You are on page 1of 8

SEAT NUMBER: . ROOM:...

FAMILY NAME:......
This question paper must be returned.
OTHER NAMES:.......
Candidates are not permitted to remove any
part of it from the examination room.
STUDENT NUMBER:.......

FORMAL EXAMINATION PERIOD: SESSION 1, JUNE 2016

Unit Code: ACST402


Unit Name: Actuarial Control Cycle 1
Duration of Exam
Three (3) hours plus ten (10) minutes reading time
(including reading time if applicable):

Total No. of Questions: Seven (7) questions


Total No. of Pages
Eight (8)
(including this cover sheet):

GENERAL INSTRUCTIONS TO CANDIDATES:


Candidates are required to obey all instructions provided by the Final Examination Supervisor and must refrain from communicating in any way

Candidates may not write or mark the exam materials in any way during reading time.
with another student once they have entered the final examination venue.

Candidates may only access authorised materials during this examination. A list of authorised material is available on this cover sheet.
If it is alleged you have breached these rules at any time during the examination, the matter may be reported to a University Discipline Committee
for determination.

EXAMINATION INSTRUCTIONS:

Answer all questions

Total marks available100

Answer each question in a separate book

You have been supplied with seven (7) exam booklets. Label them Q1, Q2, Q3, Q4, Q5, Q6 and Q7
respectively, then answer each question in the corresponding separate booklet.

Write your name and student ID at the top of this question paper, as well as on each of your answer
booklets. Hand in this question paper, your one page of handwritten notes and your seven answer booklets
at the end of the exam.

This examination is being held in a number of locations internationally and it is inevitable that there
will be differences in timing of up to several hours. You are absolutely prohibited from doing
anything that may lead to other students gaining information about this exam paper before sitting
for the examination. Any breaches (either disclosing information or receiving information) will be
viewed as professional misconduct as well as an infringement of University rules and will be dealt
with accordingly.

AIDS AND MATERIALS PERMITTED/NOT PERMITTED:

Dictionaries: No dictionaries permitted

Calculators: Non-programmable calculators that do not have text retrieval capacity permitted

Other: Closed book with specified materials permitted: 1 x A4 sheet of handwritten notes (double-
sided) collect with exam paper
Question 1 [13 marks]
Barramundi Financial (BF) is a diversified financial services group oper-
ating mainly in one country. BF has business units providing insurance,
banking, superannuation, funds management and financial planning services
to wholesale and retail customers.
BF has just been acquired by Kujira Financial (KF) which is a much
larger international group providing financial services in many countries. KF
is keen to expand the business of BF and has set BF management the fol-
lowing objectives.

Increase market share from 5% to 10% over the next 5 years.

Achieve an average return on capital of 10% p.a.

These objectives will require some risks to be taken and KF can tolerate BF
making a loss once in every 5 years.
These objectives are much more aggressive than the objectives set by the
BF Board and management prior to the acquisition.
You are the Chief Risk Officer at BF and you are about to meet the Global
Chief Executive of KF for the first time. Prepare notes for your meeting on
the following topics.

a. [4 marks] The role of the Chief Risk Officer of BF and your strategy
for integrating ERM into the operations and culture of the business
units.

b. [3 marks] Three (3) major risks you see in achieving the new objectives
and how these might be managed.

c. [6 marks] The approach you propose for translating the new objectives
for BF as a whole into objectives for each business unit.

Cease writing in your first booklet

Please turn over


Open your second examination booklet

Question 2 [13 marks]


In a particular country the insurance regulations require that outstanding
claims and premium liabilities included in the financial statements are cal-
culated at a 75% probability of sufficiency. The regulations also prescribe
additional capital requirements expressed as a percentage of the outstanding
claims liabilities and the premium liabilities respectively.

a. [2 marks] Explain what is meant by 75% probability of sufficiency and


the method you would use to calculate its value.

b. [3 marks] The regulator has set the probability of sufficiency at 75%


for all companies. An alternative would be to allow each company to
choose a percentage appropriate for its own business and disclose the
percentage chosen in its financial statements. From the perspective
of the regulator what are the advantages and disadvantages of each
approach?

c. [2 marks] Explain the meaning of premium liabilities, distinguishing


these from outstanding claims liabilities.

d. [2 marks] From the regulators perspective what is the purpose of the


additional capital requirement relating to outstanding claims liabilities
and premium liabilities?

e. [4 marks] If you are pricing a long tail general insurance product,


how would you allow for these regulatory capital requirements in your
pricing?

Cease writing in your second booklet

Please turn over


Open your third examination booklet

Question 3 [14 marks]


Bridges Engineering (BE) is a professional engineering firm which spe-
cialises in providing engineering advice to construction groups building large
infrastructure projects such as roads, railways and airports. BE has a profes-
sional indemnity (PI) insurance policy which covers the costs of damages
resulting from BE giving negligent advice, and also covers related legal ex-
penses.
The annual renewal date of this policy is approaching and the current
insurer has proposed to renew the policy on similar terms to last year. BE
has also been approached by an overseas insurance company which is very
keen to write this business and has offered a much lower premium rate for
the same cover. As a result BE has decided to review its insurance needs
and obtain competitive quotes for this cover.
You are an insurance risk consultant and you have been asked to prepare
a report for the management team at BE covering the following matters.

a. [5 marks] Identify the needs of BE that are met by PI insurance, and


the risks to BE in purchasing PI insurance.

b. [3 marks] Help the management team at BE to understand the insurers


perspective by identifying the risks to the insurer of providing this
cover.

c. [3 marks] Apart from negotiating better insurance terms, what other


steps might BE consider to better manage this risk and thereby reduce
its PI costs?

d. [3 marks] What are the main criteria you would suggest for selecting
the PI insurance proposal best suited to meet the needs of BE? Include
your thoughts about using an overseas insurance company rather than
a local one.

Cease writing in your third booklet

Please turn over


Open your fourth examination booklet

Question 4 [16 marks]


The Sunset Superannuation Fund (Fund) is a defined benefit fund that has
been closed to new members for many years. The youngest member of the
Fund is now aged 50 and the normal retiring age is 65 so it is expected that
all benefits will be paid out over the next 15 years. All members will receive
benefits equal to a multiple of their salaries when they leave the Fund.
The Fund has accumulated substantial assets to fund the expected benefit
payments from the Fund but the employer will need to continue to contribute
to fund all of the benefits. Fund assets are invested in a balanced fund
consisting of local and international shares, local and international bonds
and cash.
The employer pays all the costs of the fund and has asked you to calculate
the ongoing employer contribution rate expressed as a level percentage of
members salaries while they remain in the Fund. So employer contributions
(expressed in dollar terms) will reduce as the membership reduces over time.
The employer is comfortable with the risk of salary increases in the current
low inflation environment but more concerned that investment fluctuations
create uncertainty about the contributions required to fund the benefits. In
particular the employer is concerned that low or negative investment returns
may substantially increase the cost of funding the benefits.

a. [5 marks] Outline the model you will use to determine the required
employer contribution rate.

b. [4 marks] What are the two (2) most important assumptions you will
need to make for the model you have outlined in a.? How will you set
those assumptions and how are the two assumptions interrelated?

c. [3 marks] Explain how you might use a stochastic model to help the
employer understand the risks of investment fluctuations.

d. [4 marks] Suggest two (2) methods of managing the risks of investment


fluctuations and any disadvantages you see with each method.

Cease writing in your fourth booklet

Please turn over


Open your fifth examination booklet

Question 5 [15 marks]


A recent inquiry into the financial system has recommended that big banks
should be required to increase the level and quality of their capital. This will
make it easier for smaller banks to compete in the market.
Mega Bank, the countrys largest bank, needs to increase its capital over
the next 12 months to meet its growth objectives (even under the current
rules), and has resolved to further strengthen its capital base to meet the
prospective new requirements in the same time period.

a. [3 marks] Explain the meaning of quality of capital. Suggest some


criteria that might be used to assess the quality of capital.

b. [3 marks] Mega Bank is expecting to need substantially more Common


Equity Tier 1 capital. What are the main components of this form of
capital? What disadvantages do you see in raising substantially more
capital in the next 12 months?

c. [6 marks] Apart from raising more capital, what other strategies does
Mega Bank have to strengthen its regulatory capital position over the
next 12 months? What disadvantages do you see with each strategy?

d. [3 marks] How can Mega Bank make sure that it will continue to meet
the new capital requirements?

Cease writing in your fifth booklet

Please turn over


Open your sixth examination booklet

Question 6 [14 marks]


You are working as the pricing actuary for a life insurance company. The
company sells a competitive term life insurance product through a large
number of independent financial planners. The company has a 10% market
share of both new business and in-force business.
The product is step-rated so premiums increase each year with the age of
the life insured. Premium rates are guaranteed renewable so the company is
obliged to continue the policies as long as the premiums are paid.
The company follows industry practice of paying commissions to the plan-
ners of 115% of premiums in the first policy year and 10% of premiums in
subsequent policy years.
The government has announced that it will legislate maximum commis-
sions of 80% in the first policy year and 20% in subsequent policy years. The
Governments purposes in making this change are as follows.

To improve the quality of advice provided by planners generally.

To reduce incentives for planners to replace existing policies to earn a


new up-front commission.

As a result, to reduce life insurance premium rates overall.

So you will need to review the pricing of your companys product. This is
an important issue for your company and the Chief Executive has asked for
a memo explaining your approach to each of the following aspects.

a. [2 marks] Your approach to using cost-based pricing and competition


pricing in your pricing review.

b. [4 marks] Your approach to assessing the risks involved in your revised


pricing with an example to illustrate each test you propose.

c. [8 marks] Your assessment of the four (4) main aspects of pricing you
will need to consider carefully resulting from the commission change
(other than the arithmetic result of changing the commission rates)
and the likely impact of each aspect.

Cease writing in your sixth booklet

Please turn over


Open your seventh examination booklet

Question 7 [15 marks]

a. [3 marks] In your role as a consulting actuary you have been recently


asked a number of times by your clients to explain to them what is
meant by big data. To help you better answer such questions, you
decide to formulate a written response to this question, and to include
two examples. What will you write?

b. [4 marks] Give two examples of how big data and data analytics can
be of use to the insurance industry. For each of your examples, explain
clearly how this paradigm offers an improvement over current practice.

c. [8 marks] You are a consulting actuary who has recently read the pa-
per SM bondsA New Product for Managing Longevity Risk. Human
mortality and longevity are key issues in that paper. The Australian
government, in its process of evaluating the costs and benefits of im-
plementing SM bonds, has asked you to prepare a detailed technical
report on how big data and data analytics could be used to predict
the number of deaths, by postcode, in Australia in 2016.
Write down the key points you will make in your report.

Cease writing in your seventh booklet

End of paper