a whole life assurance issued to a life aged 20

exact payable immediately on death where the benefit paid on death at time t is t)

using the following basis:

Basis:

Mortality

x = 0.03 for x<40 inclusive and 0.04 for x 40

Force of interest 5% per annum

[6]

18

Show, using the random variable approach, that the expected present value of an

annuity of 1 per annum payable annually in arrears to a life now aged x, deferred for n

[7]

years is equal to ax ax:n .

CT5 S20133

19

The following statistics have been provided in relation to a particular country and one

of its regions:

Region A

Population Number

exposed

of Deaths

Age

band

1835

3650

5170

(i)

(ii)

20

25,000

50,000

70,000

25

80

170

Country

Population Number

exposed

of Deaths

500,000

125,000

110,000

1,000

375

500

Calculate:

(a)

the mortality rates for each age band both for Region A and Country

(b)

(c)

the Country

(d)

Country

[5]

[2]

[Total 7]

The following is an extract of a decrement table assumed for a funeral plan, showing

deaths (d) and withdrawals (w):

Age x

(al)x

(ad)xd

(ad)xw

85

86

87

10,000

6,300

4,200

1,400

1,000

2,300

1,100

It has been established that the independent rates of decrement of withdrawal are now

only 50% of those assumed in the table above for the ages of 85 and 86. The

underlying independent mortality rates are unchanged.

Construct a revised decrement table to reflect this change.

CT5 S20134

[7]

21

A pension scheme provides a lump sum benefit on death in service of three times

salary in the 12 months before death. Normal retirement age is 65 exact.

(i)

death benefit for a life now aged 35 exact with salary in the previous 12

months of 25,000.

Basis: Pension scheme tables in the Formulae and Tables for Examinations

(ii)

[3]

(a)

Give a formula for the expected present value of the death benefit.

(b)

[5]

[Total 8]

22

special endowment assurance policies to male lives then aged 40 exact. Each

policy provides a death benefit of 75,000 payable at the end of year of death and a

maturity benefit of 150,000.

Premiums on each policy are payable annually in advance for the term of the policy,

ceasing on earlier death.

(i)

Calculate the annual gross premium for each policy using the following

premium basis:

Mortality

Interest

Initial commission

Initial expenses

Renewal expenses

[4]

AM92 Select

4% per annum

25% of the first annual premium

400

45 per annum at the start of the second and subsequent

policy years

(ii)

Determine the gross premium reserve for each policy in force at the end of the

eighth policy year and for each policy in force at the end of the ninth policy

year, using the same basis as above.

[6]

At the beginning of 2012, there were 625 policies in force. Actual experience for this

portfolio of business during 2012 was as follows:

Number of deaths 3

Interest earned

4.5%

Expense incurred per policy in force at beginning of policy year 45

(iii)

Derive, using the recursive relationship between the opening and closing

reserves, the profit/loss from this portfolio of business in 2012 separately

from:

mortality

interest

expenses

CT5 S20135

[4]

[Total 14]

23

A life insurance company issues a 15-year increasing term assurance policy to a life

aged 50 exact.

The death benefit on the policy, payable immediately on death, is given by the

formula:

10,000 [6+t] t = 0, 1, 2, ......, 14

where t denotes the curtate duration in years since the inception of the policy.

Level premiums on the policy are payable monthly in advance for the term of the

policy, ceasing on death if earlier.

(i)

Calculate the monthly premium for the policy using the following premium

basis:

Mortality

AM92 Select

Interest

6% per annum

Expenses

Initial

Renewal

225

65 per annum inflating at 1.92308% per annum, at the start

of the second and subsequent policy years

Commission

Initial

Renewal

4% of the second and subsequent monthly premiums

Claim

Inflation

outset, and the increases due to inflation start immediately.

[8]

(ii)

Calculate the gross prospective reserve for the policy at the end of the 14th

policy year using the elements of the premium basis that are relevant.

[3]

(iii)

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

of the 14th policy year, again using the elements of the premium basis that are

relevant.

[4]

[Total 15]

CT5 S20136

24

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

for a basic sum assured of 25,000 to a life aged 56 exact. Level premiums are

payable annually in advance throughout the term of the policy.

Compound reversionary bonuses are added to the policy at the start of each year,

including the first. The basic sum assured (together with any bonuses attaching) is

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

(i)

Show that the annual premium is approximately 6,483 using the following

premium basis:

Mortality

AM92 Select

Interest

6% per annum

Initial expenses

policy commencement)

the start of the second and subsequent policy years

Bonus rates

year at a rate of 1.92308% per annum

[5]

(ii)

The insurance company holds net premium reserves using a rate of interest of

4% per annum and AM92 Ultimate mortality.

Calculate the expected profit margin on this policy using the following profit

test basis:

Mortality

Interest earned on funds

Initial expenses

Renewal expenses

Bonus rates

Risk discount rate

7.5% per annum

as per premium basis

as per premium basis

as per premium basis

9.5% per annum

[13]

[Total 18]

END OF PAPER

CT5 S20137

EXAMINERS REPORT

September 2013 examinations

Core Technical

Introduction

The Examiners Report is written by the Principal Examiner with the aim of helping

candidates, both those who are sitting the examination for the first time and using past papers

as a revision aid and also those who have previously failed the subject.

The Examiners are charged by Council with examining the published syllabus. The

Examiners have access to the Core Reading, which is designed to interpret the syllabus, and

will generally base questions around it but are not required to examine the content of Core

Reading specifically or exclusively.

For numerical questions the Examiners preferred approach to the solution is reproduced in

this report; other valid approaches are given appropriate credit. For essay-style questions,

particularly the open-ended questions in the later subjects, the report may contain more points

than the Examiners will expect from a solution that scores full marks.

The report is written based on the legislative and regulatory context pertaining to the date that

the examination was set. Candidates should take into account the possibility that

circumstances may have changed if using these reports for revision.

D C Bowie

Chairman of the Board of Examiners

December 2013

General comments on Subject CT5

CT5 introduces the fundamental building blocks that stand behind all life insurance and

pensions actuarial work.

Credit is given to students who produce alternative viable numerical solutions. In the case of

descriptive answers credit is also given where appropriate to different valid points made

which do not appear in the solutions below.

In questions where definitions of symbols and then formulae are requested, a different

notation system produced by a student to that used by examiners is acceptable provided it is

used consistently, is relevant and is properly defined and used in the answer.

Comments on the September 2013 paper

The general performance was similar this session to previous ones. Well prepared students

generally scored well. Questions that were done less well were 15, 18, 11, 21, 22(iii) and

23(iii). The examiners hope that the detailed solutions given below will assist students with

further revision.

As in past examinations most of the short questions were very straightforward and this is

where many successful candidates scored particularly well. Students should note that for

long questions some credit is given if they can describe the right procedures although to score

well reasonably accurate numerical calculation is necessary.

11

0.07183

l63

9775.888

(a)

10 q63

(b)

(2)

a63

a63

(c)

s55:10 =

1

15.606 0.25 15.356

4

(1.04)10 * a55:10

10 p55

=

(l65 / l55 )

0.97843

= 12.166

This question was generally well done.

12

population by duration since entry to that class. The rates modelled are dependent on

duration up to a duration of s (the length of the select period) and after s they are

independent of duration, so the effect is temporary.

An example is a life purchasing a life assurance policy who has been medically

selected and thus initially would be expected to enjoy better mortality. This

advantage however wears off over time.

This question was generally well done. Credit was given for all relevant comments. To earn

full marks it was important to stress in the answer the fact that the effect of selection wears

off.

13

(a)

[ 0V P

(b)

a

e

) S q x 1V p x

P B ] (1 i ) (1

100

100

(t V P

c

e

P D ) (1 i ) (1

) S q x t t 1V px t

100

100

Students had in many cases difficulties in setting out these standard formulae which are

fundamental in CT5. In (a) expressing 0V as zero was fine so long as this definition was

stated. Also using t-1and t instead of t and t+1 respectively was acceptable.

Page 3

14

2.25 p90.25

.75q90

1

(1 q91 )(1 .5q92 )

q

(1

.25

)

90

.75*.170247

= 1

*.815286*.89996

(1 .25*.170247)

= 0.63587

Generally well done. An alternative correct method is to use straight line interpolation on l

factors. This is fine so long as it produces an accurate answer.

15

(a)

s

If qd40 and q40

represent the independent rates of mortality and surrender

respectively in the 1st policy year, then the dependent rate of surrender at the

end of the 1st policy year is:

s

s

= (1 0.000788) 0.15 = 0.14988

( aq ) 40

1 qd40 q40

The cash flows are now modified to include a surrender charge at the end of

the 1st policy year

s

500 ( aq) 40

500 0.14988 74.94

= 209.80 + 74.94 = 134.86

(b)

Although the profit vector for this policy will remain the same for policy years

2 and 3, the profit signature for each year will reduce as the probability of the

policy being in force at the start of each year will reduce.

This question was done poorly overall with few students being able to derive the correct

answer.

Page 4

16

PV 1100a75:10 100( Ia)75:10

1100(a75 v10 * 10 p75 a85 ) 100(( Ia)75 v10 * 10 p75 (10a85 ( Ia)85 ))

3385.2479

3385.2479

* 4.998 100(48.128 0.55839 *

* (49.98 21.503))

6879.1673

6879.1673

6936.2 2848.6

= 9785 rounded

This was a very straightforward question that was generally well done. The most common error was

for the first function above to be multiplied by 1000 rather than the correct 1100.

17

EPV =

.03* 20 te.08t dt .04* e1.6 * e1.8 te.09t dt .03* 20 te.08t dt .04* e0.2 te.09t dt

0

20

0

20

20

20

te

.08t

20

te.08t

te.08t e.08t

1 20 .08t

dt =

0 e dt .08 (.08)2

.08 0 .08

0

20e1.6

e1.6

1

0

=

2

.08

(.08)

(.08)2

= 74.230

20 te

.09t

te.09t

te.09t e.09t

1 .09t

dt =

e dt .09 (.09)2

.09 20 .09 20

20

20e1.8

e1.8

0

36.733 20.407 57.140

= 0

.09

(.09)2

EPV = .03*74.230 .04*1.2214*57.140

= 5.019

A challenging question. Well prepared students coped well but many failed at the basic level

in constructing the integral.

Page 5

18

Define the random variable Kx for the curtate duration of life aged x.

The expected present value is:

nk 0 0 P[K x k ]

k n 1 n | ak n P[K x k ]

( nk 0 ak P[K x k ] an P[K x n]) (nk 0 ak P[K x k ] an P[K x n])

k n 1 n | ak n P[K x k ]

( nk 0 ak P[K x k ] an P[K x n]

k n 1 n | ak n P[K x k ])

( nk 0 ak P[K x k ] an P[K x n])

n

(

k 0 ak P[K x k ]) ( k 0 ak P[K x k ] an P[K x n])

ax ax:n

This is a straight bookwork question taken straight from Core Reading. Most students

struggled to reproduce it and the primary error was that students did not appreciate the

random variable aspect often trying to solve it in a non random variable manner. This gained

no credit.

19

Age

1835

3650

5170

(i)

(a)

Region A

Population

Number of

exposed

Deaths

25000

50000

70000

145000

25

80

170

275

Mortality

0.00100

0.00160

0.00243

Country

Number of

Population

exposed

Deaths

500000

125000

110000

735000

1000

375

500

1875

Mortality

0.00200

0.00300

0.00455

(b)

Crude Mortality Rate (Country) = 1875/735000 = 0.00255

(c)

((500000 * .00100) + (125000 * .00160) + (110000 * .00243))/735000

= 0.00132

Page 6

(d)

Actual deaths in Region A/Expected Deaths in Region A based on

Country mortality rates i.e.

275/((25000 * .00200) + (50000 * .00300) + (70000 * .00455))

= 275/518.5 = 0.53

(ii)

Crude mortality rate in Region A suggests Region A has only 75% of the

mortality rate of Country as a whole.

significantly lighter than the appropriate crude rate.

This difference is explained by the fact that Region A has a much higher

proportion of older lives than the Country as a whole thus inflating the

crude rate.

The standardised mortality ratio shows the true difference i.e. the mortality

rates for Region A are on average 53% of those for the Country as a

whole.

Generally this was another straightforward question on which students did well. The most

common error was that not all points were covered in (ii).

20

d

( aq )85

1400

1000

d

0.14; ( aq )86

0.15873

10000

6300

w

( aq )85

2300

1100

w

0.23; (aq )86

0.17460

10000

6300

d

q85

d

(aq )85

0.14

0.158192

0.885

1

w

1 (aq )85

2

Similarly

d

q86

w

q85

Similarly

w

q86

0.15873

0.173913

0.9127

w

(aq )85

0.23

0.247312

0.93

1

d

1 (aq )85

2

0.17460

0.189659

0.9206

Page 7

w

w

But q85

and q86

are now reduced by 50% so their new values are:

w

w

q85

0.123656 and q86

.0948295

d

d

0.158192* 1 *0.123656 0.14841;(aq )86

0.173913* 1 *.0948295 0.16567

Hence (aq )85

2

w

w

0.123656* 1 *0.158192 0.113875;(aq )86

0.0948295* 1 *0.173913 0.086583

Hence (aq )85

2

Age x

(al ) x

(ad ) dx

(ad ) wx

85

86

87

10000

7377

5518

1484

1222

1139

638

This was another relatively straightforward question generally well done by well prepared

students. Most marks were awarded on knowing the principles of calculation rather than the

precision of the calculations themselves.

21

(i)

d s

3 25, 000 40 39.5

l35 s34

14 7.623 7.814 / 2

3 25, 000

6.389

18866

67.24

(ii)

t 64 x

t 0

Page 8

3 25, 000

s34

l35

v35

Define:

s

D35 = s34l35v35

d

M 35

=

t 64 x

d

C35

t

t 0

3 25, 000

d

M 35

D35

This question was very poorly done. Students seem to struggle continually with questions

involving pension commutation functions and this was felt to be a reasonably straightforward

derivation from 1st principles.

22

(i)

Let P be the annual premium for the policy. Then (functions at 4%):

EPV of premiums:

Pa 40:20 13.930 P

EPV of benefits:

1

75, 000 A[40]:20

150, 000v 20 20 p[40]

where:

v 20 20 p[40] = 0.45639

1

A[40]:20

9287.2164

0.43013

9854.3036

75, 000 0.0341 150, 000 0.43013

67, 077.0

Page 9

EPV of expenses:

0.25P 400 45(a[40]:20 1) = 0.25P 400 45 12.93

0.25P 981.85

Equation of value gives:

13.93P 67, 077.0 0.25 P 981.85

(ii)

68, 058.85

4,975.06

13.68

The gross prospective policy reserve at the end of the 8th policy year is given by:

8V

where:

v12 12 p48 0.62460 0.95220 0.59474

8V 75, 000 (0.63025 0.59474) 150, 000 0.59474 (45 4975.06) 9.613

= 44, 481.58

The gross prospective policy reserve at the end of the 9th policy year is given by:

9V

1

75, 000 A49:11

150, 000v11 11 p49 (45 P)a49:11

where:

v11 11 p49 0.64958 0.95411 0.61977

9V 75, 000 (0.65477 0.61977) 150, 000 0.61977 (45 4975.06) 8.976

= 51338.28

Note: students can alternatively calculate these reserves on a retrospective basis i.e.

8V

Page 10

D[40]

D48

1

Pa

75, 000 A[40]:8

400 45(a[40]:8 1) 0.25P

[40]:8

where:

1

A[40]:8

A[40] v8 8 p[40] A48 0.23041 0.73069 0.98977 0.30695 0.008419

and:

a[40]:8 a[40] v8 8 p[40] a48 20.009 0.73069 0.98977 18.019 6.9774

8V 1.382713[4975.06 6.9774 75, 000 0.008419 400 45 5.9774 0.25 4975.06]

9V

D[40]

D49

1

Pa

75, 000 A[40]:9

400 45(a[40]:9 1) 0.25P

[40]:9

where:

1

A[40]:9

A[40] v9 9 p[40] A49 0.23041 0.70259 0.98778 0.31786 0.009814

and:

a[40]:9 a[40] v9 9 p[40] a49 20.009 0.70259 0.98778 17.736 7.7001

9V 1.440915 4975.06 7.7001 75, 000 0.009814 400 45 6.7001 0.25 4975.06

= 51, 335.68

(iii)

Sum at risk per policy in the 9th policy year is:

DSAR = 75,000 51,338.28 = 23,661.72

Mortality profit = EDS ADS

EDS = 625 q48 23, 661.72 625 0.002008 23, 661.72 29, 695.46

ADS = 3 23, 661.72 70, 985.16

i.e. mortality profit = 41,289.7 (i.e. a loss)

total profit/loss in 2012 =

625 (8V P E ) (1 i) S actual deaths 9V number of policies inforce

Page 11

625 (44, 481.58 4, 975.06 45) 1.045 75, 000 3 51, 338.28 622

114,567.22

i.e. total profit from mortality, interest and expense combined = 114,567.22

As expenses incurred per policy during 2012 were the same as assumed in the

premium basis, then expense surplus = 0

= 44, 480.23

Therefore interest surplus = 114,567.22 (41,289.7) = 155,856.92

Most well prepared students did parts (i) and (ii) well. Part (iii) was less well done

as few students realised expense surplus was zero and many attempted only the

mortality surplus.

23

(i)

EPV of premiums (at 6% p.a.)

12 Pa

117.114 P

[50]:15

where:

a

[50]:15

a[50]:15

11

11

1 v15 15 p[50] ) (1 0.379230) 9.7595

24

24

50, 000 A

1

[50]:15

1

[50]:15

50, 000{ A[50] v15 15 p[50] A65 } 10, 000{( IA)[50] v15 15 p[50] (15 A65 ( IA)65 )}

1.060.5 [50, 000 A[50] 10, 000( IA)[50] v15 15 p[50] (200, 000 A65 10, 000( IA)65 )]

1.02956

0.41727 8821.2612 200, 000 0.40177 10, 000 5.50985

9706.0977

Page 12

7, 559.80

4%

1 275 A 1 4%

225 0.3 12 P 0.04 12 P a 65 a[50]:15

[50]:15

[50]:15

12

4%

p A

(4%) 15 [50] 65

@ 4% 15

225 3.6 P 0.48P 9.6762 65 10.259 275 A[50]

v

909.307 8.2446P

Equation of value gives:

117.114P = 7559.80 + 909.307 + 8.2446P P = 77.79

(ii)

Gross prospective reserve at the end of the 14th policy year is given by (functions

@6% p.a. unless otherwise stated):

14V

0.5

200, 000q64v 0.5 275(1.0192308)14 q64v0.04

641

2, 470.185 4.4769 84.865 867.967 1691.60

where:

a a641

641

(iii)

11

11

(1 v p64 ) 1 (1 0.9434 0.98728) 0.96856

24

24

If K64 1

GFLRV = 65(1.0192308)14 0.96 12 77.79 a12

If K64 < 1

GFLRV = 200, 000vT64 275(1.0192308)14 vT64

.06

.04

1

112T64

12

@ 6%

Page 13

Again well prepared students did part (i) well although part (ii) was done less well. Very few

students made a serious attempt at part (iii) which was set to test higher skills.

24

(i)

Let P be the annual premium payable. Then equation of value gives (functions at 6% unless

otherwise stated):

[56]:4

1.06

where i

1 0.04

1.0192308

P

(ii)

21, 600.92

6, 483.26

3.3318

Decrement table

x

qx

56

57

58

59

0.003742

0.005507

0.006352

0.007140

qx 0.8qx

0.002994

0.004406

0.005082

0.005712

px

t 1 px

0.997006

0.995594

0.994918

0.994288

1

0.997006

0.992614

0.987570

Accrued bonus at start of policy year t for each in force policy is given by:

t

1

2

3

4

Accrued

bonus

480.77

970.79

1470.22

1979.27

1V56:4

a

25, 000 1 57:3

a

56:4

Page 14

2.87

480.77 0.88963 6268.83

3.745

2V56:4

a

25, 000 1 58:2

a

56:4

1.955

970.79 A58:2 25, 000 1

970.79 0.92479 12847.04

3.745

3V56:4

a

25, 000 1 59:1

a

56:4

1.0

1470.22 0.96154 19738.11

3.745

Cash flows for the policy under the profit test are given by:

Year

T

1

2

3

4

Opening

reserve

0

6268.83

12847.04

19738.11

Year

t

1

2

3

4

Profit

vector

1206.71

586.40

790.51

991.47

Premium

Expense

Interest

6483.26

6483.26

6483.26

6483.26

1720.82

202.08

202.08

202.08

357.18

941.25

1434.62

1951.45

t 1 p

1.0

0.997006

0.992614

0.987570

Death

Claim

76.28

114.42

134.51

154.11

Profit

signature

1206.71

584.64

784.67

979.15

Discount

factor

.913242

.834011

.761654

.695574

Discount

factor

1

.913242

.834011

.761654

NPV of

premium

6483.26

5903.06

5367.17

4876.62

Maturity

Closing

Claim

reserve

0

6250.06

0

12790.44

0

19637.81

26825.16

0

NPV of profit

signature

1102.02

487.60

597.65

681.07

Year

t

1

2

3

4

t 1 p

Premium

6483.26

6483.26

6483.26

6483.26

1.0

0.997006

0.992614

0.987570

Profit margin =

664.30

0.0294 i.e. 2.94%

22, 630.11

A relatively straightforward if detailed question where well prepared students scored well. In

these types of question credit is given for understanding of the method and how to approach

the calculations even if the calculation part contains numerical errors.

Page 15

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