October 2014 MLC Multiple Choice Solutions

1. Key: C

1000 5 q 60:70 = 1000  5 p 60 5 p 70 q 65 q 75 + 5 q 60 5 p 60 q 65 

p 70 q 75 + 5 q 70 5

1000[( 0.92 )( 0.88 )( 0.02132 )( 0.05169 ) + (1 − 0.92 )( 0.88 )( 0.05169 )

+ (1 − 0.88 )( 0.92 )( 0.02132 )]
= [ 0.0008922 + 0.00363898 + 0.00235373]1000 = 6.8849

2. Key: A

By U.D.D.:
 1 
0.2 = q x(2) = q′x(2)  1 − q′x(1) 
 2 
 1 
= q′x(2)  1 − ( 0.1)  = 0.95 q′x(2)
 2 
 q′x(2) = 0.2105
p x(τ ) = p′x(1) p′x(2) = (0.90)(1 − 0.2105) = 0.71055
q x(1) = q x(τ ) − q x(2) = 1 − p x(τ ) − q (2)
= 1 − 0.71055 − 0.2 = 0.08945

3. Key: C

Path Probability
S→S→S→S 0.216
S→S→C→S 0.012
S→C→S→S 0.012
S→C→C→S 0.010
Total across all paths: 0.250

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4. Key: D

A35 = A35:15
1 + A35:151 A50
0.32 = 0.25 + 0.14 A50
0.07
A50 = = 0.50
0.14

5. Key: D

P = 30, 000 20
a40 + PA40:20
1

 P = 30, 000 20 (
a40 / 1 − A40:20
1
)
= 30, 000(3.0554) / (1 − 0.0601267) = 97,526

6. Key: E

1, 000, 000 = APV(benefits) = 100, 000 A65 + Ra65:65 + 0.60 Ra65 65 + 0.70 Ra65 65

( where a65 65
= a65 − a65:65 )
= 100, 000 A65 + R (1.3a65 − 0.3a65:65 )

A65 = 0.43980
1, 000, 000 − 100, 000 A65
R= a65 = 9.8969
1.3a65 − 0.3a65:65
a65:65 = 7.8552

956, 020
R= = 90,968
10.50941

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7. Key: C

Let π be the annual premium, so that π a50 = A50 + 0.01a50 + 0.19

A50 + 0.19 0.24905 + 0.19
π = + 0.01 = + 0.01 = 0.04309389
a50 13.2668
Loss at issue: L 0 = v k +1 − (π − 0.01) ak +1 (1 − v k +1 ) / d + 0.19
2
 (π − 0.01)  2
 Var  L 0  = 1 +  ( A50 − A50 )
2

 d 
= (2.511143)(0.09476 − 0.24905 2 )
= (2.511143)(0.032734)
= 0.082

8. Key: B

EPV(premiums) = EPV(benefits)
P (1 + vp x + v 2 2 p x ) = P ( vq x + 2v 2 p x q x +1 ) + 10000 ( v 3 2 p x q x + 2 )
 0.9 0.9 × 0.88   0.1 2 × 0.9 × 0.12   0.9 × 0.88 × 0.15 
P 1 + + 2  = P + 2  + 10000  
 1.04 1.04   1.04 1.04   1.04 3 
2.5976 P = 0.29588P + 1056.13
P = 459

9. Key: C

1000 A75:15
1
P × a75:15 = 1000 A75:15
1
(+ 15 × P × A75:151 → P = ) a75:15 − 15 × A75:151
A75:15
1 = A75:15 − A75:151 = 0.7 − 0.11 = 0.59
1 − A75:15
a75:15 = = (1 − 0.7) / 0.04 = 7.5
d
590
So P = = 100.85
7.5 − 15(0.11)

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10. Key: C

Let the monthly net premium = π

α (12) = 1.00028
100, 000 A45
12π = (12)
β (12) = 0.46812
a45:20
i
= 1.02971
δ
i
100, 000 A45 = 100, 000 A45 = (1.02971)20,120 = 20, 717.7652
δ
(12)
a45:20 = α (12)a45:20 − β (12) (1 − 20 E 45 )

( a 45 − 20 E 45 a65 )
= 1.00028 [14.1121 − 0.25634(9.8969)] − 0.46812(1 − 0.25634)
= 11.230

20717.7652
12π =
11.230
12π = 1844.858878
π = 153.7382

11. Key: D

Gax:30 = APV [ gross premium ] = APV [ Benefits + expenses ]

(
= FA x + ( 30 + 30ax ) + G 0.6 + 0.10ax:30 + 0.10ax:15 )
FA x + 30 + 30ax
G=
ax:30 − 0.6 − 0.1a x:30 − 0.1ax:15
FA x + 30 + 30(15.3926)
=
14.0145 − 0.6 − 0.1(14.0145) − 0.1(10.1329)
FA x + 491.78
=
10.9998
FA x 491.78 FA x
= + = + 44.71
10.9998 10.9998 10.9998
 h = 44.71

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12. Key: D

Intuitively:

(A) A lower interest rate increases premium, but a higher recovery rate decreases
premium, because there are lower projected benefits and more policyholders
paying premiums.

(B) A lower death rate of healthy lives → more pay premium → lower premium

(C) A higher death rate of sick lives → fewer benefits → lower premium

(D) A lower recovery rate → higher sickness benefits → higher premium

A lower death rate of sick lives → higher sickness benefits → higher premium

(E) A higher rate of interest → lower premium

A lower mortality rate for healthy lives may result in lower premium because
more healthy lives are paying premium.

13. Key: A

( V + 0.96G − 50 ) (1.05) = q
5 50 (100, 200) + p 50 6V
( 5500 + 0.96G − 50 ) (1.05) = (0.009)(100, 200) + (1 − 0.009)(7100)
(1.05)(0.96)G + 5722.5 = 7937.9
(1.05)(0.96)G = 2215.4
G = 2197.8

14. Key: E

V (1 + i )
0.4
15.6 = 0.4 px +15.6 V + 0.4 qx +15.6 100
16

V (1.05)0.4 = 0.957447(49.78) + 0.042553(100)

15.6

V = 50.91
15.6

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15. Key: D

APV future benefits

= 1000 0.04v + 0.05 × 0.96v 2 + 0.96 × 0.95 × (0.06 + 0.94 × 0.683)v 3  = 630.25
APV future premiums = 130(1 + 0.96v) = 248.56
E[ 3 L] = 630.25 − 248.56 = 381.69

16. Key: D

2
 p 2
 1 +  ( A x +τ − A x +τ )
2
V  τ L 
= 
d
V [ τ +1 L ]  p 2
2

 ( A x +τ +1 − A x +τ +1 )
2
 1 +
 d
A x +t = vqx +τ + vp x +τ A x +τ +1
1 1
= (0.90703) 2 (0.02067) + (0.90703) 2 (1 − 0.02067)(0.52536) = 0.50969
2
A x +τ = v 2 q x +τ + v 2 p x +τ 2 A x +τ +1
= (0.90703)(0.02067) + (0.90703)(1 − 0.02067)(0.30783) = 0.29219
Var ( k L ) (0.29219) − (0.50969) 2 0.03241
 = = = 1.018
Var ( k +1 L ) (0.30783) − (0.52536) 2 0.03183

17. Key: B

Pr2 = 1V + P − E + I − EDB − E2V

= (400 + 1500 − 100)1.072 − 1200 − 0.988 × 700
= 38.00

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18. Key: A

End of
Year
Expense COI Amount Credited Account
x t Premium charges rate at Risk COI Interest Value
40 0 2500 75.00 0.0028 100,000 266.67 97.12 2255.45
41 1 3000 80.00 0.0030 95,000 271.43 255.00 5159.03

The COI calculation reflects discounting the amount at risk at 5%, (e.g., in year 1,
(100, 000 /1.05) × 0.0028 = 266.67 )
Credited interest is 4.5% in year 1 and 5.2% in year 2.

19. Key: E

Annual Retirement Benefit

 9

(0.0175) 525, 000 +  (50, 000)(1.03) K  = 19, 218.39
 K =0 

APV at age 65
(12)
(19, 218.39) 10 a55 = 19, 218.39(1.04) −10 ( 10 p55 ) a65
(12)

= 19, 218.39(0.6756)(0.925)(12.60) = 151,328

20. Key: B

q [50]+ 0.4 = 1 − 2.5 p [50]+ 0.4 = 1 − 2.9 p [50] / ( p [50] )

0.4
2.5

{
= 1 − p [50] p [50]+1 ( p 52 )
0.9
} / (1 − q [50] )
0.4

= 1 − {(1 − q )(1 − q )(1 − q ) } / (1 − q )

0.9 0.4
[50] [50]+1 52 [50]

{
= 1 − (1 − 0.0050 )(1 − 0.0063)(1 − 0.0080 )
0.9
} / (1 − 0.0050) 0.4

= 0.01642

1000 2.5 q [50] + 0.4 = 16.42

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