Examination: Subject CT5 Contingencies Core Technical

Faculty of Actuaries Institute of Actuaries
EXAMINATION
6 April 2005 (pm)
Subject CT5 Contingencies

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
3. Mark allocations are shown in brackets.
4. Attempt all 14 questions, beginning your answer to each question on a separate sheet.
5. Candidates should show calculations where this is appropriate.
Graph paper is not required for this paper.
AT THE END OF THE EXAMINATION
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.
Faculty of Actuaries
CT5 A2005 Institute of Actuaries
1 Explain the difference between a profit vector and a profit signature. [2]
2 A 20-year temporary annuity-due of 1 per annum is issued to a life aged 50 exact.
(a) Express the expected present value of the annuity in terms of an assurance
function.
(b) Hence calculate the value using the mortality table AM92 Ultimate with 4%
interest.
[3]
3 A life insurance company sells an annual premium whole life assurance policy where
the sum assured is payable at the end of the year of death. Expenses are incurred at
the start of each policy year, and claim expenses are nil.
(a) Write down a recursive relationship between the gross premium provisions at
successive durations, with provisions calculated on the premium basis. Define
all the symbols that you use.
(b) Explain in words the meaning of the relationship.

[4]
4 A life insurance company issues an annuity to a life aged 60 exact. The purchase
price is £200,000. The annuity is payable monthly in advance and is guaranteed to be
paid for a period of 10 years and for the whole of life thereafter.
Calculate the annual annuity payment.
Basis:
Mortality AM92 Ultimate
Interest 6% per annum

[4]
CT5 A2005 2
5 A three-state transition model is shown in the following diagram:
Alive Sick
Dead
Assume that the transition probabilities are constant at all ages with = 2%, = 4%,
= 1% and = 5%.
Calculate the present value of a sickness benefit of £2,000 p.a. paid continuously to a
life now aged 40 exact and sick, during this period of sickness, discounted at 4% p.a.
and payable to a maximum age of 60 exact. [4]
6 Calculate the probability of survival to age 60 exact using ELT15 (Males) for a life
aged 45½ exact using two approximate methods. State any assumptions you make.
[5]
7 A joint life annuity of 1 per annum is payable continuously to lives currently aged x
and y while both lives are alive. The present value of the annuity payments is
expressed as a random variable, in terms of the joint future lifetime of x and y.
Derive and simplify as far as possible expressions for the expected present value and
the variance of the present value of the annuity. [5]
8 A pension scheme provides a pension on ill-health retirement of 1/80th of Final

Pensionable Salary for each year of pensionable service subject to a minimum pension
of 20/80ths of Final Pensionable Salary. Final Pensionable Salary is defined as the
average salary earned in the three years before retirement. Normal retirement age is
65 exact.
Derive a formula for the present value of the ill-health retirement benefit for a
member currently aged 35 exact with exactly 10 years past service and salary for the
year before the calculation date of £20,000. [5]
9 Explain how an insurance company uses risk classification to control the profitability
of its life insurance business. [5]
CT5 A2005 3 PLEASE TURN OVER

10 You are given the following statistics in respect of the population of Urbania:
Males Females
Age band Exposed to Observed Exposed to Observed

risk Mortality rate risk Mortality rate
20 29 125,000 0.00356 100,000 0.00125

30 39 200,000 0.00689 250,000 0.00265
40 49 100,000 0.00989 200,000 0.00465
50 59 90,000 0.01233 150,000 0.00685
Calculate the directly and indirectly standardised mortality rates for the female lives,
using the combined population as the standard population. [6]
11 A life insurance company issues a 25-year with profits endowment assurance policy
to a male life aged 40 exact. The sum assured of £100,000 plus declared reversionary
bonuses are payable on survival to the end of the term or immediately on death, if
earlier.
Calculate the monthly premium payable in advance throughout the term of the policy
if the company assumes that future reversionary bonuses will be declared at a rate of
1.92308% of the sum assured, compounded and vesting at the end of each policy year.
Basis:
Mortality AM92 Select
Initial commission 87.5% of the total annual premium
Initial expenses £175 paid at policy commencement date
Renewal commission 2.5% of each monthly premium from the start of the
second policy year
Renewal expenses £65 at the start of the second and subsequent policy years
Claim expense 2.5% of the claim amount

[10]
CT5 A2005 4
12 (i) By considering a term assurance policy as a series of one year deferred term
assurance policies, show that:
i
A1x:n = A1x:n [5]
(ii) Calculate the expected present value and variance of the present value of a
term assurance of 1 payable immediately on death for a life aged 40 exact, if
death occurs within 30 years.
Basis:
Expenses: None
[6]
[Total 11]

13 A life insurance company issues a 4-year unit-linked endowment assurance contract
to a male life aged 40 exact under which level premiums of £1,000 per annum are
payable in advance. In the first year, 50% of the premium is allocated to units and
102.5% in the second and subsequent years. The units are subject to a bid-offer
spread of 5% and an annual management charge of 0.5% of the bid value of the units
is deducted at the end of each year.
If the policyholder dies during the term of the policy, the death benefit of £4,000 or
the bid value of the units after the deduction of the management charge, whichever is
higher, is payable at the end of the year of death. On surrender or on survival to the
end of the term, the bid value of the units is payable at the end of the year of exit.
The company uses the following assumptions in its profit test of this contract:
Rate of growth on assets in the unit fund 6% per annum
Rate of interest on non-unit fund cashflows 4% per annum
Independent rates of mortality AM92 Select
Independent rate of withdrawal 10% per annum in the first policy year;
5% per annum in the second and
subsequent policy years.
Initial expenses £150 plus 100% of the amount of initial

commission
Renewal expenses £50 per annum on the second and

subsequent premium dates
Initial commission 10% of first premium
Renewal commission 2.5% of the second and subsequent

years premiums
Risk discount rate 8% per annum
(i) Calculate the profit margin on the assumption that the office does not zeroise
future negative cashflows and that decrements are uniformly distributed over
the year. [13]
(ii) Suppose the office does zeroise future negative cashflows.
(a) Calculate the expected provisions that must be set up at the end of each
year, per policy in force at the start of each year.
(b) Calculate the profit margin allowing for the cost of setting up these
provisions. [4]
[Total 17]
CT5 A2005 6
14 (i) Write down in the form of symbols, and also explain in words, the expressions
death strain at risk , expected death strain and actual death strain . [6]
(ii) A life insurance company issues the following policies:
15-year term assurances with a sum assured of £150,000 where the death
benefit is payable at the end of the year of death
15-year pure endowment assurances with a sum assured of £75,000
5-year single premium temporary immediate annuities with an annual

benefit payable in arrear of £25,000
On 1 January 2002, the company sold 5,000 term assurance policies and 2,000
pure endowment policies to male lives aged 45 exact and 1,000 temporary
immediate annuity policies to male lives aged 55 exact. For the term
assurance and pure endowment policies, premiums are payable annually in
advance. During the first two years, there were fifteen actual deaths from the
term assurance policies written and five actual deaths from each of the other
two types of policy written.
(a) Calculate the death strain at risk for each type of policy during 2004.
(b) During 2004, there were eight actual deaths from the term assurance
policies written and one actual death from each of the other two types
of policy written. Calculate the total mortality profit or loss to the
office in the year 2004.
Basis:
Mortality AM92 Ultimate for term assurances and pure endowments

PMA92C20 for annuities
[13]
[Total 19]
END OF PAPER
CT5 A2005 7
EXAMINATION
April 2005

Core Technical
EXAMINERS REPORT
Introduction
The attached subject report has been written by the Principal Examiner with
the aim of helping candidates. The questions and comments are based around
Core Reading as the interpretation of the syllabus to which the examiners are
working. They have however given credit for any alternative approach or
interpretation which they consider to be reasonable.
M Flaherty
Chairman of the Board of Examiners
15 June 2005
Institute of Actuaries
Subject CT5 (Contingencies Core Technical) April 2005 Examiners Report
1 The profit vector is the vector of expected end-year profits for policies which are still
in force at the start of each year.
The profit signature is the vector of expected end-year profits allowing for
survivorship from the start of the contract.
1 A50:20
2 (a) ä50:20
d
(b) A50:20 A50 v 20 20 p50 (1 A70 )
8054.0544
0.32907 0.45639 (1 0.60097)
9712.0728
0.480093
1 0.480093
ä50:20 13.5176
d
3 (a) ( tV ' OP et )(1 i ) qx t ( S ) p x t ( t 1V ' )
where
'
tV gross premium provision at time t
OP = office premium
et expenses incurred at time t
i = interest rate in premium/valuation basis
S = sum assured
p x t is the probability that a life aged x + t survives one year on the

premium/valuation mortality basis
qx t is the probability that a life aged x + t dies within one year on the
premium/valuation mortality basis
Page 2
(b) Income (opening provision plus interest on excess of premium over expense,
and provision) equals outgo (death claims and closing provision for survivors)
if assumptions are borne out.
4 The value of a pension of £1 p.a. is
ä (12) (12)
10 | ä60 where first term is an annuity certain
10
1 v10 1 0.55839
ä (12) (12)
@ 6% 7.59720
10 d 0.058128
(12) (12)
10 | ä60 ä60 ä (12) (12)
v10 10 p60 ä70
60:10
8054.0544
10 p60 0.867219
9287.2164
(12)
ä70 ä70 11/ 24 9.140 11/ 24 8.682
So value of a pension of £1 p.a. is
7.59720 + v10 0.867219 8.682 = 11.801
So annuity purchased by £200,000 is 200000/11.801 = £16,948
Page 3
20
t ii
5 The present value is 2000.e t p40 dt where ln(1.04)
0
t
ii
t p40 exp ( )ds
0
exp( .05t )
So value is
20
t 5%t
2000 e e dt where ln(1.04)
0
20
e t (.05 ln(1.04))
2000
(.05 ln(1.04))
0
18, 653
6 Require to calculate 14½ p45½ ½ p45½ .14 p46
l60 86714
14 p46 0.91023
l46 95266
(a) Assume deaths uniformly distributed so t p x . x t constant
(1 ½)q45 ½0.00266
Then ½ q45½ .001332
(1 ½ q45 ) (1 ½.00266)
So 14½ p45½ (1 .001332) 0.91023 0.909018
(b) Assume that force of mortality is constant across year of age 45 to 46
½
½ p45½ e 45
45 ln(1 q45 ) ln(1 0.00266) 0.002664

½0.002664
½ p45½ e 0.998669
So 14½ p45½ 0.998669 0.91023 0.909018
Page 4
7 Define a random variable Txy, the lifetime of the joint life status
The expected value at a rate of interest i is
axy E (aTxy )
Txy
1 v
E
Txy
1 E (v )
1 Axy
The variance is
Txy
1 v
var
1 Txy
2
var(v )
1
2
( 2 Axy ( Axy ) 2 )
where 2 Axy is at (1 i ) 2 1
8 Past Service
29
10 i35 t v35 t ½ z35 t ½
20000 a35 t ½
80 t 0 l35 v35 s34
or
z ia
10 M
20000 s 35
80 D35
Page 5
Future Service
z ia z ia
10 M 1 R
20000 s 35 20000 s 45
80 D35 80 D35
9
Insurance works on the basis of pooling independent homogeneous risks
The central limit theorem then implies that profit can be defined as a random
variable having a normal distribution.
Life insurance risks are usually independent
Risk classification ensures that the risks are homogeneous
Lives are divided by risk factors
More factors implies better homogeneity
But the collection of more factors is restricted by
The cost of obtaining data
Problems with accuracy of information
The significance of the factors
The desires of the marketing department
10
Males Females Male Female Total Total Female Total
Age band Exposed Observed Exposed Observed Actual Actual Actual Exposed Expected Expected
to risk Mortality to risk Mortality deaths deaths deaths to risk deaths using deaths using
rate rate total female
mortality rates
rates
20 29 125000 0.00356 100000 0.00125 445 125 570 225000 253.333333 281.25
30 39 200000 0.00689 250000 0.00265 1378 662.5 2040.5 450000 1133.61111 1192.5
40 49 100000 0.00989 200000 0.00465 989 930 1919 300000 1279.33333 1395
50 59 90000 0.01233 150000 0.00685 1109.7 1027.5 2137.2 240000 1335.75 1644
3921.7 2745 6666.7 1215000 4002.02778 4512.75
Direct 0.003714
Indirect 0.003764
Page 6
11 Let P be the monthly premium. Then:
EPV of premiums:
12 Pa (12) 155.124 P
[40]:25
11
a (12) a[40]:25 (1 25 p[40]v
25
)
[40]:25 24
11 25 8821.2612
13.290 1 (1.06) 12.927
24 9854.3036
EPV of benefits:
100, 000
(1.06)1/ 2 {q[40] (1 b)v 1 q[40] (1 b) 2 v 2
(1 b)
.... 24 q[40] (1 b)25 v 25 } 100, 000 25 p[40] (1 b) 25 v 25
where b = 0.0192308
100, 000 D65

(1.06)1/ 2 A[40]:25
1
@ i ' 100, 000 @ i'
(1 b) D[40]
100, 000
(1.06)1/ 2 (.38896 .33579) 100, 000 .33579 38949.90
1.0192308
1.06
where i ' 1 0.04
1 b
EPV of expenses:
.875 12 P 175 0.025 12 P(a (12) a (12) ) 65[a[40]:25 1] 14.086 P 973.85

[40]:25 [40]:1
11 11 9846.5384
a (12) a[40]:1 (1 p[40]v ) 1 1 (1.06) 1
0.974
[40]:1 24 24 9854.3036
EPV of claim expense:
.025 38949.9 =973.748
Page 7
Equation of value gives 155.124P = 38949.9 + 14.086P + 973.85 + 973.75
and P = £289.98
n 1
12 (i) A1x:n 1
t |Ax:1
t 0
n 1
vt t p x A1x t:1
t 0
1
A1x t:1
vs s p x t x t s ds
0
Assuming a uniform distribution of deaths, then s p x t x t s qx t
1 1
A1x t:1
v s q x t ds qx t v s ds
0 0
iv
qx t
n 1
iv
A1x:n vt . t p x .qx t
t 0
n 1
i
vt 1. t px .q x t
t 0
i
A1x:n
Page 8
2
i i
(ii) var( A1x:n ) var( A1x:n ) var( A1x:n )
2
i
( 2 A1x:n ( A1x:n ) 2 )
A140 :30 A 40 v30 . 30 p 40 . A70
8054.0544
0.23041 v30 0.60097 0.078970
9854.3036
2 1 2
A 40 :30 A 40 v30 . 30 p 40 . 2 A70
8054.0544
0.06775 v30 0.38975 0.037469
9854.3036
where v = 1/1.0816
2
0.04
var( A1x:n ) (0.037469 (0.078970)2 ) 0.032486
ln(1.04)
i 1 0.04
Expected value = A[40]:30 0.078970 0.080539
ln(1.04)
13
Annual premium 1000.00 Allocation % (1st yr)

50.0%
Risk discount rate 8.0% Allocation % (2nd yr +)
102.50%
Interest on
investments 6.0% Man charge
0.50%
Interest on sterling
provisions 4.0% B/O spread
5.0%
Minimum death
benefit 4000.00
£ % prm Total
Initial expense 150 20.0% 350
Renewal expense 50 2.5% 75
Page 9
(i) Multiple decrement table
x q xd q xs
40 0.000788 0.10
41 0.000962 0.05
42 0.001104 0.05
43 0.001208 0.05
x (aq ) dx (aq ) sx (ap) t 1 ( ap )

40 0.000749 0.09996 0.899291 1.000000
41 0.000938 0.04998 0.949086 0.899291
42 0.001076 0.04997 0.948951 0.853504
43 0.001178 0.04997 0.948852 0.809934
Unit fund (per policy at start of year)
yr 1 yr 2 yr 3 yr 4
value of units at
start of year 0.000 500.983 1555.400 2667.495
alloc 500.000 1025.000 1025.000 1025.000
B/O 25 51.25 51.25 51.25
interest 28.500 88.484 151.749 218.475
management
charge 2.518 7.816 13.404 19.299
value of units at
year end 500.983 1555.400 2667.495 3840.421
Page 10
Cash flows (per policy at start of year)
yr 1 yr 2 yr 3 yr 4
unallocated
premium 500.000 25.000 25.000 25.000
B/O spread 25.000 51.250 51.250 51.250
expenses 350.000 75.000 75.000 75.000
interest 7.000 1.950 1.950 1.950
man charge 2.518 7.816 13.404 19.299
extra death
benefit 2.619 2.293 1.434 0.188
end of year
cashflow 181.898 45.177 38.730 31.589
probability in
force 1 0.899291 0.853504 0.809934
discount factor 0.925925926 0.85733882 0.793832241 0.735029853
expected p.v. of
profit 88.54607934
premium
signature 1000 832.67667 731.74245 642.95174
expected p.v. of
premiums 3207.370861
profit
margin 2.76%
(ii)
(a)
To calculate the expected provisions at the end of each year we have (utilising the end of year
cashflow figures and decrement tables in (i) above):
31.589
3V 30.374
1.04
2V (1.04) ( ap ) 42 3V 38.73 2V 64.9552
1V (1.04) (ap ) 41 2V 45.177 1V 102.7164
Page 11
These need to be adjusted as the question asks for the values in respect of the beginning of
the year. Thus we have:
Year 3 30.374(ap)42 = 28.823

Year 2 64.9552(ap)41 = 61.648
Year 1 102.7164(ap)40 = 92.372
(b)
Based on the expected provisions calculated in (a) above, the cash flow for years 2, 3 and 4
will be zeroised whilst year 1 will become:
181.898 92.372 = 89.526
Hence the table blow can now be completed for the revised profit margin.
revised end of
year cash flow 89.526 0 0 0
probability in
force 1 0.899291 0.853504 0.809934
discount factor 0.925925926 0.85733882 0.793832241 0.735029853
expected p.v. of
profit 82.89461768
profit margin 2.58%
14 (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 )
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
Page 12
(ii) Annual premium for pure endowment with £75,000 sum assured given by:
75, 000 D60 75, 000 882.85

P PE 3465.71
a45:15 D45 11.386 1677.97
Annual premium for term assurance with £150,000 sum assured given by:
150, 000 A45:15

PTA P EA 2 P PE 2 P PE
a45:15
150, 000 0.56206

2 3465.71 473.20
11.386
Provisions at the end of the third year:
for pure endowment with £75,000 sum assured given by:
PE D60
3V 75, 000 P PE a48:12
D48
882.85
75, 000 3465.71 9.613 11289.63
1484.43
for term assurance with £150,000 sum assured given by:
TA EA PE
3V 3V 3V
150, 000 A48:12 (2 3465.71 473.20)a48:12 2 11289.63
150, 000 0.63025 7, 404.62 9.613 22,579.26
777.63
for temporary immediate annuity paying an annual benefit of £25,000 given

by:
IA
3V 25, 000a58:2
25, 000(a58:3 1)
25, 000(a58 v3 3 p58 a61 1)
3 9802.048
25, 000 16.356 (1.04) 15.254 1 47, 037.91
9864.803
Page 13
Sums at risk:
Pure endowment: DSAR = 0 11,289.63 = 11,289.63
Term assurance: DSAR = 150,000 777.63 = 149,222.37
Immediate annuity: DSAR = (47,037.91 + 25,000) = 72,037.91
Mortality profit = EDS ADS
For term assurance
EDS 4985 q47 149, 222.37 4985 .001802 149, 222.37 1,340, 460.07
ADS 8 149, 222.37 1,193, 778.96
mortality profit = 146,681.11
For pure endowment
EDS 1995 q47 11, 289.63 1995 .001802 11, 289.63 40,586.11
ADS 1 11, 289.63 11, 289.63
For immediate annuity
EDS 995 q57 72, 037.91 995 .001558 72, 037.91 111, 673.89
ADS 1 72, 037.91 72, 037.91
Hence, total mortality profit = £77,748.65
END OF EXAMINERS REPORT
Page 14
EXAMINATION
7 September 2005 (pm)

Core Technical
booklet.
supervisor.
question paper.
CT5 S2005 Institute of Actuaries
1 Describe what is meant by adverse selection in the context of a life insurance
company s underwriting process and give an example. [2]
2 Describe how occupation affects morbidity and mortality. [3]
3 A graph of f0(t), the probability density function for the random future lifetime, T0, is
plotted on the vertical axis, with t plotted on the horizontal axis, for data taken from
the English Life Table No. 15 (Males).
You are given that f0(t) = t p0 t. You observe that the graph rises to a peak at around
t 80 and then falls.
Explain why the graph falls at around t 80 . [3]
4 Calculate the value of 1.75 p45.5 on the basis of mortality of AM92 Ultimate and
assuming that deaths are uniformly distributed between integral ages. [3]
5 A population is subject to a constant force of mortality of 0.015.
Calculate:
(a) The probability that a life aged 20 exact will die before age 21.25 exact.
(b) The curtate expectation of a life aged 20 exact.
[4]
6 Define ä (12) fully in words and calculate its value using PMA92C20 and
60:50:20
PFA92C20 tables for the two lives respectively at 4% interest. [5]
CT5 S2005 2
7 A life insurance company prices its long-term sickness policies using the following
three-state continuous-time Markov model, in which the forces of transition , ,
and are assumed to be constant:
Healthy Sick
Dead
The company issues a particular long-term sickness policy with a benefit of £10,000
per annum payable continuously while sick, provided that the life has been sick
continuously for at least one year. Benefit payments under this policy cease at age 65
exact.
Write down an expression for the expected present value of the sickness benefit for a
healthy life aged 20 exact. Define the symbols that you use.
[5]
8 A life insurance company issues an annuity contract to a man aged 65 exact and his
wife aged 62 exact. Under the contract, an annuity of £20,000 per annum is
guaranteed payable for a period of 5 years and thereafter during the lifetime of the
man. On the man s death, an annuity of £10,000 per annum is payable to his wife, if
she is then alive. This annuity commences on the monthly payment date next
following, or coincident with, the date of his death or from the 5th policy anniversary,
if later and is payable for the lifetime of his wife. Annuities are payable monthly in
advance.
Calculate the single premium required for the contract.
Basis:
Mortality PMA92C20 for the male and PFA92C20 for the female
Expenses none [9]
CT5 S2005 3 PLEASE TURN OVER

9 A life insurance company issues an annuity policy to two lives each aged 60 exact in
return for a single premium. Under the policy, an annuity of £10,000 per annum is
payable annually in advance while at least one of the lives is alive.
(i) Write down an expression for the net future loss random variable at the outset
for this policy. [2]
(ii) Calculate the single premium, using the equivalence principle.
Basis:
Mortality PMA92C20 for the first life, PFA92C20 for the second life
Expenses ignored [3]
(iii) Calculate the standard deviation of the net future loss random variable at the
outset for this policy, using the basis in part (ii).
You are given that a60:60 = 11.957 at a rate of interest 8.16% per annum. [4]
[Total 9]
CT5 S2005 4
10 A life insurance company issued a with profits whole life policy to a life aged 20
exact, on 1 July 2002. Under the policy, the basic sum assured of £100,000 and
attaching bonuses are payable immediately on death. The company declares simple
reversionary bonuses at the start of each year. Level premiums are payable annually
in advance under the policy.
(i) Give an expression for the gross future loss random variable under the policy
at the outset. Define symbols where necessary. [3]
(ii) Calculate the annual premium, using the equivalence principle.
Basis:
Bonus loading 3% simple per annum
Expenses Initial £200
Renewal 5% of each premium payable in the second and

subsequent years
Assume bonus entitlement earned immediately on payment of premium.

[4]
(iii) On 30 June 2005 the policy is still in force. A total of £10,000 has been
declared as a simple bonus to date on the policy.
The company calculates provisions for the policy using a gross premium
prospective basis, with the following assumptions:

Interest 4%
Bonus loading 4% per annum simple
Renewal expenses 5% of each premium
Calculate the provision for the policy as at 30 June 2005. [4]

[Total 11]

11 A life insurance company issues a three-year unit-linked endowment assurance
contract to a male life aged 62 exact under which level annual premiums of £10,000
are payable in advance throughout the term of the policy or until earlier death. 85% of
each year s premium is invested in units at the offer price.
There is a bid-offer spread in unit values, with the bid price being 95% of the offer
price.
There is an annual management charge of 1.25% of the bid value of units.

Management charges are deducted at the end of each year, before death or maturity
benefits are paid.
On the death of the policyholder during the term of the policy, there is a benefit
payable at the end of the year of death of £20,000, or the bid value of the units
allocated to the policy, if greater. On maturity, 115% of the full bid value of the units
is payable.
The company holds unit provisions equal to the full bid value of the units. It sets up
non-unit provisions to zeroise any negative non-unit fund cashflows, other than those
occurring in the first year.
The life insurance company uses the following assumptions in carrying out profit tests
of this contract:

Renewal £100 at the start of each of the second and third policy years
Unit fund growth rate 8% per annum
Non-unit fund
interest rate 4% per annum
Non-unit fund
provision basis AM92 Ultimate mortality, interest 4% per annum
Risk discount rate 15% per annum
Calculate the profit margin on the contract. [14]
CT5 S2005 6
12 On 1 January 2000, a life insurance company issued joint life whole life assurance
policies to couples. Each couple comprised one male and one female life and both
were aged 50 exact on 1 January 2000. Under each policy, a sum assured of £200,000
is payable immediately on the death of the second of the lives to die.
Premiums under each policy are payable annually in advance while at least one of the
lives is alive.
(i) Calculate the annual premium payable under each policy.
Basis:
Mortality PMA92C20 for the male

PFA92C20 for the female
Expenses Initial £1,000

Renewal 5% of each premium payment
[5]
(ii) On I January 2004, 5,000 of these policies were still in force. Under 100 of
these policies only the female life was alive. Both lives were alive under the
other 4,900 policies.
The company calculates provisions for the policies on a net premium basis,
using PMA92C20 and PFA92C20 mortality for the male and female lives
respectively and 4% per annum interest.
During the calendar year 2004, there was one claim for death benefit, in
respect of a policy where the female life only was alive at the start of the year.
In addition, one male life died during the year under a policy where both lives
were alive at the start of the year. 4,999 of the policies were in force at the
end of the year.
Calculate the mortality profit or loss for the group of 5,000 policies for the
calendar year 2004. [9]
[Total 14]

13 Under the rules of a pension scheme, a member may retire due to age at any age from
exact age 60 to exact age 65.
On age retirement, the scheme provides a pension of 1/60th of Final Pensionable

Salary for each year of scheme service, subject to a maximum of 40/60ths of Final
Pensionable Salary. Only complete years of service are taken into account.
Final Pensionable Salary is defined as the average salary over the three-year period
before the date of retirement.
The pension scheme also provides a lump sum benefit of four times Pensionable
Salary on death before retirement. The benefit is payable immediately on death and
Pensionable Salary is defined as the annual rate of salary at the date of death.
You are given the following data in respect of a member:
Date of birth 1 January 1979

Date of joining the scheme 1 January 2000
Annual rate of salary at 1 January 2005 £50,000
Date of last salary increase 1 April 2004
(i) Derive commutation functions to value the past service and future service
pension liability on age retirement for this member as at 1 January 2005. State
any assumptions that you make and define all the symbols that you use.
[12]
(ii) Derive commutation functions to value the liability in respect of the lump sum
payable on death before retirement for this member as at 1 January 2005.
State any assumptions that you make and define all the symbols that you use.
[6]
[Total 18]
END OF PAPER
CT5 S2005 8
EXAMINATION
September 2005

Core Technical
EXAMINERS REPORT
Subject CT5 (Contingencies Core Technical) September 2005 Examiners Report
In general, this examination was done well by students who were well prepared.
Several questions gave difficulties particularly Question 7 and 12(ii) the latter one
being very challenging. To help students comments are attached to those questions
where particular points are of relevance. Absence of comments can be indicate that
the particular question was generally done well.
1 Adverse selection is the manner in which lives form part of a group, which acts
against a controlled process of selecting the lives with respect to some characteristic
that affects mortality or morbidity.
An example is where a life insurance company does not distinguish between smokers
and non-smokers in proposals for term assurance cover. A greater proportion of
smokers are likely to select this company in preference to a company that charges
different rates to smokers and non-smokers. This would be adverse to the company s
selection process, if the company had assumed that its proportion of smokers was
similar to that in the general population.
Other examples were credited.
2 Occupation can have several direct effects on mortality and morbidity. Occupation
determines a person s environment for 40 or more hours each week. The environment
may be rural or urban, the occupation may involve exposure to harmful substances
e.g. chemicals, or to potentially dangerous situations e.g. working at heights. Much of
this is moderated by health and safety at work regulations.
Some occupations are more healthy by their very nature e.g. bus drivers have a
sedentary and stressful occupation while bus conductors are more active and less
stressed. Some work environments e.g. pubs, give exposure to a less healthy lifestyle.
Some occupations by their very nature attract more healthy workers. This may be
accentuated by health checks made on appointment or by the need to pass regular
health checks e.g. airline pilots. Some occupations can attract less healthy workers,
for example, former miners who have left the mining industry as a result of ill health
and then chosen to sell newspapers. This will inflate the mortality rates of newspaper
sellers.
A person s occupation largely determines their income, which permits them to adopt a
particular lifestyle e.g. content and pattern of diet, quality of housing. This effect can
be positive or negative e.g. over-indulgence.
Other appropriate examples were credited.
3 As t increases, t increases, but t p0 decreases. At t = 80 approximately, the decrease

in t p0 is greater than the increase in t , hence f 0 t t p0 t decreases.
A deceptively straightforward answer which many students struggled to find. The key
point is to compare the 2 parameters as shown.
Page 2
4 1.75 p45.5 0.5 p45.5 * p46 * 0.25 p47
1 q45
*(1 q46 ) *(1 0.25q47 )
1 0.5q45
1 0.001465
*(1 0.001622) *(1 0.25*0.001802)
1 0.5*0.001465
0.999267 *0.998378*0.99955 0.997197
5 (a) The required probability is
1.25
0.015dt 0.01875
1 e 0 1 e 0.018575
(b) The curtate expectation is
k 0.015
0.015dt 0.015k e
k p20 e 0 e 0.015
66.168.
k 1 k 1 k 1 1 e
6 ä (12) is the present value of 1 p.a. payable monthly in advance while two lives
60:50:20
aged 60 and 50 are both still alive, for a maximum period of 20 years.
ä (12) (12)
ä60:50 (12)
v 20 20 p60:50 ä80:70
60:50:20
(a60:50 11 ) v 20 20 p60:50 (a80:70 11 )

24 24
6953.536 9392.621
(15.161 0.458) v 20 (6.876 0.458) 12.747
9826.131 9952.697
Page 3
45 hh ss 44 t t u 1 ss
7 EPV =£ 10, 000 p20 * * 1 p20 t* e p21 t du dt
0 t 20 t 0 u
where is the force of interest
hh
t p20 is the probability of a healthy life aged 20 being healthy at age 20 t
ss
1 p20 t is the probability that a life who is sick at age 20 t is sick continuously for
one year thereafter
ss
u p21 t is the probability that a life who is sick at age 21 t is still sick at
age 21 t u
This question was not done well and few students obtained the whole result. Partial
credits were given for correct portions. There were other potentially correct
approaches which were credited provided proper definitions of symbols given.
12 D70 12 l70 D67 12 l70 D67 12

8 Premium = 20, 000 a a 10, 000 1 a a
5 D65 70 l65 D62 67 l65 D62 70|67
12
a 4.5477
5
D70 9238.134
v5 0.787027
D65 9647.797
12
a70 11.562 0.458 11.104
l70
0.957538
l65
12
a67 14.111 0.458 13.653
D67 9605.483
v5 0.80527
D62 9804.173
12 12 12)
a70|67 a67 a70:67 (14.111 0.458) (10.233 0.458) 3.878
Premium = 265,736.96 + 34,570.77 = £300,308 to nearer £
Page 4
9 (i) 10, 000a A B

P , where A and B refer to the first and second lives
max K 60 1, K 60 1|
and P is the single premium.
A B A B
(ii) P 10, 000 a60 a60 a60 * a60
10, 000* 15.632 16.652 14.09 £181,940
108 2
2
Variance = A A B A A B
d2 60 :60 60 :60
108 2
2
* 1 0.075444*11.957 1 0.038462*18.194
0.038462
standard deviation = 22,936.7
10 (i) The gross future loss random variable is
100, 000 1 bK 20 1 vT20 I eaK 1

fvT20 GaK 1
20 20
where b is the annual rate of bonus

I is the initial expense
e is the annual renewal expense and
f is the claim expense
G is the gross annual premium
(ii) The premium is given by
Ga 20 100,000 A 20 3,000 IA 20 200 0.05Ga 20
G * 16.877 100,000 * 1.06 0.5 * 0.04472 3,000 * 1.06 0.5 * 2.00874

200 0.05G *(16.877 1) 1] 16.083G 4604.206 6204.373 200
G £684.49
Page 5
(iii) The required provision is
110,000 A23 4,000 IA 23 0.95 * 684.48 * a 23
110,000 * 1.04 0.5 * 0.12469 4,000 * 1.04 0.5 * 6.09644

0.95 * 684.49 * 22.758
13,987.528 24,868.693 14, 798.742
£24, 057.48
11 Unit fund
Year 1 2 3
Fund at the start of the year 0 8611.988 17796.67

Premium 10000 10000 10000
Allocation to units 8075 8075 8075
Interest 646 1334.959 2069.734
Management charge 109.0123 225.274 349.268
Fund at the end of the year 8611.988 17796.67 27592.14
Non-unit fund before provisions
Year 1 2 3
Premium margin 1925 1925 1925

Expenses 600 100 100
Interest 53 73 73
Death cost 115.156 24.995 0
Maturity cost 0 0 4138.821
Management charge 109.013 225.274 349.268
Profit 1371.857 2098.28 1891.55
Provision required at the start of year 3 = (1891.55 4138.821 (1 p64)) / 1.04

= 1768.192
Reduced profit at the end of year 2 = 2098.28 1768.192*p63 = 350.146
Page 6
Revised profit vector: 1371.857,350.146, 0
p62 0.989888
2 p62 0.978659
1371.857 350.146* p62

Net Present Value = 1455.003
1.15 1.152
p62 2 p62
Present value of premiums = 10000* 1 26007.788
1.15 1.152
1455.003
Profit margin = 5.59%
26007.788
Most students completed the tables satisfactorily in this question but struggled to get
the revised profit vectors. Very few produced a complete result.
12 (i) Let P be the annual premium.
0.95* P * a 1000 200000* A

50m :50 f 50m :50 f
a a50m a50 f a50m:50 f 18.843 19.539 17.688 20.694

50m :50 f
A 1.040.5 * A 1.040.5 *(1 d * a )

50m :50 f 50m :50 f 50m :50 f
1.040.5 *(1 0.038462* 20.694) 0.208109
0.95* P * 20.694 1000 200000*0.208109
P £2,168.02 .
(ii) From part (i) the net premium is:
1
200000 * (1.04)0.5 * d at 4%
a m f
50 :50
1 .04
= 200000 * (1.04)0.5 *
20.694 1.04
= 2011.39
We require 3 provisions at end of 5th policy year
Page 7
Both lives alive
a
55m :55 f
200000 * (1.04)0.5 * 1
a
50m :50 f
17.364 18.210 16.016

= 200000 * (1.04)0.5 1
18.843 19.539 17.688
= 11196.46
Male only alive
200000 A55m 2011.39 a55m
.04
= 200000 * (1.04)0.5 * 1 *17.364 2011.39 *17.364
1.04
= 32820.60
Female only alive
200000 A55 f 2011.39 a55 f
.04
= 200000 * (1.04)0.5 * 1 *18.210 2011.39 *18.210
1.04
= 24482.39
Mortality Profit Loss
= Expected Death Strain Actual Death Strain
In this case there are 4 components:
(a) Both lives die during 2004 no actual claims
Result
= (4900 * q54m * q54 f 0) (200000 *1.040.5 11196.46)
= (4900 * 0.000986 * 0.000912) (192764.32)
= 849.37
(b) Female alive at begin 2004, death during 2004 1 actual claim
Result
= (100 * q54 f 1) (200000 *1.040.5 24482.39)
Page 8
= (100 * 0.000912 1) (179478.39)
= 163109.96
(c) Both lives alive beginning 2004, males only die during 2004 -1 actual claim. Here
the claim cost is the change in provision from joint lives to female only
surviving i.e.
Result = (4900 * q54m * q54 f 1) (24482.39 11196.46)
= (4900 * 0.000986 * 0.999088 1) (13285.93)
= 50845.17
(d) Both lives alive beginning 2004, females only die during 2004 no actual claims.
Claim cost change in provision from joint lives to male only surviving
Result = (4900 * p54m * q54 f 0) (32820.611 11196.46)
= (4900 * 0.999014 * 0.000912) (21624.14)
= 96538.66
Hence overall total = 849.37 163109.16 + 50845.17 + 96538.66
= 14876.77
i.e. a mortality loss of 14877 when rounded.
For part (i) assuming renewal expenses did not include the first premium (answer
£2162.62) was also fully acceptable.
Part (ii) was very challenging and very few students realised the extension of
mortality profit/loss extended to joint life contracts involved reserve change costs on
first death. Most just considered the first 2 components of the answer and in many
cases failed to correctly cost this part. A few exceptional students did manage to
reach the final result.
13 (i) Define a service table:
l26 t = no. of members aged 26 + t last birthday
r26 t = no. of members who retire age 26 + t last birthday
sx t / sx = ratio of earnings in the year of age x + t to x + t + 1 to the earnings

in the year of age x to x + 1
Page 9
1 r
Define z26 t s26 t 3 s26 t 2 s26 t 1 ; a26 t = value of annuity of 1 p.a.
3
to a retiree aged exactly 26 + t.
Past service:
Assume that retirements take place uniformly over the year of age between 60
and 65. Retirement for those who attain age 65 takes place at exact age 65.
Consider retirement between ages 26 + t and 26 + t + 1, 34 t 38 .
The present value of the retirement benefits related to past service:
26 t 1 2
50000*5 z26 t 12 v r26 t r 50000*5 zC26ra
t
a 1
60 s25.25 v 26 l26 26 t 2 60 s
D26
26 t 1
where zC26
ra
t z26 t 1 v 2 r
r26 t a26 t 1
2 2
s
and D26 s25.25v 26l26
For retirement at age 65, the present value of the benefits is:
50000*5 z65 v65 r65 r 50000*5 zC65

ra
a65
60 s25.25 v 26 l26 60 s
D26
where zC65
ra
z65v65r65 a65
r
Summing over all ages, the value is:
50000*5 z M 60
ra
60 s
D26
39
where z M 60
ra z ra
C26 t
t 34
Future service:
Assume that retirements take place uniformly over the year of age, between
ages 60 and 65. Retirement at 65 takes place at exactly age 65.
If retirement takes place between ages 60 and 61, the number of future years
service to count is 34. If retirement takes place at age 61 or after, the number
of future years service to count is 35.
For retirement between ages 60 and 61, the present value of the retirement
benefits is:
Page 10
60 1 2
34*50000 z60 1 2 v r60 i 34*50000 zC60
ra
a 1
60 s25.25 v 26 l26 60 2 60 s
D26
For retirement at later years, the formula is similar to the above, with 35 in
place of 34.
Adding all these together gives:
50000
s
34 z C60
ra
35( z C61
ra
... z ra
C65 )
60 D26
50000 z ra
= s
M 60
60 D26
5
z ra
where M 60 35* zC60
ra
t
z ra
C60
t 0
(ii) Define a service table, with l26 t and s x t / s x defined as in part (i). In
addition, define d 26 t as the number of members dying age 26 t last
birthday.
Assume that deaths take place on average in the middle of the year of age.
The present value of the death benefit, for death between ages 26 t and
26 t 1 , is
26 t 1 s d
s v 2 d 26 t C26
50000* 4* 26.25 t 50000* 4* t
s25.25 v 26 l26 s
D26
26 t 1
where sC26
d
t s26.25 t v 2 d 26 t
Adding the present value of benefits for all possible years of death gives
38 s d s d
C26 t M 26
50000* 4* s
200000* s
t 0 D26 D26
38
where s M 26
d s d
C26 t
t 0
Examiners felt that this question was quite simple provided students
constructed proper definitions and followed them through logically allowing
of course for the adjusted salary scale. The above answer is one of a number
possible and full credit was given for credible alternatives.
Page 11
Many students, however struggled with this question despite these remarks.
Page 12
EXAMINATION
5 April 2006 (pm)

Core Technical
booklet.
supervisor.
question paper.
CT5 A2006 Institute of Actuaries
1 It is possible to model the mortality of current active members of a pension scheme
using the following three-state continuous-time Markov model, with age-dependent
forces of transition x, x and x:
Active Retired
x x
Dead
A pension scheme provides a benefit of £10,000 payable on death regardless of

whether death occurs before or after retirement. Give an expression to value this
benefit for an active life currently aged x. [2]
2 (i) In the context of with-profit policies, describe the super compound method of
adding bonuses. [2]
(ii) Suggest a reason why a life insurance company might use the super compound
method of adding bonuses as opposed to the compound method. [1]
[Total 3]
3 Using the PMA92C20 table for both lives calculate:
(a) 65:60
(b) 5 p65:60
1
(c) 2 q65:65
[4]
4 State the main difference between an overhead expense and a direct expense incurred
in writing a life insurance policy and give an example of each. [4]
CT5 A2006 2
5 A life office issues term assurance policies to 500 lives all aged 30 exact with a term
of 25 years. The benefit of £10,000 is payable at the end of the year of death of any
of the lives into a special fund. Calculate the expected share of this fund for each
survivor after 25 years.
Basis:

[4]
6 A life office has issued for a number of years whole-life regular premium policies to a
group of lives through direct advertising. Assured lives are only required to complete
an application form with no further evidence of health. Outline the forms of selection
that the insurer should expect to find in the mortality experience of the lives.
[5]
7 (i) Show that:
s px t s px t ( x t x t s) [2]
t
(ii) Prove Thiele s differential equation for a whole-life assurance issued to a life
aged x to be as follows:
tV x (1 tV x ) x t tV x Px [4]
t
[Total 6]
8 (i) Calculate the expected present value of an annuity-due of 1 per annum payable
annually in advance until the death of the last survivor of two lives using the
following basis:
First life: male aged 70, mortality table PMA92C20

Second life: female aged 67, mortality table PFA92C20
Rate of interest: 4% per annum
[2]
(ii) Give an expression for the variance of the annuity-due in terms of annuity
functions. [5]
[Total 7]

9 (i) Express fully in words:
axy:n [3]
(ii) Express a xy:n as the expected value of random variables and hence show that
1 Axy:n
a xy:n [4]
[Total 7]
10 A 20-year special endowment assurance policy is issued to a group of lives aged 45

exact. Each policy provides a sum assured of £10,000 payable at the end of the year of
death or £20,000 payable if the life survives until the maturity date. Premiums on the
policy are payable annually in advance for 15 years or until earlier death.
You are given the following information:
Number of deaths during the 13th policy year 4

Number of policies in force at the end of the 13th policy year 195
(i) Calculate the profit or loss arising from mortality in the 13th policy year. [7]
(ii) Comment on your results. [2]
Basis:

Expenses none
[Total 9]
11 An employer wishes to introduce a lump-sum retirement benefit payable immediately

on retirement at 65 or earlier other than on the grounds of ill-health. The amount of
the benefit is £1,000 for each year of an employee s service, with proportionate parts
of a year counting.
(i) Give a formula to value this benefit for an employee currently aged x with n
years of past service, defining all terms used. [5]
(ii) Using the Pension Scheme Tables from the Actuarial Formulae and Tables,
calculate the value for an employee currently aged 30 exact with exactly 10
years past service. [2]
(iii) Calculate the level annual contribution payable continuously throughout this
employee s service to fund the future retirement benefit. [3]
[Total 10]
CT5 A2006 4
12 (i) Define the following terms without giving detailed formulae:
(a) Crude Mortality Rate

(b) Directly Standardised Mortality Rate
(c) Indirectly Standardised Mortality Rate
[3]
(ii) The data in the following table are taken from data published by the Office of
National Statistics in 2001.
England and Wales Tyne and Wear

Population Number of Population Number of
births births
Under 25 3,149,000 153,000 71,000 4,000
25 35 3,769,000 339,000 74,000 6,000
35+ 3,927,000 103,000 82,000 1,000
(a) Using the population for England and Wales as the standard population
calculate crude birth rates and the directly and indirectly standardised
birth rates for Tyne and Wear.
(b) State an advantage of using the Indirectly Standardised Birth Rate and
comment briefly on the answers you have obtained.
[8]
[Total 11]

13 A life aged 35 exact purchases a 30-year with-profit endowment assurance policy.
Level premiums are payable monthly in advance throughout the duration of the
contract. The sum assured of £250,000 plus declared reversionary bonuses are
payable at maturity or at the end of the year of death if earlier.
(i) Show that the monthly premium is £647.47 if the life insurance company
assumes that future simple reversionary bonuses will be declared at the rate of
2% per annum and vesting at the end of each policy year (i.e. the death benefit
does not include any bonus relating to the policy year of death).
Basis:
mortality AM92 Select

interest 4% per annum
initial expenses £250 plus 50% of the gross annual premium
renewal expenses 3% of the second and subsequent monthly premiums
claims expenses £300 on death; £150 on maturity
[7]
(ii) At age 60 exact, immediately before the premium then due, the life wishes to
surrender the policy. The life insurance company calculates a surrender value
equal to the gross retrospective policy value, assuming the same basis as in (i)
above.
Calculate the surrender value using the retrospective policy value at the end of
the 25th policy year immediately before the premium then due and just after
the declared bonus has increased the sum assured plus reversionary bonuses to
£375,000. Assume that the life insurance company has declared a simple
bonus throughout the duration of the policy consistent with the bonus loading
assumption used to derive the premium in (i) above. [6]
(iii) State with a reason whether the surrender value would have been larger, the
same or smaller than in (ii) above if the office had used the prospective gross
premium policy value, on the same basis. [1]
[Total 14]
CT5 A2006 6
14 A life insurance company issues a 3-year unit linked endowment policy to a life aged
45 exact under which level premiums are payable yearly in advance. In the 1st year,
35% of the premium is allocated to units and 105% in the 2nd and 3rd years. The
units are subject to a bid-offer spread of 5% and an annual management charge of
0.5% of the bid value of units is deducted at the end of each policy year.
Management charges are deducted from the unit fund before death and surrender
benefits are paid.
If the policyholder dies during the term of the policy, the death benefit of the bid
value of the units is payable at the end of the year of death. The policyholder may
surrender the policy only at the end of each year. On surrender or on survival to the
end of the term, the bid value of the units is payable at the end of the year of exit.
The company uses the following assumptions in its profit test of this contract:
Rate of growth on assets in the unit fund 5% per annum

Rate of interest on non-unit fund cash flows 4% per annum
Independent rates of mortality AM92 Ultimate
Independent rates of withdrawal 5% per annum
Initial expenses £250
Renewal expenses £50 per annum on the 2nd and 3rd
premium dates
Initial commission 20% of 1st premium
Renewal commission 2.5% of the 2nd and 3rd years
premiums
The company sets premiums so that the net present value of the profit on the policy is
15% of the annual premium.
(i) Using a risk discount rate of 8% per annum, calculate the premium for the
policy on the assumption that the company does not zeroise future expected
negative cash flows. [12]
(ii) Explain why the company might need to zeroise future expected negative
cash flows on the policy. [2]
[Total 14]
END OF PAPER
CT5 A2006 7
EXAMINATION
April 2006

Core Technical
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
M Flaherty
June 2006
Comments
No comments are given.
t
1 10, 000 e ( t p xaa x t t pxar x t ) dt
0
2 (i) The super compound bonus method is a method of allocating bonuses (mostly
these days on an annual basis) under which two bonus rates are declared each
year. The first rate, usually the lower, is applied to the basic sum assured and
the second rate is applied to the bonuses already declared.
(ii) The sum assured and bonuses increase more slowly than under other methods
for the same ultimate benefit, enabling the office to retain surplus for longer
and thereby providing greater investment freedom.
3 (a) 65:60 65 60 0.005543 0.002266 0.007809
l70 l65 9238.134 9647.797

(b) 5 p65:60 . . 0.940160
l65 l60 9647.797 9826.131
1
(c) 2 q65:65 ½. 2 q65:65 ½.(1 2 p65:65 )
9521.065 9521.065
½(1 2 p65 . 2 p65 ) ½ 1 . 0.013050
9647.797 9647.797
4 Overhead expenses are those that in the short term do not vary with the amount of
business.
An example of an overhead expense is the cost of the company s premises (as the sale
of an extra policy now will have no impact on these costs).
Direct expenses are those that do vary with the amount of business.
An example of a direct expense is commission payment to a direct salesman (as the
sale of an extra policy now will have an impact on these costs).
Page 2
5 The expected share of the fund is
10, 000(1.04) 25 . A[30]:25

1
. 25 p[30]
10, 000(1.0425 ( A[30] v 25 . 25 p[30] . A55 ))

25 p[30]
2.66584(0.16011 0.37512 x 9557.8179 x0.38950)

10, 000 9923.7497
9557.8179
9923.7497
536.65
6 The insurer should expect to find:
Time selection the experience would be different in different time periods; in

developed economies mortality has tended to improve with time.
Class selection The insurer may price policies differently depending on fixed
factors such as age/sex. Also different groups of recipients may have different
mortality based on factors such as occupation.
Temporary Initial Selection if there is no evidence of health required then there is

an expectation that poor lives would be likely to take out the insurance and in the
short term the experience would be adverse. This effect should reduce with duration.
Conversely, if there are medical questions on the application form then we would
expect to see some form of self selection and mortality experience would be better in
the short term.
This is also evidence of adverse selection as highlighted above.
Spurious selection If there is no evidence of health required then the duration

effect would be confounded by the differential mortality experience of withdrawals,
as those lives withdrawing would be expected to have lighter mortality.
Page 3
1
7 (i) s px t ln( s px t ) (ln l x t s ln l x t )
s px t t t t
x t s x t
Multiplying through by s px t gives the required result.
(ii) Now
ax t
t Vx Ax t Px ax t 1
ax
s s
ax t e s p x t ds e s p x t ds
t t t
0 0
s
e s px t ( x t x t s )ds x t ax t Ax t
0
( x t ax t Ax t ) (1 ax t )
t Vx x t (1 t Vx )
t ax ax
ax t 1
x t (1 t Vx ) 1
ax ax
1 ax
(1 t Vx ) x t t Vx
ax
(1 t Vx ) x t t Vx Px
Page 4
8 (i) Expected present value:
ä70:67 ä70 ä67 ä70:67
11.562 14.111 10.233
15.440
(ii) Variance:
1 2 1
2
Axy ( Axy ) 2 2
(1 (1 v 2 ). 2äxy ) (1 d .äxy ) 2
d d
where normal functions are at a rate of interest i and functions with a left
superscript are at a rate of interest i2+2i.
The expression (1-v2) in the right hand side of the above equation can also be
expressed as 2d.
9 (i) The expected present value

of 1 per annum
payable continuously
until the second death
of 2 lives
currently age x and y
for a maximum n years
(ii) a xy:n E (amin(max(T )

x ,Ty ),n )
Tx and Ty are random variables which measures the complete lifetime of two
lives aged x and y
min(max(Tx ,Ty ),n )

1 v
E (amin(max(T ) E
x ,Ty ), n )
min(max(Tx ,Ty ),n )

1 E (v )
1 Axy:n
Page 5
10 (i) Let P be the net premium for the policy payable annually in advance. Then,
equation of value becomes:
Pa45:15 10, 000( A45:20 v 20 20 p45 )
11.386 P 10, 000(0.46998 0.41075)
P £773.52
Net premium reserve at the end of the 13th policy year is
13V 10, 000( A58:7 v 7 7 p58 ) Pa58:2
10, 000(0.76516 0.71209) 773.52 1.955
14, 772.48 1,512.23 13, 260.25
Death strain at risk per policy = 10,000 13,260.25 = 3,260.25
EDS 199q57 3, 260.25 199 0.00565 3, 260.25 3, 665.66

ADS 4 3, 260.25 13, 041.00
mortality profit = 3,665.66 + 13,041.00 = £9,375.34
(ii) The death strain at risk is negative. Hence, the life insurance company makes
money on early deaths.
More people die than expected during the year considered so the company
makes a mortality profit.
r
Mr Rx
11 (i) 1, 000.n. x 1, 000.
Dx Dx
Where Dx v xlx
C xr vx ½
rx for x < 65
r 65
C65 v r65
65 x
M xr C xr t
t 0
r
Mx M xr ½C xr for x < 65
Page 6
64 x
r r
Rx Mx t
t 0
782 25,502
(ii) 1, 000.10. 1000. 4, 231.902
7,874 7,874
(iii) Given contribution of C then
Nx
C. 4, 231.902
Dx
N 30 90684, D30 7874
Therefore C £367.45
12 Definitions:
(i) (a) Crude Mortality Rate the ratio of the total number of deaths in a
category to the total exposed to risk in the same category.
(b) Directly Standardised Mortality Rate the mortality rate of a

category weighted according to a standard population.
(c) Indirectly Standardised Mortality Rate an approximation to the

directly standardised mortality rate being the crude rate for the
standard population multiplied by the ratio of actual to expected deaths
for the region.
This is the same as the crude rate for the local population multiplied by
the Area Comparability Factor.
Page 7
(ii) (a) Calculations.

Population Number of births Population Number of births
Total 10,845,000 595,000 227,000 11,000
Crude birth rate: England and Wales 595,000/10,845,000 = 5.49%
Tyne and Wear: 11,000/227,000 = 4.85%

Expected number of
Population Fertility rate births
Under 25 3,149,000 0.0563 177,408
25 35 3,769,000 0.0811 305,595
35+ 3,927,000 0.0122 47,890
Total 10,845,000 530,893
Directly standardised rate: 530,893/10,845,000 = 4.90%

Fertility rate Population Expected Births
Under 25 0.0486 71,000 3,450
25 35 0.0899 74,000 6,656
35+ 0.0262 82,000 2,151
Total 227,000 12,256
Indirectly standardised rate: 5.49%/(12,256/11,000) = 4.93%
(b) The indirectly standardised rate does not require local records of births
to be analysed by age grouping.
The standardised rates are similar so the approximation is acceptable.
Both standardised rates are higher than the crude rate, showing that the
reason for the low cruder rate compared to the national population is
due to population distribution by age.
Both standardised rates are below the crude rate for England and
Wales so the birth rate of Tyne and Wear is lower, even allowing for
the age distribution.
Page 8
13 (i) Let P denote the monthly premium for the contract. Then
EPV of premiums =
(12) 11
12 Pa[35]:30 12 a[35]:30 (1 v30 30 p[35] )
24
11 689.23
12 P 17.631 1 207.5841P
24 2507.02
EPV of benefits and expenses =
1
(245, 000 300) A[35]:30 5000 IA [35]:30
(155, 000 150)v30 30 p[35]
0.03 12 Pa (12) 0.03P 250 0.5 12 P

[35]:30
where
1
IA [35]:30
IA [35]
v30 30 p[35] ( IA)65 30 A65
689.23
7.47005 7.89442 30 0.52786 0.946137
2507.02
EPV of benefits and expenses =
689.23
245,300 0.32187 5, 000 0.946137 154,850
2507.02
0.03 12 P 17.298675 0.03P 250 0.5 12 P
Equating EPV of premiums with EPV of benefits and expenses gives
207.5841P 78,954.711 4, 730.685 42,571.366 6.227523P 0.03P 250 6 P
126,506.762
P £647.47
195.3866
Page 9
(ii) (a)
retrospective (1 i ) 25 (12) 1 1
25V 0.97 12 Pa[35]:25 245,300 A[35]:25 5, 000 IA [35]:25
0.03P 250 0.5 12 P
p
25 [35]
where
1
IA [35]:25
IA [35]
v 25 25 p[35] IA 60
25 A60
882.85
7.47005 8.36234 25 0.4564 0.507198
2507.02
1
A[35]:25 A[35]:25 v 25 25 p[35] 0.3835 0.35215 0.03135
11
a (12) a[35]:25 (1 v 25 25 p[35] ) 16.029 0.29693 15.73207
[35]:25 24
retrospective
25V 2.83969(11.64 P 15.73207 245,300 0.03135 5000 0.507198 0.03P 250 6 P)
2.83969(177.151295P 10476.145) £295,963.86
(b) Surrender value would be the same i.e. 25V retrospective 25V prospective at
4% per annum rate of interest as the equality of bases ensures that the
prospective and retrospective reserves of any policy at any given time t
should be equal.
Page 10
14 (i) Let P be the annual premium required to meet the company s profit criteria.
Then:
(a) Multiple decrement table
Here not all decrements are uniform as whilst deaths can be assumed to
be uniformly distributed over the year, surrenders occur only at the
year end.
Hence:
(aq ) dx qxd and (aq ) wx qxw (1 qwd )
x q xd qxw aq
d
aq
w ap t 1 ( ap ) x
x x x
45 0.001465 0.05 0.001465 0.049927 0.948608 1
46 0.001622 0.05 0.001622 0.049919 0.948459 0.948608
47 0.001802 0.05 0.001802 0.049910 0.948288 0.899716
(b) Unit fund cashflows (per policy at start of year)
Year 1 Year 2 Year 3

Value of units 0 0.347379P 1.405063P
at start of year
Allocation 0.35P 1.05P 1.05P
Bid/offer 0.0175P 0.0525P 0.0525P
Interest 0.016625P 0.067244P 0.120128P
Management 0.001746P 0.007061P 0.012613P
charge
Value of units 0.347379P 1.405063P 2.510077P
at start of year
Page 11
(c) Non-unit fund cashflows
Year 1 Year 2 Year 3

Unallocated 0.65P -0.05P -0.05P
premium
Bid/offer 0.0175P 0.0525P 0.0525P
Expenses 0.2P+250 0.025P+50 0.025P+50
Interest 0.0187P-10 -0.0009P-2 -0.0009P-2
Management 0.001746P 0.007061P 0.012613P
charge
End of year 0.487946P-260 -0.016339P-52 -0.010787P-52
cashflows
Probability in 1 0.948608 0.899716

force
Discount factor 0.925926 0.857339 0.793832
Expected
present value 0.430809P-
of profit 320.170863
NPV = .15P = 0.430809P 320.170863 => P = £1140.17
(ii) Later expected future negative cashflows should be reduced to zero by

establishing reserves in the non-unit fund at earlier durations so that the
company does not expect to have to input further money in the future. The
expected non-unit fund cashflows derived in (i) are negative in years 2and 3 so
need to be eliminated.
Page 12
EXAMINATION
12 September 2006 (pm)

Core Technical
booklet.
supervisor.
question paper.
CT5 S2006 Institute of Actuaries
1 In a certain country, pension funds always provide pensions to retiring employees. At
the point of retirement, the fund can choose to buy an annuity from a life insurance
company, or pay the pension directly themselves on an ongoing basis.
A mortality study of pensioners has established that the experience of those whose
pension is received through annuities paid by insurance companies is lighter than the
experience of those being paid directly by pension funds.
Explain why the mortality experiences of the two groups differ. Your answer should
include reference to some form of selection. [4]
2 A life insurance company uses the following three-state continuous-time Markov

model, with constant forces of transition, to price its stand-alone critical illness
policies:
Healthy Critically ill
Dead
Under these policies, a lump sum benefit is payable on the occasion that a life
becomes critically ill during a specified policy term. No other benefits are payable.
A 20-year policy with sum assured £200,000 is issued to a healthy life aged 40 exact.
(i) Write down a formula, in integral terms, for the expected present value of
benefits under this policy. [2]
(ii) Calculate the expected present value at outset for this policy.
Basis: : 0.01
: 0.02
: 3
Interest: 8% per annum
[3]
[Total 5]
1
3 Calculate the exact value of A
70: 1
assuming the force of mortality is constant
between consecutive integer ages.
Basis: Mortality: ELT15 (Males)

Interest: 7.5% per annum
[5]
CT5 S2006 2
4 A life insurance company issues a reversionary annuity contract. Under the contract
an annuity of £20,000 per annum is payable monthly for life, to a female life now
aged 60 exact, on the death of a male life now aged 65 exact. Annuity payments are
always on monthly anniversaries of the date of issue of the contract.
Premiums are to be paid monthly until the annuity commences or the risk ceases.
Calculate the monthly premium required for the contract.
Basis: Mortality: PFA92C20 for the female

PMA92C20 for the male
Expenses: 5% of each premium payment
1.5% of each annuity payment
[6]
5 Tx and Ty are the complete future lifetimes of two lives aged x and y respectively:
Let the random variable g(T) take the following values
aT if Tx Ty
x
g(T) =
aT if Tx Ty
y
(i) Describe the benefit which has present value equal to g(T). [2]
(ii) Express E[g(T)] as an integral. [2]
(iii) Write down an expression for the variance of g(T) using assurance functions.
[2]
[Total 6]

6 A member of a pension scheme is aged 55 exact, and joined the scheme at age 35
exact. She earned a salary of £40,000 in the 12 months preceding the scheme
valuation date.
The scheme provides a pension on retirement for any reason of 1/80th of final
pensionable salary for each year of service, with fractions counting proportionately.
Final pensionable salary is defined as the average salary over the three years prior to
retirement.
Using the functions and symbols defined in, and assumptions underlying, the
Example Pension Scheme Table in the Actuarial Tables:
(i) Calculate the expected present value now of this member s total pension. [4]
(ii) Calculate the contribution rate required, as a percentage of salary, to fund the
future service element of the pension. [2]
[Total 6]
7 The following data relate to a certain country and its biggest province:
Country Province
Age-group Population Deaths Population
0-19 2,900,000 580 800,000

20-44 3,500,000 2,450 1,000,000
45-69 2,900,000 20,300 900,000
70 and over 700,000 49,000 300,000
Total 10,000,000 72,330 3,000,000
The population figures are from a mid-year census along with the deaths that occurred
in that year.
There were 25,344 deaths in the province in total.
Calculate the Area Comparability Factor and a standardised mortality rate for the
province. [6]
8 A pure endowment policy for a term of n years payable by single premium is issued to
lives aged x at entry.
(i) Derive Thiele s differential equation for t V , the reserve for this policy at time
t (0 < t < n). [5]
(ii) Explain the effect of each term in your answer in (i). [2]
(iii) State the boundary condition needed to solve the equation in (i). [2]
[Total 9]
CT5 S2006 4
9 A life insurance company issues a 3-year unit-linked endowment assurance contract
to a female life aged 60 exact under which level premiums of £5,000 per annum are
payable in advance. In the first year, 85% of the premium is allocated to units and
104% in the second and third years. The units are subject to a bid-offer spread of 5%
and an annual management charge of 0.75% of the bid value of the units is deducted
at the end of each year.
the bid value of the units after the deduction of the management charge, whichever is
higher, is payable at the end of the year of death. On survival to the end of the term,
the bid value of the units is payable.
The company holds unit reserves equal to the full bid value of the units but does not
set up non-unit reserves.
It uses the following assumptions in carrying out profit tests of this contract:
Mortality: AM92 Ultimate

Surrenders: None
Expenses: Initial: £600
Renewal: £100 at the start of each of the second and
third policy years
Unit fund growth rate: 6% per annum
Non-unit fund interest rate: 4% per annum
Risk discount rate: 10% per annum
(i) Calculate the expected net present value of the profit on this contract. [10]
(ii) State, with a reason, what the effect would be on the profit if the insurance
company did hold non-unit reserves to zeroise negative cashflows, assuming it
used a discount rate of 4% per annum for calculating those reserves. (You do
not need to perform any further calculations.) [2]
[Total 12]

10 A life insurance company is reviewing the 2005 mortality experience of its portfolio
of whole life assurances.
You are given the following information:
Age exact on Sum assured in force Reserves at 31 Dec 2005 of policies

1 Jan 2005 on 1 Jan 2005 in force on 31 Dec 2005
£ £
69 500,000 175,000
70 400,000 150,000
There were 2 death claims during 2005 arising from these policies as follows:
Date of issue of Age exact at issue of Sum assured

policy policy £
1 Jan 1980 45 12,000

1 Jan 1982 46 10,000
All premiums are payable annually on 1st January throughout life.
Sums assured are payable at the end of the year of death.
Net premium reserves are held, based on mortality of AM92 Ultimate and interest of
4% per annum.
(i) Calculate the mortality profit or loss for 2005 in respect of this group of
policies. [8]
(ii) (a) Calculate the amount of expected death claims for 2005 and compare it
with the amount of actual claims.
(b) Suggest a reason for this result compared with that obtained in (i).
[4]
[Total 12]
CT5 S2006 6
11 A life insurance company issues identical deferred annuities to each of 100 women
aged 63 exact. The benefit is £5,000 per annum payable continuously from a
woman s 65th birthday, if still alive at that time, and for life thereafter.
(i) Write down an expression for the random variable for the present value of
future benefits for one policy at outset. [3]
(ii) Calculate the total expected present value at outset of these annuities.
Basis: Mortality: PFA92C20

Interest: 4% per annum [2]
(iii) Calculate the total variance of the present value at outset of these annuities,
using the same basis as in part (ii). [8]
[Total 13]
12 A life insurance company issues a 10-year decreasing term assurance to a man aged
50 exact. The death benefit is £100,000 in the first year, £90,000 in the 2nd year, and
decreases by £10,000 each year so that the benefit in the 10th year is £10,000. The
death benefit is payable at the end of the year of death.
Level premiums are payable annually in advance for the term of the policy, ceasing
on earlier death.
(i) Calculate the annual premium.
Basis:

Mortality: AM92 Select
Initial expenses: £200 and 25% of the total annual premium (all incurred
on policy commencement)
Renewal expenses: 2% of each premium from the start of the 2nd policy year
and £50 per annum, inflating at 1.923% per annum, at
the start of the second and subsequent policy years
Claim expenses: £200 inflating at 1.923% per annum
Inflation: For renewal and claim expenses, the amounts quoted are
at outset, and the increases due to inflation start
immediately. [8]
(ii) Write down an expression for the gross future loss random variable at the end
of the ninth year, using whatever elements of the basis in (i) that are relevant.
[3]
(iii) Calculate the gross premium reserve at the end of the ninth year, using the
premium basis. [3]
(iv) Comment on any unusual aspect of your answer. [2]

[Total 16]
END OF PAPER
CT5 S2006 7
EXAMINATION
September 2006
Subject CT5 — Contingencies

Core Technical
EXAMINERS’ REPORT
Introduction
M A Stocker
November 2006
Comments
No comments are given
© Faculty of Actuaries
© Institute of Actuaries
Subject CT5 (Contingencies Core Technical) — September 2006 — Examiners’ Report
1 If funds chose at random which annuities to insure and which to self-insure, we would
expect approximately the same mortality experience in both groups. The self-insured
experience is heavier, meaning their lives are somehow below standard on average.
The most likely explanation is that the pension funds make informed decisions based
on the health or reason for retirement of the pensioners. Those retiring early due to
ill-health or those known to have poor health are retained for payment directly by the
fund. That should be cheaper than paying a premium to the insurer based on normal
mortality for these lives. The remainder of the lives, known to be on reasonable health
are insured.
This is adverse selection.
Sensible comments regarding other forms of selection are also acceptable.
20 20
−δt
2 (i) EPV = 200, 000 ∫ e HH
t p40 σ 40+t dt = 200, 000 ∫ e−δt t p40
HH
σ40+t dt
0 0
t
20 − ∫ (μ 40 + r +σ40 + r ) dr
= 200, 000 ∫ e −δt e 0 σ40+t dt
0
where:
HH
t p40 is the probability that the healthy life aged 40is healthy at age 40+t
HH
tp40 is the probability that the healthy life aged 40 is healthy at all points up
to age 40+t (These 2 probabilities are the same for this model)
δ = ln(1.08) = 0.076961
(ii)
t
20 − ∫ (μ 40 + r +σ40 + r ) dr
From EPV = 200, 000 ∫ e −δt e 0 σ40+t dt
0
t
20 − ∫ {(0.01) +(0.02)}dr
EPV = 200, 000 ∫ e −(0.076961)t e 0 (0.02)dt
0
20 20
− (0.076961)t − (0.03)t
= 200, 000 ∫ e e (0.02)dt = 200, 000 ∫ e− (0.106961)t (0.02)dt
0 0
(200, 000)(0.02) ⎡ −(0.106961)t ⎤ 20
=− e = 37,396.79[1 − 0.11775] = 32,993.32
0.106961 ⎣ ⎦0
Page 2
1
3 A1 = ∫ e−δ.075t t p70μ70+t dt in the general case.
70:1
0
Here, assuming μ is constant for 0 < t < 1, we get
μ = -ln(p70) = -ln(1 - .03930) = 0.040093

t p70 = exp(-μt) = exp(-.040093t)
δ.075 = ln(1.075) = 0.07232
1
A1 = ∫ e −0.07232t e−0.040093t (0.040093)dt
70:1
0
−(0.040093) ⎡e −(0.07232+0.040093)t ⎤
1
=
(0.07232 + 0.040093) ⎣ ⎦0
= (−0.35610)(0.89368 − 1) = 0.0379
4 EPV of benefits:
(12)
20, 000a65|60 = 20, 000(a60
(12)
− a65:60
(12)
) = 20, 000(a60 − a65:60 ) = 20, 000(15.652 − 11.682)
= 79, 400
EPV premiums:
(The premium term will be the joint lifetime of the two lives because if his death is
first the annuity commences or if her death is first, there will never be any annuity.)
Let P be the monthly premium
(12)
12 Pa65:60 = 12 P(a65:60 − 11
24
) = 12 P(12.682 − 0.458) = 146.688 P
Equation of value allowing for expenses:
1.015(79,400) = (1 - 0.05)(146.688P) ⇒ 80,591 = 139.3536P ⇒ P

= 578.32 per month
5 (i) This is the present value of a joint life annuity of amount 1 per annum payable
continuously until the first death of 2 lives (x) and (y).
∞ ∞
(ii) E[ g (T )] = ∫ t pxy μ x +t: y +t at dt or E[ g (T )] = ∫ t pxy e −δt dt
0 0
Page 3
2
A xy − ( A xy ) 2 2
(iii) Var[ g (T )] = where A xy indicates that the function is to be
δ 2
evaluated at force of interest 2δ.
6 (i) EPV past service benefits:
20 ( z M 55
ia
+ z M 55
ra
) 20 (34, 048 + 128, 026)
40, 000 = 40, 000 = 119, 737
80 s54 D55 80 (9.745)(1,389)
EPV future service benefits:
z ia z ra
40, 000 ( R55 + R55 ) 40, 000 (163, 063 + 963,869)
= = 41, 628
80 s54 D55 80 (9.745)(1,389)
EPV total pension benefits = 119,737 + 41,628 = £161,365
s
N 55 88, 615
(ii) (k )(40, 000) = 41, 628 ⇒ ( k )(40, 000) = 41, 628 ⇒ k = .159
s54 D55 (9.745)(1,389)
i.e. 15.9% salary per annum
∑ s Exc,t s mx,t ∑ Exc,t s mx,t

7 ACF = x x
∑ s
Exc,t ∑ Exc,t
x x
Here
s
E xc,t s
E xc,t s m x ,t E xc,t leading to s
m x ,t E xc,t s m x ,t
Age-group Population Deaths Population
0–19 2,900,000 580 800,000 0.0002 160

20–44 3,500,000 2,450 1,000,000 0.0007 700
45–69 2,900,000 20,300 900,000 0.007 6,300
70 and over 700,000 49,000 300,000
0.07 21,000
Total 10,000,000 72,330 3,000,000 28,160
Page 4
72,330 28,160
ACF = = (0.007233 0.0093867) = 0.77056
10, 000, 000 3, 000, 000
Indirectly standardised mortality rate = (ACF)*(Province crude rate)
⎛ 25,344 ⎞
= (0.77056) ⎜ ⎟ = (0.77056)(0.008448) = 0.00651
⎝ 3, 000, 000 ⎠
8 (i)
tV = n −t px +t e−δ( n−t )
∂ ∂ ∂ ∂
tV = ( n−t px +t e−δ( n−t ) ) = {e−δ( n−t ) ( n−t px+t )} + { n−t px +t (e−δ( n−t ) )}
∂t ∂t ∂t ∂t
1 ∂ ∂ ∂ ⎛l ⎞ ∂
( n−t px +t ) = ln( n−t px +t ) = ln ⎜ x + n ⎟ = {ln(l x+ n ) − ln(l x +t )} = μ x+t
n −t p x +t ∂t ∂t ∂t ⎝ l x +t ⎠ ∂t
∂
⇒ ( n−t px +t ) = (μ x +t )( n−t px+t )
∂t
∂ −δ( n−t )
(e ) = δe−δ( n−t )
∂t
∂ −δ ( n −t )
⇒ t V = {e (μ x +t )( n−t px +t )} + { n−t px+t δe−δ( n−t ) } = n−t px +t e−δ( n−t ) (μ x+t + δ)
∂t
∂
⇒ t V = (μ x +t + δ) t V
∂t
(ii) The change in reserve at time t consists of the interest earned and the release
of reserves from the deaths.
(The release may be more easily seen if the last line of (i) is rewritten as:
∂
t V = δ t V − μ x+t (0 − t V ) where the pure endowment has zero death
∂t
benefit.)
(iii) nV = 1.
Page 5
9 (i) Survival table
x qx px t-1px
60 0.008022 0.99198 1
61 0.009009 0.99099 0.991978
62 0.010112 0.98989 0.983041
Unit fund
Value of Allocation Bid/offer Interest Management Value of

units at charge units at
start of end of year
year
Year 1 0.00 4,250.00 212.50 242.25 32.10 4,247.65
Year 2 4,247.65 5,200.00 260.00 551.26 73.04 9,665.87
Year 3 9,665.87 5,200.00 260.00 876.35 116.12 15,366.10
Non-unit fund
Unallocated Bid/offer Expenses Interest Management Extra End of year

premium charge death cashflows
benefit
Year 1 750.00 212.50 600.00 14.50 32.10 126.37 282.73

Year 2 -200.00 260.00 100.00 -1.60 73.04 93.10 -61.66
Year 3 -200.00 260.00 100.00 -1.60 116.12 46.86 27.66
Non-unit Probability Profit Discount Expected

fund cash in force at signature factor present
flow (profit start of value of
vector) year profit
Year 1 282.73 1 282.73 0.909091 257.03
Year 2 -61.66 0.991978 -61.16 0.826446 -50.55
Year 3 27.66 0.983041 27.19 0.751315 20.43
Total NPV 226.91
Expected NPV = 226.91
(ii) The NPV would decrease. Holding reserves would delay the emergence of
some of the Year 1 cash flow, and as the non-unit fund earns 4%, well below
the risk discount rate, the NPV would reduce.
Page 6
10 (i) The 2 deaths were 70 and 69 respectively at 1/1/2005. The reserves for these
policies at 31/12/2005 were
⎛ a ⎞ ⎛ 9.998 ⎞
26V = 12, 000 ⎜1 − 71 ⎟ = 12, 000 ⎜1 − ⎟ = 5, 626.10 and
⎝ a45 ⎠ ⎝ 18.823 ⎠
⎛ a ⎞ ⎛ 10.375 ⎞
24V = 10, 000 ⎜1 − 70 ⎟ = 10, 000 ⎜ 1 − ⎟ = 4, 410.92
⎝ a46 ⎠ ⎝ 18.563 ⎠
Total death strain at risk, sorted by age at 1/1/2005:
Age 69: 500,000 - (175,000 + 4,410.92) = 320,589.08

Age 70: 400,000 - (150,000 + 5,626.10) = 244,373.90
Expected death strain:
(q69)(320,589.08) + (q70)(244,373.90)
= (0.022226)(320,589.08) + (0.024783)(244,373.90)
= 7,125.41 + 6,056.32
= 13,181.73
Actual death strain:
(12,000-5,626.10)+(10,000-4,410.92) = 6,373.90+5,589.08 = 11,962.98
Mortality profit = EDS – ADS = 13,181.73-11,962.98 = 1,218.75 profit
(ii) (a) Expected claims:
(q69)(500,000)+(q70)(400,000)
= (0.022226)(500,000) + (0.024783)(400,000)
= 11,113 + 9,913.2 = 21,026.20
Actual claims:
12,000 + 10,000 = 22,000
(b) Actual claims were higher than expected claims but the company still
made a mortality profit. This can only have occurred because the
deaths were disproportionately concentrated on lower DSAR lives
(policies more mature on average). (This can be seen by comparing the
ratio of reserves to sum assured for the death claim policies with the
corresponding ratio for the full portfolio.)
Page 7
5, 000v 2 aT if T63 ≥ 2 (or 5, 000(aT − a2 )

11 (i) g(T) = 63 − 2 63
0 if T63 < 2
(ii)
E[ g (T )] = (100)(5, 000)v 2 2 p63a65 = (500, 000)(0.92456)(0.992617)(14.871 − 0.5)

= (500, 000)(13.1887) = 6,594,350
(iii) Var[ g (T )] = E[ g (T ) 2 ] − E[ g (T )]2
For £1 of annuity:
∞
E[ g (T ) ] = ∫ t p63μ63+t [v 2 at −2 ]2 dt
2
Let t = r + 2 ⇒
∞
E[ g (T ) ] = ∫ r + 2 p63μ63+ r + 2 [v 2 ar ]2 dr
2
0
∞ 2
⎡1 − v r ⎤
= ∫ r p652 p63μ65+ r v ⎢ 4
⎥ dr
⎢
⎣ δ ⎥⎦
0
4 ∞
2 p63v
∫ r p65μ65+r [1 − 2v
r
= + v 2 r ]dr
δ
2
0
4
2 p63v 2
= [1 − 2 A65 + A65 ]
δ
2
where
⎛ 0.04 ⎞
A65 = (1.04)0.5 (1 − da65 ) = 1.019804{1 − ⎜ ⎟ (14.871)} = 0.436515
⎝ 1.04 ⎠
2
and A65 = (1.04)( 2 A65 ) = (1.04)(0.20847) = 0.21681
(0.992617)(0.85480)
∴ E[ g (T ) 2 ] = [1 − (2)(0.436515) + (0.21681)] = 189.622
(0.039221) 2
Var[ g (T )] = 189.622 − (13.1887)2 = 15.680
Page 8
For annuity of 5,000 we need to increase by 5,0002 and for 100 (independent)
lives we need to multiply by 100.
Total variance = (15.680)(5,0002)(100) = 39,200,000,000 = (197,999)2
12 EPV benefits:
110, 000 A 1 − 10, 000( IA) 1

(functions @ 6% p.a.)
[50]:10 [50]:10
= 110, 000{ A[50] − v10 10 p[50] A60 } − 10, 000{( IA)[50] − v10 10 p[50] (10 A60 + ( IA)60 )}
= 110, 000 A[50] − 10, 000( IA)[50] + v10 10 p[50]{10, 000(( IA)60 − A60 )}
= (110, 000)(0.20463) − (10, 000)(4.84789) + (0.55839)(0.95684){10, 000(5.46572 − 0.32692)}
= 22,509.30 − 48, 478.90 + 27, 456.09 = 1, 486.49
EPV gross premiums
Let P be annual premium
6%
Pa[50]:10 = 7.698 P
EPV expenses
4%
200 + 0.25 P + 0.02 Pa[50]:9
6%
+ 50a[50]:9
4%
+ 200 A 1
[50]:10
4%
= 150 + 0.23P + 0.02 Pa[50]:10
6%
+ 50a[50]:10
4%
+ 200( A[50] − v10 p A )
(4%) 10 [50] 60
= 150 + 0.23P + 0.02 P(7.698) + (50)(8.318) + 200(0.32868 − (0.67556)(0.95684)(0.45640))
= 150 + 415.90 + 6.73 + P(.23 + 0.15396) = 572.63 + 0.38396 P
Equation of value:
7.698P = 1,486.49 + 572.63 + 0.38396P ⇒ 7.31404P = 2,059.12 so P = 281.53 p.a.
(ii) If K59 ≥ 1 GFLRV = 50(1.01923)9 − 0.98(281.53) else (i.e. K59 = 0)
GFLRV = 10, 000v + 200(1.01923)9 v

.06 .04
+50(1.01923)9 − 0.98(281.53)
or
GFLRV = 10, 000v + 200(1.01923)10 v
.06 .06
+50(1.01923) − 0.98(281.53)
9
Page 9
(iii)
9V = 10, 000q59v.06 + 200(1.01923)9 q59v.04
+50(1.01923)9 − 0.98(281.53)
= (10, 000)(0.007140)(0.94340) + (237.40)((0.007140)(0.96154) + 59.35 − 275.90
= 67.36 + 1.63 + 59.35 − 275.90 = −147.56
(iv) The reserve is negative. The expected future income exceeds expected future
outgo, because past outgo exceeded past income, meaning the office needs a
net inflow in the last year to recoup previous losses. However, it is at risk of
the policy lapsing, and never getting this net inflow.
END OF EXAMINERS’ REPORT
Page 10
EXAMINATION
17 April 2007 (am)

Core Technical
booklet.
supervisor.
question paper.
CT5 A2007 © Institute of Actuaries
1 Calculate
(i) 5|10q[52]
(ii) p[50]:[60] for two independent lives
Basis:
Mortality: AM92 Select [3]
2 State, with examples, three distinct types of selection in the membership of a pension
scheme. [3]
3 A three-state transition model is shown in the following diagram:
σx
a =able i = ill
ρx
μx νx
d = dead
Assume that the transition probabilities are constant at all ages with σ = 2%, ν = 6%,
ρ = 1% and μ = 3%.
An able life age 55 exact takes out a 10-year sickness contract that provides a “no-
claim” bonus of £100 if the insured remains able for the full duration of the contract.
Calculate the expected present value of the bonus at the beginning of the contract with
a force of interest of 0.04. [4]
4 (i) In the context of net premiums and reserves, state the conditions necessary for
equality of prospective and retrospective reserves. [2]
(ii) Give two reasons why, in practice, these conditions may not hold. [2]
[Total 4]
CT5 A2007—2
5 An assurance contract provides a death benefit of £1,000 payable immediately on
death, with a savings benefit of £500 payable on every fifth anniversary of the
inception of the policy.
The following basis is used:
Force of mortality: μx = 0.05 for all x

Force of interest: δ = 0.04
Expenses: None
Calculate the level premium payable annually in advance for life. [5]
6 A pension scheme provides a benefit on death in service of 4 times the member’s

salary at the date of death. Normal Pension Age is 65. State a formula, without using
commutation functions, for the present value of this benefit to a life aged 35 exact
with salary of £25,000 who has just received a salary increase. Define all symbols
used. [5]
7 A term assurance contract for a life aged 50 exact for a term of 10 years provides a
benefit of £10,000 payable at the end of the year of death. Calculate the expected
present value and variance of benefits payable under this contract.
Basis:

[6]
8 You are given the following statistics in relation to the mortality experience of
Actuaria and its province Giro:
Actuaria Giro
Age Exposed to risk Number of deaths Exposed to risk Number of deaths
0–19 300,000 25 12,000 2

20–39 275,000 35 10,000 3
40–59 200,000 100 9,000 6
60–79 175,000 500 8,000 50
(i) Explain, giving a formula, the term Standardised Mortality Ratio (SMR).
Define all the symbols that you use. [2]
(ii) Comment on the relative mortality of the province, by calculating the SMR
for Giro. [4]
[Total 6]
CT5 A2007—3 PLEASE TURN OVER

9 A life insurance company issues an annuity to a life aged 60 exact to provide an
annual income of £15,000. The annuity is payable monthly in advance and is
guaranteed to be paid for a period of 5 years and for the whole of life thereafter. On
the annuitant’s death a survivor’s pension is paid at the rate £7,500 per annum for the
remainder of life for the spouse of the annuitant who is currently aged 55 exact under
the following circumstances:
(a) If the life dies within the guarantee period then the survivor’s pension
commences with the first payment immediately after the end of the guarantee
period.
(b) If the life dies after the guarantee period has expired then the survivor’s
pension commences with the first payment immediately after the death of the
first life.
Calculate the single premium:
Basis:
Annuitant mortality: PMA92C20

Spouse mortality: PFA92C20
[6]
10 Let X be a random variable representing the present value of the benefits of a whole of
life assurance, and Y be a random variable representing the present value of the
benefits of a temporary assurance with a term of n years. Both assurances have a sum
assured of 1 payable at the end of the year of death and were issued to the same life
aged x.
(i) Describe the benefits provided by the contract which has a present value
represented by the random variable X - Y. [1]
(ii) Show that
Cov[ X , Y ] = 2 A1x:n − Ax * A1x:n
and hence or otherwise that
Var( X − Y ) = 2
Ax − ( n | Ax ) 2 − 2 A1x:n
where the functions A are determined using an interest rate of i, and

functions 2A are determined using an interest rate of i2 + 2i. [7]
[Total 8]
CT5 A2007—4
11 A five-year unit-linked policy issued to a life aged 50 exact has the following pattern
of end of year cashflows per policy in force at the start of each year:
(-95.21, -30.18, -20.15, 77.15, 120.29)
(i) Explain why a life office might need to set up non-unit reserves in respect of a
unit-linked life assurance policy. [2]
(ii) Calculate the non-unit reserves required for the policy in order to zeroise
negative cashflows assuming AM92 Ultimate mortality and that reserves earn
interest at the rate of 5% per annum. [2]
(iii) Determine the net present value of the profits before and after zeroisation
assuming the risk discount rate used is 8% per annum and state with reasons
which of these figures you would expect to be higher. [6]
[Total 10]
12 A life office issued 750 identical 25-year temporary assurance policies to lives aged
30 exact each with a sum assured of £75,000 payable at the end of year of death.
Premiums are payable annually in advance for 20 years or until earlier death.
(i) Show that the annual net premium for each policy is approximately equal to
£104 using the basis given below. [2]
(ii) Calculate the net premium reserve per policy at the start and at the end of the
20th year of the policy. [4]
(iii) Calculate the mortality profit or loss to the life office during the 20th year if
twelve policyholders die during the first nineteen years of the policies and two
policyholders die during the 20th year. [4]
Basis:

[Total 10]

13 A life office issues with-profit whole of life contracts, with the sum assured payable
immediately on death of the life assured. Level premiums are payable monthly in
advance to age 65 or until earlier death.
The life office markets two versions of this policy, one assumed to provide simple
bonuses of 4% per annum of the sum assured vesting at the end of each policy year
and the other assumed to provide compound bonuses of 4% of the sum assured, again
vesting at the end of each policy year. The death benefit under each version does not
include any bonus relating to the policy year of death.
The following basis is assumed to price these contracts:

Renewal expenses 2.5% of the second and subsequent monthly premiums
Initial commission 50% of the gross annual premium
Renewal commission 2.5% of the second and subsequent monthly premiums
Claims expenses £250 at termination of the contract
Calculate the level monthly premium required for each version of this policy issued to
a life aged 30 exact at outset for an initial sum assured of £50,000. [12]
14 A life office issues a 4-year non profit endowment assurance policy to a male life
aged 61 exact for a sum assured of £100,000 payable on survival to the end of the
term or at the end of the year of death if earlier. Premiums are payable annually in
advance throughout the term of the policy.
There is a surrender benefit payable equal to a return of premiums paid, with no

interest. This benefit is payable at the end of the year of surrender.
The life office uses the following assumptions to price this contract:

Surrenders None
Renewal expenses (on the second
and subsequent premium dates) £50 per annum plus 2.5% of the premium
In addition, the company holds net premium reserves, calculated using AM92
Ultimate mortality and interest of 4% per annum.
In order to profit test this contract, the life office assumes the same mortality and
expense assumptions as per the pricing basis above. In addition, it assumes it earns
5% per annum on funds and that 5% of all policies still in force at the end of 1, 2, and
3 years then surrender.
Calculate, using a risk discount rate of 8% per annum, the expected profit margin on
this contract. [18]
END OF PAPER
CT5 A2007—6
EXAMINATION
April 2007

Core Technical
EXAMINERS’ REPORT
Introduction
M A Stocker
June 2007
Comments
Comments, where applicable, are given in the solutions that follow.
Subject CT5 (Contingencies Core Technical) — April 2007 — Examiners’ Report
1 (i) 5|10 q[52] = (l57 − l67 ) / l[52] = (9467.2906 − 8557.0118) / 9652.6965 = 0.094303
(ii) p[50]:[60] = p[50] × p[60] = (1 − 0.001971) × (1 − 0.005774) = 0.992266
2 Class selection — different classes of members experience different mortality rates.

e.g. works versus staff. Alternatively ill-health retirements, other early retirement and
normal retirements experience different mortality
Temporary Initial selection — employee turnover rates vary with duration of

employment, recent joiners are most likely to leave.
Time selection — turnover rates vary with economic conditions.
Other answers given credit if properly defined with pension fund specific examples.
65
− ∫ (0.02+ 0.03+ 0.04) dx
3 EPV = 100e 55
= 100e−0.09*[65−55]
= 100e −0.9
= 40.66
4 (i) The conditions are:
• The retrospective and prospective reserves are calculated on the same

basis.
• The basis is the same as the basis used to calculate the premiums used in
the reserve calculation.
(ii) Two reasons are:
• The assumptions used for the retrospective calculation (for which the
experienced conditions over the duration of the contract up to the valuation
date are used) are not generally appropriate for the prospective calculation
(for which the assumptions considered suitable for the remainder of the
policy term are used).
• The assumptions considered appropriate at the time the premium was

calculated may not be appropriate for the retrospective or prospective
reserve some years later.
Page 2
5 Value of death benefit:

∞ t
1000* ∫ 0.05*exp(− ∫ 0.09ds )dt =
0 0
∞ −0.09t
1000* ∫ 0.05*e dt = 1000*0.05 / 0.09
0
= 555.56
Value of survival benefit every 5th year:
500*(e-0.45 + e-0.9 + e-1.35 +………)
= 500*e-0.45/(1 - e-0.45) = 500*0.63763/0.36237
= 879.81
Value of premiums:
P*(1 + e-.09 + e -.18 + e-.27 +…….)
= P*(1/1 - e-.09) = 11.619*P
Hence
11.619*P = 555.56+879.81
P = 123.54
29
∑ s35+t +1d35+t v35+t +0.5
6 4 × 25, 000 × t =0
s36l35v35
definitions:
s x — salary in year to age x

d x — number of deaths in year of age x to x + 1
l x — number of lives alive at age x exact
Other schemes given credit if properly defined.
Page 3
7 Present value
l60
1
10000 A[50]:10 = 10000( A[50] − v10 A60 )
l[50]
= 10000(0.32868 − v10 9287.2164 0.45640) = 336.60

9706.0977
Variance
= 100002 ( 2 A[50]:10
1
− ( A[50]:10
1
)2 )
l60
= 100002 (( 2 A[50] − v 20 2
A60 ) − (336.66 /10000) 2 )
l[50]
= 100002 ((0.13017 − v 20 9287.2164 0.23723) − 0.0336662 ) = 2543992

9706.0977
The function with the 2 suffix is calculated at rate i2+2i i.e 8.16% in this case.
8 (i) The standardised mortality ratio is the ratio of the indirectly standardised
mortality rate to the crude mortality rate in the standard population.
∑ Ecx,t mx,t
SMR = x
∑ Ecx,t s mx,t
x
E xc,t = central exposed to risk in population being studied between age x and age x + t
mx,t = central mortality rate in population being studied for ages x to x + t
s
mx,t = central mortality rate in standard population for ages x to x + t
(ii) SMR = (2 + 3 + 6 + 50) / (25 × 12/300 + 35 × 10/275 + 100 × 9 / 200

+ 500 × 8 / 175)
= 2.058
As the SMR is greater than 1, Giro experiences heavier mortality than

Actuaria
Page 4
9 Equation of present value:
Purchase price = 15, 000a(12) + 7500 5 ¦ a60

(12)
+ 7500 5 ¦ a60:55
(12)
5
+7500v5 (1 − 5 p 60) 5 p55 a(12)

60 + 7500v (1 − 5 p 55) 5 p60 a
5 (12)
65
l65
= 15, 000(1 − v5 ) / d (12) + 7500 v5 (a65 − 11/ 24) + 7500v5
l60
l65l60
(a65 + a60 − a65:60 − 11/ 24)
l60l55
+7500v5 [(1 − l 65 / l 60)l 60 / l 55)(a60 − 11/ 24) + (1 − l 60 / l 55)l 65 / l 60)(a65 − 11/ 24)]
= 15000 × (1 − 0.82193) / 0.039157 + 7500 × 0.82193 × 9647.797 × (13.666 − 11/ 24)

9826.131
+7500 × 0.82193 × 9647.797 × 9848.431 × (13.666 + 16.652 − 12.682 − 11/ 24)

9826.131 9917.623
+7500 × 0.82193 × (1 − 9647.797 / 9826.131) × 9848.431/ 9917.623 × (16.652 − 11/ 24)

+7500 × 0.82193 × (1 − 9848.431/ 9917.623) × 9647.797 / 9826.131× (13.666 − 11/ 24)
= 68213.86 + 79940.67 + 103244.12 + 1799.09 + 557.72
= £253755 to nearest £
The following is an alternative derivation of the formula for the purchase price above.
15, 000a5|(12) + 15, 000v5 5 p60 (1 − 5 p55 )a65

(12)
+ 7,500v5 5 p55 (1 − 5 p60 )a60
(12)
+ v5 5 p60 5 p55 (15, 000a65

(12)
+ 7,500[a60
(12)
− a65:60
(12)
])
10 (i) X − Y is the present value of a deferred whole of life assurance with a sum
assured of 1 payable at the end of the year of death of a life now aged x
provided the life dies after age x + n.
⎪⎧v k +1 0 ≤ k < n
(ii) X = vk+1 all k Y= ⎨
⎪⎩0 k≥n
Cov(X, Y) = E[XY] − E[X] E[Y]
Page 5
k = n −1 k =∞
Now E[XY] = ∑ (v k +1 ) 2 P[ K x = k ] + ∑ vk +1 × 0 × P[ K x = k ]
k =0 k =n
k = n −1
= ∑ (v 2 ) k +1 P[ K x = k ]
k =0
= 2 A1x:n
Where 2A is determined using a discount function v2 , i.e. using an interest rate
i* = (1 + i)2 − 1 = 2i + i2
Then: Cov(X, Y) = 2 A1x:n − Ax . A1x:n
Now: Var(X − Y) = Var(X) + Var(Y) − 2 Cov(X, Y)
= ( 2 Ax − ( Ax ) 2 ) + ( 2 A1x:n − ( A1 ) 2 ) − 2( 2 A1x:n − Ax . A1x:n )

x:n
= ( 2 Ax + 2 A1x:n − 2 2 A1x:n ) − (( Ax ) 2 + ( A1 ) 2 ) − 2 A1x:n Ax )

x:n
= 2 Ax − 2 A1x:n − ( Ax − A1x:n ) 2
= 2 Ax − 2 A1x:n − ( n⏐Ax ) 2
The Examiners regret that two typographical errors occurred in the question wording set in
the Examination:
• In line 2 of 10(ii) the symbol shown as 2 A1x should have been 2 A1x:n .
• In the same line the function on the left hand side of the equation should have read
Cov(X,Y) and not have included in the brackets 2 assurance functions (which as
erroneously stated would have equated to zero).
In the event this question was done well despite the errors. The majority of students
attempting the question noticed the first error as obvious and adjusted accordingly. The
second error was rarely noticed by students who often went on to produce an otherwise good
proof.
The question has been corrected for publication. The Examiners wish to sincerely apologise
for these errors and wish to assure students that the marking system was sympathetically
adjusted to meet the circumstances.
Page 6
11 (i) It is a principle of prudent financial management that once sold and funded at
outset a product should be self-supporting. Many products produce profit
signatures that usually have a single financing phase. However, some
products, particularly those with substantial expected outgo at later policy
durations, can give profit signatures which have more than one financing
phase. In such cases these later negative cashflows should be reduced to zero
by establishing reserves in the non-unit fund at earlier durations. These
reserves are funded by reducing earlier positive cashflows.
(ii) The reserves required at the end of year 2 and year 1 are:
20.15
2V = = 19.190
1.05
1 1
1V = (30.18 + p51 ×19.190) = (30.18 + 0.99719 × 19.190) = 46.968
1.05 1.05
(iii) Before zeroisation, the net present value (based on a risk discount rate of 8%)
is:
95.21 p50 × 30.18 2 p50 × 20.15 3 p50 × 77.15 4 p50 × 120.29

NPV = − − − + +
1.08 1.082 1.083 1.084 1.085
95.21 0.99749 × 30.18 0.99469 × 20.15 0.99155 × 77.15 0.98804 × 120.29

=− − − + +
1.08 1.082 1.083 1.084 1.085
= −88.157 − 25.810 − 15.911 + 56.228 + 80.888 = 7.238
After zeroisation, the profit in year 1 becomes:
Profit in year 1 = −95.21 − p50 × 1V = −95.21 − 0.99749 × 46.968 = −142.06
So profit vector will become (-142.06, 0, 0, 77.15, 120.29)
And NPV after zeroisation will be:
142.06 p × 77.15 4 p50 ×120.29

NPV = − + 0 + 0 + 3 50 4 +
1.08 1.08 1.085
142.06 0.99155 × 77.15 0.98804 × 120.29

=− +0+0+ +
1.08 1.084 1.085
= −131.537 + 56.228 + 80.888 = 5.579
Page 7
As expected, the NPV after zeroisation is smaller because the emergence of

the profits has been deferred and the risk discount rate is greater than the
accumulation rate.
12 (i) Net premium per policy is P where Pa30:20 = 75, 000 A30:25
1
P=
(
75, 000 A30 − v 25 25 p30 A55 )
a30 − v 20 20 p30 a50
⎛ 9557.8179 ⎞
75, 000 ⎜ 0.16023 − 1.04−25 0.38950 ⎟
= ⎝ 9925.2094 ⎠
9712.0728
21.834 − 1.04−20 17.444
9925.2094
= 75, 000
( 0.16023 − 0.14070 ) = £104.30
( 21.834 − 7.7903)
(ii) Net premium reserve per policy at the end of the 20th year
= 75, 000 A50:5

1
(
− 0 = 75, 000 A50 − v5 5 p50 A55 )
⎛ 9557.8179 ⎞
= 75, 000 ⎜ 0.32907 − 1.04−5 0.38950 ⎟ = 75, 000 × 0.014014 = £1051.06
⎝ 9712.0728 ⎠
Net premium reserve per policy at the start of the 20th year
Sq49 + 20Vp49
= −P
1+ i
75, 000q49 + 1051.06 p49
= − 104.30
1.04
75, 000 × 0.002241 + 1051.06 × 0.997759
= − 104.30
1.04
= 1065.68
(iii) Death strain at risk = 75,000 – 1051 = 73,949
EDS = 738q49 × 73,949 = 122,301
ADS = 2 × 73,949 = 147,898
Mortality profit = 122,301 – 147,898 = -£25,597 (i.e. a loss)
Page 8
13 (i) Let P be the monthly premium for the contract with simple bonus. Then
equation of value (at 4% p.a. interest) is:
12 P(.95a(12) ) − 5.95 P = (48, 000 + 250) A[30] + 2, 000( IA)[30] + 300

[30]:35
where a(12)
[30]:35
= a[30]:35 −
11
24
( ) 11 ⎛
1 − v35 35 p[30] = 19.072 − ⎜1 − 1.04−35
24 ⎝
8821.2612 ⎞
⎟
9923.7497 ⎠
= 18.7169
Therefore:
12 P(.95 × 18.7169) − 5.95 P = (48, 000 + 250) × 1.040.5 × 0.16011 + 2, 000 × 1.040.5 × 6.91644 + 300
i.e.
207.42266 P = 7,878.299 + 14,106.825 + 300
22, 285.124
⇒P= = £107.44
207.42266
(ii) Let P′ be the monthly premium for the contract with compound bonus. Then
equation of value (at 4% p.a. interest) is:
12 P′(.95a[30]:35
(12)
) − 5.95 P′ = 50, 000 ⎡v 0.5 q[ x ] + v1.5 p[ x ]q[ x ]+1 (1.04) + ...⎤ + 250 A[30]
@ 4%
+ 300
⎣ ⎦
50, 000 ⎡ 0.5

= v × 1.04q[ x ] + v1.5 × 1.042 p[ x ]q[ x ]+1 + ...⎤ + 250 A[30]
@ 4%
+ 300
1.04 ⎣ ⎦
50, 000 ⎡
= 0.5 ⎣
v × 1.04q[ x ] + v 2 × 1.042 p[ x ]q[ x ]+1 + ...⎤ + 250 A[30]
@ 4%
+ 300
⎦
(1.04 )
50, 000
= @ 0%
A[30] + 250 A[30]
@ 4%
+ 300
(1.04 ) 0.5
@ 0%
where A[30] =1
50, 000
⇒ 12 P′(.95 × 18.7169) − 5.95P′ = + 250 × 1.040.5 × 0.16011 + 300
(1.04 ) 0.5
207.42266 P′ = 49, 029.034 + 40.820 + 300
49,369.854
⇒ P′ = = £238.02
207.42266
Page 9
14 Multiple decrement table:
X q[dx ] = ( aq )[ x ]
d
q[sx ] ( aq )[sx] = q[sx] (1 − ( aq ) )
d
[ x]
61 0.006433 0.05 0.04968

62 0.009696 0.05 0.04952
63 0.011344 0.05 0.04943
64 0.012716 — —
T (ap)[61]+t −1 t −1 ( ap )[61]
1 0.943887 1
2 0.940784 0.94389
3 0.939226 0.88799
4 0.987284 0.83403
Let P be the annual premium payable. Then equation value is:
Pa[61]:4 = 100, 000 A[61]:4 + (50 + 0.025 P)(a[61]:4 − 1) + 500
⇒ P(0.975a[61]:4 + 0.025) = 100, 000 A[61]:4 + 50(a[61]:4 − 1) + 500
⇒ P(0.975 × 3.730 + 0.025) = 100, 000 × 0.85654 + 50 × 2.730 + 500
85, 654 + 636.5

P= = 23,565.37
3.66175
Reserves required on the policy per unit sum assured are:
a62:3 2.857
1V61:4 = 1− = 1− = 0.23240
a61:4 3.722
a63:2 1.951
2V61:4 = 1− = 1− = 0.47582
a61:4 3.722
a64:1 1.000
3V61:4 = 1− = 1− = 0.73133
a61:4 3.722
Page 10
Year t Prem Expense Opening Interest Death Surr Mat Closing Profit
reserve Claim Claim Claim reserve vector
1 23565.4 500 0 1153.3 643.3 1170.7 0 21935.9 468.8

2 23565.4 639.1 23240.0 2308.3 969.6 2333.9 0 44764.4 406.7
3 23565.4 639.1 47582.0 3525.4 1134.4 3494.5 0 68688.4 716.4
4 23565.4 639.1 73133.0 4803.0 1271.6 0 98728.4 0 862.3
Year t Profit signature Discount factor NPV of profit signature
1 468.8 .92593 434.1

2 383.9 .85734 329.1
3 636.2 .79383 505.0
4 719.2 .73503 528.6
NPV of profit signature = £1,796.8
Year t Premium t −1 p[61] Discount factor NPV of premium
1 23565.4 1 1 23565.4
2 23565.4 0.94389 .92593 20595.6
3 23565.4 0.88799 .85734 17940.6
4 23565.4 0.83403 .79383 15602.1
NPV of premiums = £77,703.7
1, 796.8
Profit margin = = 0.0231 i.e. 2.31%
77, 703.7
Page 11
EXAMINATION
28 September 2007 (am)

Core Technical
booklet.
supervisor.
question paper.
CT5 S2007 © Institute of Actuaries
1 Calculate t+1Vx given the following:
Px = 0.017
tVx = 0.468
i = 0.03
qx+t = 0.024 [2]
2 In a special mortality table with a select period of one year, the following
relationships are true for all ages:
0.5 q[ x ] = (0.33)qx
0.5 q[ x ]+ 0.5 = (0.5)qx
Express p[ x ] in terms of px . [3]
3 A twelve-year life insurance contract has the following profit signature before any
non-unit reserves are created:
(+1, -1, +1, +1, +1, -1, 0, -1, +1, -1, +1, +1)
Non-unit reserves are to be set up to zeroise the negative cash flows.
Write down the revised profit signature, ignoring interest. [3]
4 An annuity makes monthly payments in arrear to a life aged 65 exact where each
payment is 1.0039207 times greater than the one immediately preceding. The first
monthly amount is £1,000.
Calculate the expected present value of the annuity using the following basis:
Mortality: PFA92C20
5 (i) Write down the formula for a directly standardised mortality rate. [2]
(ii) State the main disadvantage of this rate and outline how is it overcome in
practice. [2]
[Total 4]
CT5 S2007—2
6 For a certain group of pensioners, q75 = 0.05 and q76 = 0.06.
Calculate the probability that a pensioner aged 75 exact will die between ages 75.5
and 76.5 assuming:
(a) a uniform distribution of deaths between consecutive birthdays

(b) a constant force of mortality between consecutive birthdays. [5]
7 A life insurance company sells two whole life contracts to lives aged 40 exact at
entry. Level monthly premiums are payable in advance until the death of the life
assured. Death benefits are paid at the end of the year of death.
Under policy A, the sum assured is £100,000 during the first year and it increases by
£5,000 at the end of each year for surviving policyholders.
Policy B is a with profit policy with initial sum assured of £100,000. The company
intends to declare simple annual reversionary bonuses of 5% of the original sum
assured each year, vesting at the end of each policy year.
After ten years, the total declared bonuses under the with profit policy amount to
£50,000.
Calculate the net premium reserve required for each policy after ten years.
Basis:

8 Explain the following terms and give an example of each:
(a) class selection

(b) spurious selection
(c) time selection. [6]
CT5 S2007—3 PLEASE TURN OVER

9 A life office issues an annuity to a woman aged 65 exact and a man aged 68 exact.
The annuity of £20,000 per annum is payable annually in arrears for as long as either
of the lives is alive.
The office values this benefit using the following basis:

Mortality: Female: PFA92C20
Males: PMA92C20
(i) Calculate the expected present value of this benefit. [2]
(ii) Calculate the probability that the life office makes a profit in this case if it
charges a single premium of £320,000. [4]
[Total 6]
10 A policy provides a benefit of £500,000 immediately on the death of (y) if she dies
after (x).
(i) Write down an expression in terms of Tx and Ty (random variables denoting

the complete future lifetimes of (x) and (y) respectively) for the present value
of the benefit under this policy. [2]
(ii) Write down an expression for the expected present value of the benefit in
terms of an integral. [2]
(iii) Suggest, with a reason, the most appropriate term for regular premiums to be
payable under this policy. [2]
[Total 6]
11 Let X be a random variable representing the present value of the benefits of a pure
endowment contract and Y be a random variable representing the present value of the
benefits of a term assurance contract which pays the death benefit at the end of the
year of death. Both contracts have unit sum assured, a term of n years and were
issued to the same life aged x.
(i) Derive and simplify as far as possible using standard actuarial notation an
expression for the covariance of X and Y. [4]
(ii) Hence or otherwise, derive an expression for the variance of (X+Y) and
simplify it as far as possible using standard actuarial notation. [4]
[Total 8]
CT5 S2007—4
12 On 1 January 1992 a life insurance company issued a number of 20-year pure
endowment policies to a group of lives aged 40 exact. In each case, the sum assured
was £75,000 and premiums were payable annually in advance.
On 1 January 2006, 500 policies were still in force. During 2006, 3 policyholders
died, and no policy lapsed for any other reason.
The office calculates net premiums and net premium reserves on the following basis:

(i) Calculate the profit or loss from mortality for this group for the year ending
31 December 2006. [7]
(ii) Explain why the mortality profit or loss has arisen. [2]
[Total 9]
13 A life insurance company issues a 35-year endowment assurance contract to a life

aged 30 exact. The sum assured of £200,000 is payable at maturity or at the end of
the year of death if earlier. Level premiums are payable annually in advance for the
duration of the contract.
(i) Show that the annual premium is approximately £2,007, using the following
basis:
Interest: 6% p.a.
Expenses: Initial: £300 plus 50% of the annual premium
Renewal: 2% of the second and subsequent annual premiums
Claim: £600 on death; £200 on maturity [6]
(ii) Write down the gross premium future loss random variable after 25 years,
immediately before the premium then due is paid. [3]
(iii) Calculate the retrospective policy reserve after 25 years, using the same basis
as in (i), but with 4% p.a. interest. [6]
(iv) Explain whether the reserve in (iii) would have been smaller, the same or
greater than in (iii) if the office had used the prospective gross premium
reserve, on the same basis. [3]
[Total 18]

14 A life office uses the following three-state model to calculate premiums for a 2-year
accelerated critical illness policy issued to healthy policyholders aged 63 exact at
entry.
H: Healthy C: Critically ill
D: Dead
In return for a single premium payable at entry, the office will pay benefits of:
£100,000 if the policyholder dies from the healthy state;

£60,000 if he is diagnosed as having a critical illness;
£40,000 if he dies from the critically ill state.
All benefits are payable at the end of the relevant policy year.
Let St represent the state of the policyholder at age 63 + t, so that S0 = H and for t = 1,
2, St = H, C or D. The transition probabilities are defined as follows:
ij
p63 +t = Pr(St+1= j | St = i ).
Their values are:
t HC
p63 HD
p63 CD
p63
+t +t +t
0 0.04 0.02 0.25

1 0.06 0.03 0.33
(i) Identify all 6 possible outcomes under this policy. [3]
(ii) Calculate the net present value at entry of the benefits assuming a rate of
interest of 10% per annum for each of the outcomes in (i). [3]
(iii) Calculate the probability that each outcome occurs. [3]
(iv) Calculate the mean and variance of the present value at entry of the total
benefits per policy. [5]
(v) The office expects to sell 10,000 of these policies. The single premium is set
at a level which will ensure that the probability that the office makes a profit is
0.95. Calculate the amount of the single premium, assuming the profit is
normally distributed. [6]
[Total 20]
END OF PAPER
CT5 S2007—6
EXAMINATION
September 2007

Core Technical
EXAMINERS’ REPORT
Introduction
M A Stocker
December 2007
1 ( tVx + Px )(1 + i ) = qx +t + px +t ( t +1Vx )

⇒ (0.468 + 0.017)(1.03) = 0.024 + (0.976)( t +1Vx )
⇒ t +1Vx = (0.49955 − 0.024) / 0.976 = 0.487
2 p[ x ] = ( 0.5 p[ x ] )( 0.5 p[ x ]+0.5 ) = (1 − 0.5 q[ x ] )(1 − 0.5 q[ x ]+0.5 )

= (1 − 0.33qx )(1 − 0.5qx ) = (1 − 0.33(1 − px ))(1 − 0.5(1 − px ))
= (0.67 + 0.33 px )(0.5 + 0.5 p x )
= 0.335 + 0.5 px + 0.165 p x 2
3 (+1, -1, +1, +1, +1, -1, 0, -1, +1, -1, +1, +1)
→ (+1, -1, +1, +1, +1, -1, 0, -1, 0, 0, +1, +1)
→ (+1, -1, +1, +1, +1, -1, -1, 0, 0, 0, +1, +1)
→ (+1, -1, +1, +1, +1, -2, 0, 0, 0, 0, +1, +1)
→ (+1, -1, +1, +1, -1, 0, 0, 0, 0, 0, +1, +1)
→ (+1, -1, +1, 0, 0, 0, 0, 0, 0, 0, +1, +1)
→ (0, 0, +1, 0, 0, 0, 0, 0, 0, 0, +1, +1)
(Following not necessary for marks but to help explain)
All positives after last negative remain unchanged.
Consider last negative in year 10. The underlying cash flow that year, per policy in
force at start of year 10, is
−1 = ( NUCF )10 .
9px
The reserve needed at t = 9 to counter this is
− ( NUCF )10
1+i
= −( NUCF )10 since i = 0 .
This is funded from year 9 cash flows at a cost of
= ( px +8 )(−( NUCF )10 )
per policy in force at the start of year 9.
The change in year 9 cash flow is
( NUCF )9 = −( p x +8 )(−( NUCF )10 ) = p x +8 ( NUCF )10
Page 2
and the change in year 9 profit signature becomes
( PS )*9 = 8 px px +8 ( NUCF )10 = 9 p x ( NUCF )10 = −1
resulting in a revised year 9 profit signature of +1-1=0.
The other results follow by repeating this step from year 9 towards year 1 wherever
there are negative values in the profit signature.
2
4 EPV = 1, 000( 1/12 p65 1 + 2 /12 p65 1.0039207
2 /12 + 3/12 p65
1.0039207 + +
1.091/12 1.09 3/12
1.09
But 1.003920712 = 1.048076 and 1.048076

1.09
= 1.04
1 leading to
EPV = 1.0039207
1,000
( 1/12 p65 1 + 2 /12 p65 1 + 3/12 p65 1 ++
1.041/12 1.042 /12 1.043/12
= 1.0039207
12,000 (12)
a65 @ 4%p.a.
EPV = 11,953.14 * (14.871 - 1+(11/24)) = 11,953.14 * 14.329 = 171,276
∑ s Exc,t mx,t
x
5 (i) Directly standardised mortality rate = .
∑ s
Exc,t
x
Where:
s
Exc,t : Central exposed to risk in standard population between ages x and x+t
m x,t : central rate of mortality either observed or from a life table in

population being studied for ages x to x+t
(ii) The main disadvantage is that it requires age-specific mortality rates, mx,t , for
the group / population in question, and these are often not available
conveniently. To overcome this, indirect standardisation, which relies on
easily available data, can be used.
Page 3
6 0.5| q75 = 0.5 p75 ( q75.5 ) = 0.5 p75 [ 0.5 q75.5 + ( 0.5 p75.5 )( 0.5 q76 )]
= [( 0.5 p75 )( 0.5 q75.5 ) + ( p75 )( 0.5 q76 )]
(a) UDD ⇒ t qx = (t )qx , 0 ≤ t ≤ 1
0.5| q75 = 0.5 p75 ( q75.5 ) = 0.5 p75 (1 − p75.5 ) = 0.5 p75 [1 − ( 0.5 p75.5 )( 0.5 p76 )]
= 0.5 p75 − ( p75 )( 0.5 p76 ) = (1 − 0.5 q75 ) − (1 − q75 )(1 − 0.5 q76 )
= (1 − (0.5)(.05) − (1 − 0.05)(1 − (0.5)(.06)) = 0.975 − (0.95)(0.97) = 0.0535 or
using
0.5| q75 = [( 0.5 p75 )( 0.5 q75.5 ) + ( p75 )( 0.5 q76 )] = [(1 − 0.5 q75 )( 0.5 q75.5 ) + (1 − q75 )( 0.5 q76 )]
(0.5)(.05)
= [((1 − (0.5)(.05))(1−(0.5)(.05) ) + (1 − .05)(0.5)(.06)] = 0.025 + 0.0285 = 0.0535
−μt −μ t
Constant force of mortality ⇒ t px + r = e = (e ) = ( px ) , 0 ≤ r + t ≤ 1
t
(b)
0.5| q75 = 0.5 p75 [1 − ( 0.5 p75.5 )( 0.5 p76 )]
= (0.95)0.5 [1 − (0.95)0.5 (0.94)0.5 ]

= (0.974679)[1 − 0.944987] = 0.05362
7 Policy A:
10V = 145, 000 A50 + 5, 000( IA)50 − ( NP)a50

(12)
where NP from
95, 000 A[40] + 5, 000( IA)[40] = ( NP)a(12)

[40]
⇒ NP = {(95,000)(0.23041) + (5,000)(7.95835)}/(20.009 - 0.458) = 3,154.86
and 10V = {(145,000)(0.32907) + (5,000)(8.55929)}- (3,154.86)(17.444 - 0.458)

= 36,923.15
Policy B:
10V = 150, 000 A50 − ( NP)a50

(12)
where NP from
100, 000 A[40] = ( NP )a(12)

[40]
⇒ NP = (100,000)(0.23041)/(20.009 - 0.458) = 1,178.51
Page 4
and 10V = (150,000)(0.32907) - (1,178.51)(17.444 - 0.458)

= 29,342.33
8 (a) Class selection: groups with different permanent attributes having different
mortality
e.g. sex, male and female rates differ at all ages
(b) Spurious selection: ascribing mortality differences to groups formed by factors

which are not the true causes of these differences. The influence of some
confounding factor has been ignored.
e.g. Regional mortality differences actually explained by the different

composition of occupations in the different regions.
(c) Time selection: within a population, mortality varies over calendar time. The
effect is usually noticed at all ages and usually rates become lighter over time
e.g. ELT12 male mortality vs. ELT15male
m
9 (i) EPV = 20, 000a = 20, 000(a68 + a65
f
− a68:65 )
68:65
= 20, 000(11.412 + 13.871 − 10.112) = 20, 000(15.171) = 303, 420
(ii) The office loses money if PV of payments > 320,000

i.e. if 20,000 an >320,000 or an >16.
At 4% p.a., a26 =15.9828 and a27 = 16.3296 so if the office makes the 27th
payment under this annuity, it incurs a loss. It therefore makes a profit so long
as both lives have died before this time, with probability 27 q
68:65
m f
l95 l92
q
27 68:65
= ( 27 q68
m f
)( 27 q65 ) = (1 − m )(1 − f )
l68 l65
= (1 − 9,440.717
1,020.409
)(1 − 9,703.708
3,300.559
) = (0.891914)(0.65987) = 0.5885
Page 5
⎧⎪500, 000vTy Ty > Tx

10 (i) g (T ) = ⎨
⎪⎩ 0 Ty ≤ Tx
∞
(ii) E[ g (T )] = 500, 000 ∫ vt (1 − t px ) t p y μ y +t dt
0
(iii) Lifetime of (y). If (y) dies first, no benefit is possible and if (y) dies second,
SA becomes payable immediately. (x)’s lifetime is irrelevant in this context.
Premium could be payable for joint lifetime of (x) and (y) but this is shorter
than (y) and therefore we use (y)’s lifetime.
⎧⎪ v n Kx ≥ n ⎧⎪ 0 Kx ≥ n
11 (i) X =⎨ Y = ⎨ K +1
⎪⎩0 Kx < n ⎪⎩v x Kx < n
⇒ XY = 0 for all K x
COV ( X , Y ) = E[ XY ] − E[ X ]E[Y ] = 0 − ( Ax:n1 )( A1x:n )
(ii) VAR( X + Y ) = VAR( X ) + VAR(Y ) + 2COV ( X , Y )
= 2 Ax:n1 − ( Ax:n1 ) 2 + 2 A1x:n − ( A1x:n ) 2 − 2( Ax:n1 )( A1x:n )

= { 2 Ax:n1 + 2 A1x:n } − {( Ax:n1 ) 2 + ( A1x:n ) 2 + 2( Ax:n1 )( A1x:n )}
= { 2 Ax:n1 + 2 A1x:n } − {( Ax:n1 ) + ( A1x:n )}2
= 2 Ax:n − ( Ax:n ) 2
12 (i) Pa[40]:20 = 75, 000 A[40]:201 = 75, 000v 20 20 p[40]

⇒ P(13.930) = (75, 000)(0.45639)(0.94245)
⇒ P = 32, 259.45 /13.93 = 2,315.83
Mortality profit = Expected Death Strain – Actual Death Strain
DSAR = 0 − 15V = −(75, 000 A55:51 − Pa55:5 )

= −(75, 000v5 5 p55 − Pa55:5 )
= −{(75, 000)(0.82193)(0.97169) − (2,315.83)(4.585)} = −49, 281.51
EDS = (q54)(500)(-49,281.51) = (0.003976)(500)(-49,281.51) = -97,971.64

ADS = (3)(-49,281.51) = -147,844.53
Page 6
Mortality Profit = -97,971.64 - (-147,844.53) = 49,872.89 profit.
(ii) We expected 500q54 = 1.988 deaths. Actual deaths were 3. With pure
endowments, the death strain is negative because no death claim is paid and
there is a release of reserves to the company on death. In this case, more
deaths than expected means this release of reserves is greater than required by
the equation of equilibrium and the company therefore makes a profit.
13 (i) Pa30:35 = 200, 600 A30:35 − 400 A30:351 + (0.02) Pa30:35 − 0.02 P + 300 + (0.5)( P)
Expected present value of premiums:
Pa30:35 = 15.150 P
EPV of benefit and claim expenses:
A30:35 = 0.14246
A30:351 = v35 35 p30 = (0.13011)(0.88877) = 0.11563
⇒ EPV of benefits and claim expenses
= (200,600)(0.14246) - (400)(0.11563)
= 28,577.48 - 46.25 = 28,531.23
EPV of remaining expenses:
[(0.02)(15.150P)] - 0.02P + 0.5P + 300 = 0.783P + 300
Equation of value:
15.150P = 28,531.23 + 300 + 0.783P ⇒14.367P = 28,831.23
⇒ P = 2,006.77 per annum = 2,007 p.a.
⎧ K55 +1
⎪200, 600v − (0.98)(2, 007)(aK +1 ) K55 < 10
(ii) GFLRV = ⎨ 55
⎪⎩ 200, 200v − (0.98)(2, 007)(a10 )

10
K55 ≥ 10
Page 7
(iii) 25V
retro
= 1 {0.98Pa30:25 − 0.48 P − 300 − 200, 600 A30:25
1
}
v 25 25 p30
v 25 25 p30 = (0.37512)(0.96298) = 0.36123

a30:25 = a30 − v 25 25 p30 a55 = 21.834 − (0.36123)(15.873) = 16.100
1
A30:25 = A30 − v 25 25 p30 A55 = 0.16023 − (0.36123)(0.38950) = 0.01953
25V
retro
= 1
0.36123
{[2, 007][(0.98)(16.100) − (0.48)] − 300 − (200, 600)(0.01953)}
= 1
0.36123
{30, 703.09 − 300 − 3,917.72} = 73,319.96
(iv) It would have been larger. At 6% both would be the same but
4% < V@6% = V@ 6% < V@ 4%

pro pro
V@retro retro
since retrospective reserves are accumulating premiums in excess of claims

and expenses and lower interest leads to lower reserves but prospective
reserves are meeting the excess of future benefits claims over future
premiums and lower interest leads to higher reserves.
14 (i), (ii) and (iii)
Transition probabilities not given explicitly are
t HH
p63 CC
p63 DD
p63
+t +t +t
0 0.94 0.75 1.00

(not needed) (not needed)
1 0.91 0.67 1.00
Outcome PV of Cash PV Ben (PV Ben)2 Prob. Prob. E[PVB] E[PVB2]

flow (000's)
HH 0 0.00 0.00 0.94*0.91 0.8554 0 0

HC 60v2 49.59 2458.85 0.94*0.06 0.0564 2.79669 138.67905
HD 100v2 82.64 6830.13 0.94*0.03 0.0282 2.33058 192.60979
CC 60v 54.55 2975.21 0.04*0.67 0.0268 1.46182 79.73554
CD 60v+40v2 87.60 7674.34 0.04*0.33 0.0132 1.15636 101.30128
DD 100v 90.91 8264.46 0.02 0.02 1.81818 165.28926
Total 1 9.56364 677.61492
Page 8
(iv) Mean = (1,000)(9.56364) = 9,563.64
Var. = (1,000)2{(677.61492 - (9.56364)2}
= 586,151,710 = (24,210.57)2
(v) Var.(profit) = Var.(SP - EPV(bens)) = Var.(EPV(bens))
EPV(profit) = (10,000)(SP - 9,563.64) = 10,000SP - 95,636,400
Var.(profit) = Var.(SP - EPV(bens)) = Var.(EPV(bens))
For 10,000 independent policies,
Var.(profit) = (10,000)(586,151,710) = (2,421,057)2
St. Dev.(profit) = 2,421,057
We need SP so Prob.(profit > 0) = 0.95
⎛ profit − ( EPV (profit) 0 − (10, 000SP − 95, 636, 400) ⎞

⇒ Pr . ⎜ > ⎟ = 0.95
⎝ StDev(profit) 2, 421, 057 ⎠
Assuming profit is normally distributed
⎛ 95, 636, 400 − 10, 000 SP ⎞ ⎛ 95, 636, 400 − 10, 000 SP ⎞
⇒ Pr . ⎜ z > ⎟ = 0.95 ⇒ Φ ⎜ ⎟ = 0.05
⎝ 2, 421, 057 ⎠ ⎝ 2, 421, 057 ⎠
⎛ 95, 636, 400 − 10, 000 SP ⎞
⇒⎜ ⎟ = Φ −1 (0.05) = −1.6449
⎝ 2, 421, 057 ⎠
⎛ 95, 636, 400 + (1.6449)(2, 421, 057) ⎞
⇒ SP = ⎜ ⎟ = 9,961.88 = 9,962
⎝ 10, 000 ⎠
Page 9
EXAMINATION
14 April 2008 (am)

Core Technical
booklet.
supervisor.
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.
1 (a) Express 5|10 q40 in words.
(b) Calculate its value using AM92 mortality.
[2]
2 Describe three types of reversionary bonus that may be given to a with-profits

contract. [4]
3 Explain why a life insurance company will need to set up reserves for the endowment
assurance contracts it has sold. [4]
4 A life insurance company sells a term assurance and critical illness policy with a 20
year term to a life aged 40 exact. The policy provides a benefit of £50,000 payable
immediately on death or earlier diagnosis of critical illness. No further benefit is paid
in the event of death within the term after a prior critical illness claim has been paid.
The company prices the policy using the following multiple state model:
σx
Healthy (h) Critically Ill (i)
µx νx
Dead (d)
Calculate the expected present value of the benefits under the policy.
Basis: i = 5% per annum

μx = 0.005 at all ages
νx = 0.006 at all ages
σx = 0.003 at all ages [5]
5 A reversionary annuity is payable continuously beginning on the death of a life aged x

to an annuitant aged y.
(a) Derive an expression for the present value of the reversionary annuity using
random variables for the future lifetimes.
(b) Derive an expression for the expected present value of the reversionary
annuity in terms of assurance functions.
[5]
CT5 A2008—2
6 A parent who has just died left a bond in their will that provides a single payment of
£15,000 in 10 years’ time. The payment of £15,000 will be shared equally between
the local cats’ home and such of the parent’s two sons (currently aged 25 and 30
exact) who are then still alive. Calculate the expected present value of the share due
to the cats’ home.
Basis: Mortality AM92 Ultimate

Interest 3% per annum [5]
7 A defined benefit pension scheme provides a pension on retirement for any reason of
one-sixtieth of final pensionable salary for each year of service (with proportion for
part years of service). Final pensionable salary is average salary over the three years
immediately preceding retirement. Calculate the cost of providing future service
benefits for a new member aged 40 exact as a percentage of salary.
Basis: Example Pension Scheme Table in the Formulae and Tables for Examinations
Handbook
[6]
8 (i) Show that
(t − s )qx
t − s qx+ s = , ( 0 ≤ s < t ≤ 1)
(1 − sqx )
using an assumption of a uniform distribution of deaths. [4]
(ii) Calculate the value of 0.5q62.25 using assumptions of:
(a) a uniform distribution of deaths

(b) a constant force of mortality
Basis: Mortality PMA92C20 [3]

[Total 7]

9 A life insurance company prices annuities using a basis which incorporates the
location of the proposing annuitants as an additional rating factor.
(i) Identify three factors that influence mortality and would cause the insurance
company to adopt location as a rating factor. State which form of selection is
demonstrated by the use of location as a rating factor. [4]
(ii) The company has produced the following data in respect of two locations.
Calculate the standardised mortality ratio for each location based on the
standard mortality table ELT15(Males).
Location A Location B
Age Initial exposed Number Initial exposed Number
to risk of deaths to risk of deaths
60 100 1 200 3
61 175 3 150 3
62 190 2 170 3
63 210 3 100 2
[4]
[Total 8]
10 A male life aged 60 exact wants to buy the following benefits within one policy:
(a) an annuity of £5,000 per annum payable monthly in arrear to his wife
currently aged 55 exact commencing on his death and for the rest of her life,
and
(b) an annuity of £2,000 per annum payable monthly in arrear to his grandson
currently aged 13 exact commencing on the death of either grandparent and
ceasing when the grandson reaches age 21
Calculate the overall single premium.
Basis:
Mortality Male life – PMA92C20

Wife – PFA92C20
Grandson – ignore
[10]
CT5 A2008—4
11 A life insurance company issues a 10-year with-profits endowment policy to a life
then aged 50 exact. Under the policy, the basic sum assured of £75,000 and attaching
bonuses are payable at maturity or immediately on death, if earlier. The company
declares compound reversionary bonuses vesting at the end of each policy year (i.e.
the death benefit does not include any bonus relating to the policy year of death).
Level premiums are payable annually in advance under the policy.
(i) Show that the annual premium, using the equivalence principle, is
approximately £7,487.
Basis:
Bonus loading 1.92308% of the sum assured, compounded and
vesting at the end of each policy year
Expenses Initial £350 plus 50% of the annual premium
Renewal 5% of each premium payable in the second and
subsequent years
[7]
At aged 55 exact, immediately before the premium then due and just after the
declared bonus relating to the 5th policy year has been added to the policy, the policy
is still in force.
(ii) Calculate the reserve for the policy at this point in time using a gross premium
prospective basis assuming the same basis as in (i) above. You should also
assume that the life insurance company has declared a compound bonus
throughout the duration of the policy consistent with the bonus loading
assumption used to derive the premium in (i) above. [5]
[Total 12]

12 A life assurance company issues the following policies:
• 10-year term assurances with a sum assured of £50,000 where the death benefit is
payable at the end of the policy year of death
• 10-year pure endowment assurances with a sum assured of £50,000 payable on

maturity
For the term assurance and pure endowment policies, premiums are paid annually in
advance.
The company sold 5,000 policies of each type to lives then aged 50 exact. During the
first policy year, there were five actual deaths from each of the two types of policies
written.
(i) Assuming each type of policy was sold to a distinct set of lives (i.e. no life
buys more than one type of policy).
(a) Calculate the death strain at risk for each type of policy at the end of
the second policy year of the policies.
(b) During the second policy year, there were ten deaths from each of the
two types of policy written. Calculate the total mortality profit or loss
to the company during the second policy year.
Basis:
Mortality AM92 Ultimate for term assurance and pure endowment
Expenses Nil
[11]
(ii) The company now discovers that 5,000 lives had bought one of each type of
policy.
(a) State whether the mortality profit or loss calculated would now be
higher, lower or unchanged to that calculated in (i)(b).
(b) State whether the variance of the benefits paid out by the company in
future years would be higher, lower or unchanged to that in (i). Explain
your answer by general reasoning. [3]
[Total 14]
CT5 A2008—6
13 A life insurance company issues a 4-year unit-linked endowment policy to a life aged
50 exact under which level premiums of £750 are payable yearly in advance
throughout the term of the policy or until earlier death. In the first policy year, 25%
of the premium is allocated to units and 102.5% in the second and subsequent years.
The units are subject to a bid-offer spread of 5% and an annual management charge of
1% of the bid value of units is deducted at the end of each policy year.
Management charges are deducted from the unit fund before death, surrender and
maturity benefits are paid.
the bid value of the units, whichever is higher, is payable at the end of the policy year
of death. The policyholder may surrender the policy only at the end of each policy
year. On surrender, the bid value of the units is payable at the end of the policy year
of exit. On maturity, 110% of the bid value of the units is payable.
The company uses the following assumptions in carrying out profit tests of this
contract:
Rate of growth on assets in the unit fund 6.5% per annum

Rate of interest on non-unit fund cash flows 5.5% per annum
Renewal expenses £65 per annum on the second and
subsequent premium dates
Initial commission 10% of first premium
Renewal commission 2.5% of the second and subsequent
years’ premiums
Risk discount rate 8.5% per annum
In addition assume that at the end of each of the first 3 years, 10% of all policies still
in force then surrender.
(i) Calculate the profit margin for the policy on the assumption that the company
does not zeroise future expected negative cash flows. [13]
(ii) Suppose the company sets up reserves in order to zeroise future expected
negative cash flows.
(a) Calculate the expected reserve that must be set up at the end of each
policy year, per policy in force at the start of each policy year.
(b) Calculate the profit margin allowing for the cost of setting up these
reserves.
[5]
[Total 18]
END OF PAPER
CT5 A2008—7

Core Technical
EXAMINERS’ REPORT
April 2008
Introduction
M A Stocker
June 2008
Subject CT5 — Contingencies Core Technical — April 2008 — Examiners’ Report
1 The probability that an ultimate life age 40 dies between 45 and 55 (all exact)
(l45 − l55 ) (9801.3123 − 9557.8179)

5|10 q40 = = = 0.024704
l40 9856.2863
2 The following are three types of guaranteed reversionary bonuses. The bonuses are
usually allocated annually in arrears, following a valuation.
Simple – the rate of bonus each year is a percentage of the initial (basic) sum assured
under the policy. The effect is that the sum assured increases linearly over the term of
the policy.
Compound – the rate of bonus each year is a percentage of the initial (basic) sum
assured and the bonuses previously added. The effect is that the sum assured increases
exponentially over the term of the policy.
Super compound – two compound bonus rates are declared each year. The first rate
(usually the lower) is applied to the initial (basic) sum assured. The second rate is
applied to bonuses previously added. The effect is that the sum assured increases
exponentially over the term of the policy. The sum assured usually increases more
slowly than under a compound allocation in the earlier years and faster in the later
years.
(Note: credit given if special reversionary bonus mentioned)
3 The expected cost of paying benefits usually increases as the life ages and the
probability of a claim by death increases. In the final year the probability of payment
is large, since the payment will be made if the life survives the term, and for most
contracts the probability of survival is large.
Level premiums received in the early years of a contract are more than enough to pay
the benefits that fall due in those early years, but in the later years, and in particular in
the last year of an endowment assurance policy, the premiums are too small to pay for
the benefits. It is therefore prudent for the premiums that are not required in the early
years of the contract to be set aside, or reserved, to fund the shortfall in the later years
of the contract.
If premiums received that were not required to pay benefits were spent by the
company, perhaps by distributing to shareholders, then later in the contract the
company may not be able to find the money to pay for the excess of the cost of
benefits over the premiums received.
(Credit given for other valid points)
Page 2
4 Value =
20
50, 000 ∫ vt . t p40
hh
(μ 40+t + σ40+t )dt
0
20
= 50, 000∫ e− ln(1.05)t . t p40
hh
0.008dt
0
40+t
= = exp(− ∫ (μ s + σ s )ds )
hh hh
t p40 t p40
40
40+t
= exp(− ∫ 0.008ds )
40
−0.008t
=e
Therefore, value =
20
50, 000*0.008∫ e− ln(1.05)t .e −0.008t dt
0
20 −0.05679t
= 400∫ e dt
0
−.05679t
= 400*[−e / .05679]020
= 400*(−5.65531 + 17.60873)
= 4781.4
5 (a) Define random variables Tx and Ty for the complete duration of life for the
lives aged x and y.
Define a random variable Z for the value of the reversionary annuity, which
has the following definition:
Z = aTy | − aTx | if Ty > Tx = 0 otherwise

Z = aTy | − aTxy | where Txy is a random variable for the duration to the first
death
Ty Txy Txy T
(1 − v ) (1 − v ) (v −v y)
Z= − =
δ δ δ
Txy T
( E[v ] − E[v y ]) ( A xy − A y )
(b) E[ Z ] = =
δ δ
Page 3
6 The probability that the life age 25 survives 10 years

= 9894.4299 / 9953.6144 = 0.994054
The probability that the life age 30 survives 10 years
= 9856.2863 / 9925.2094 = 0.993056
There are four possible outcomes:
Outcome Expression for value value

Both survive V10×0.994054×0.993056×15000/3 3672.67
Only 25 survives V10×0.994054×(1-0.993056)×15000/2 38.52
Only 30 survives V10×(1-0.994054)×0.993056×15000/2 32.95
Neither survive V10×(1-0.994054)×(1-0.993056)×15000 0.46
Total value is 3744.60
7 Value of future service benefits
z ra z ia
1 ( R 40 + R 40 ) 1 (2884260 + 887117)
.S . = .S . = 2.5S
60 s
D40 60 25059
Value of contributions of k% of future salary
s
k N 40 k (363573)
.S . s = .S . = k /100*14.5S
100 D40 100 25059
Equating these values give k = 17.3
Page 4
8 (i) The uniform distribution of deaths is consistent with an assumption that
sqx = s.qx
t − s qx+ s = (1 − t − s px + s )
px
= (1 − t
)
s px
(1 − t qx )
= (1 − )
(1 − s qx )
(1 − tqx )
= (1 − )
(1 − sq x )
(t − s ).qx
=
(1 − s.qx )
(ii) (a) 0.5q62.25 = 0.5q62/(1-0.25q62) = 0.5×0.00355/(1-0.25*0.00355)

= 0.001777
(b) The assumption of a constant force of mortality requires μ to be

derived from the expression p = e-μ. p62=0.99645 => μ62=0.003556
t −s p x + s = e −(t − s )μ = e −0.5 x 0.003556 = 0.998224

t −s qx+ s = 0.001776
9 (i) Occupation – as some occupations have a regional distribution
Housing – as quality of housing will be impacted by occupationally influenced

income levels
Climate – different locations having different climates
Using location is a spurious form of class selection as it disguises the

underlying causes
Page 5
(ii) Actual deaths (location A) = 9

Actual deaths (location B) = 11
The calculation of the expected deaths is
Location A Location B
Age Standard Initial Number Initial Number
Mortality Exposed of deaths Exposed of deaths
Rate to risk to risk
60 0.01392 100 1.4 200 2.8
61 0.01560 175 2.7 150 2.3
62 0.01749 190 3.3 170 3.0
63 0.01965 210 4.1 100 2.0
Total 11.5 10.1
The SMRs are therefore
Location A = 9/11.5 = 0.78

Location B = 11/10.1 = 1.09
10 (a) wife
(12) (12)
value = 5000(a55 − a60:55 ) = 5000(18.210 − 14.756) = 17, 270
Note no effect of monthly payments
(b) grandson
value =
2000(a8|(12) − a60:55:8|
(12)
)
(1 − v8 )
a8|(12) = = 6.7327 x 0.04 = 6.855
i (12) 0.039285
(12) (12) (12)
a60:55:8| = a60:55 − v8 8 p60 . 8 p55 a68:63
= a60:55 + 11/ 24 − v8 8 p60 .8 p55 (a68:63 + 11/ 24)

9440.717 9775.888
= (14.756 − 1) + 11/ 24 − v8 (11.372 − 1 + 11/ 24)
9826.131 9917.623
= 6.721
Therefore value = 2000(6.855-6.721) = 268
Total value = 17270 + 268 = 17,538
Page 6
11 (i) Let P be the annual premium. Then:
EPV of premiums:
Pa[50]:10 = 7.698 P
EPV of benefits:
75, 000
× (1.06)1/ 2{q[50] (1 + b)v +1 ⏐ q[50] (1 + b) 2 v 2
(1 + b)
+.... + 9 ⏐ q[50] (1 + b)10 v10 } + 75, 00010 p[50] (1 + b)10 v10
where b = 0.0192308
75, 000 1
= × (1.06)1/ 2 A[50]:10
1
@ i ' + 75, 000 × 10 p[50] ×
(1 + b) (1 + i ' )10
75, 000
= × (1.06)1/ 2 × (.68007 − .64641) + 75, 000 × .64641 = 2,550.091 + 48, 480.75
1.0192308
= 51, 030.84
1.06
where i ' = − 1 = 0.04
1+ b
EPV of other expenses:
.5 × P + 350 + 0.05 × P (a[50]:10 − 1) = 0.8349 P + 350
Equation of value gives 7.698P = 51,030.84+ 0.8349P + 350
and P = £7,486.54
(ii) Gross premium prospective reserve (calculated at 6%) is given by:
EPV of benefits and expenses less EPV of premiums
EPV of benefits and expenses:
82, 494.3 1
= × (1.06)1/ 2 A55:5
1
@ i ' + 82, 494.3 × 5 p55 × + 0.05 Pa55:5
(1 + b) (1 + i ' )5
82, 494.3
= × (1.06)1/ 2 × (.82365 − .79866) @ i ' + 82, 494.3 × 0.79866 + 0.05 × 7486.54 × 4.423
1.0192308
= 2, 082.43 + 65,884.90 + 1, 655.65 = 69, 622.98
Page 7
EPV of premiums:
Pa55:5 = 4.423P = 33,112.97
=> Gross premium prospective reserve = £36,510.00
12 (i) (a) Annual premium for pure endowment with £50,000 sum assured given
by:
50, 000 50, 000

P PE = × 10 p50 × v10 = × 0.64601 = 3885.10
a50:10 8.314
Annual premium for term assurance with £50,000 sum assured given
by:
50, 000 A50:10

PTA = P EA − P PE = − P PE
a50:10
50, 000 × 0.68024

= − 3885.10 = 205.83
8.314
Reserves at the end of the second year:
for pure endowment with £50,000 sum assured given by:
2V
PE
= 50, 000 × 8 p52 × v8 − P PE a52:8
= 50, 000 × 0.70246 − 3885.10 × 6.910 = 35123.0 − 26846.04 = 8276.96
for term assurance with £50,000 sum assured given by:
2V
TA
= 2V EA − 2V PE
= 50, 000 A52:8 − (3885.1 + 205.83)a52:8 − 8276.96
= 50, 000 × 0.73424 − 4090.93 × 6.91 − 8276.96
= 166.71
Sums at risk:
Pure endowment: DSAR = 0 − 8,276.96 = −8,276.96

Term assurance: DSAR = 50,000 – 166.71 = 49,833.29
Page 8
(b) Mortality profit = EDS – ADS
For term assurance
EDS = 4995 × q51 × 49,833.29 = 4995 × .002809 × 49,833.29 = 699, 208.65
ADS = 10 × 49,833.29 = 498,332.90
For pure endowment
EDS = 4995 × q51 × −8, 276.96 = 4995 × .002809 × −8, 276.96 = −116,133.65
ADS = 10 × −8, 276.96 = −82, 769.60
mortality profit = −33,364.05
Hence, total mortality profit = £167,511.70
(ii) (a) The actual mortality profit would remain as that calculated in (i) (b).
(b) The variance of the benefits would be lower than that calculated in (i).
In this case, the company would not pay out benefits under both the PE
and the TA but will definitely pay out one of the benefits. Under the
scenario in (i), the company could pay out all the benefits (if all the TA
policyholders die and the PE policyholders survive). Alternatively,
they could pay out no benefits at all (if all the TA policyholders
survive and the PE policyholders immediately die).
Page 9
13
Annual premium 750.00 Allocation % (1st yr) 25.0%

Risk discount rate 8.5% Allocation % (2nd yr +) 102.50%
Interest on
investments 6.5% Man charge 1.0%
Interest on sterling
provisions 5.5% B/O spread 5.0%
Minimum death
benefit 3000.00
£ % prm Total
Initial expense 150 10.0% 225
Renewal expense 65 2.5% 83.75
(i) Multiple decrement table
x qxd qxs
50 0.001971 0.1
51 0.002732 0.1
52 0.003152 0.1
53 0.003539 0.0
x (aq) dx (aq) sx (ap) t −1 ( ap )

50 0.001971 0.09980 0.898226 1.000000
51 0.002732 0.09973 0.897541 0.898226
52 0.003152 0.09968 0.897163 0.806195
53 0.003539 0.00000 0.996461 0.723288
Page 10
Unit fund (per policy at start of year)
yr 1 yr 2 yr 3 yr 4
value of units at
start of year 0.000 187.806 968.018 1790.635
alloc 187.500 768.750 768.750 768.750
B/O 9.375 38.4375 38.4375 38.4375
interest 11.578 59.678 110.392 163.862
management
charge 1.897 9.778 18.087 26.848
value of units at
year end 187.806 968.018 1790.635 2657.961
Cash flows (per policy at start of year)
yr 1 yr 2 yr 3 yr 4
unallocated
premium 562.500 −18.750 −18.750 −18.750
B/O spread 9.375 38.4375 38.4375 38.4375
expenses 225.000 83.750 83.750 83.750
interest 19.078 −3.523 −3.523 −3.523
man charge 1.897 9.778 18.087 26.848
extra death
benefit 5.543 5.551 3.812 1.210
Extra maturity
benefit 0.000 0.000 0.000 264.855
end of year
cashflow 362.307 −63.359 −53.311 −306.804
Page 11
probability in
force 1 0.898226 0.806195 0.723288
discount factor 0.921659 0.849455 0.782908 0.721574
expected p.v. of
profit 91.809
premium
signature 750.000 620.894 513.620 424.701
expected p.v. of
premiums 2309.215
profit
margin 3.98%
(ii) (a) To calculate the expected provisions at the end of each year we have
(utilising the end of year cashflow figures and decrement tables in (i)
above):
306.804
3V = = 290.809
1.055
2V × 1.055 − ( ap )52 × 3V = −53.311 ⇒ 2V = 297.833
1V × 1.055 − (ap )51 × 2V = −63.359 ⇒ 1V = 313.437
These need to be adjusted as the question asks for the values in respect
of the beginning of the year. Thus we have:
Year 3 290.809(ap)52 = 260.903

Year 2 297.833(ap)51 = 267.318
Year 1 313.437(ap)50 = 281.538
(b) Based on the expected provisions calculated in (a) above, the cash flow
for years 2, 3 and 4 will be zeroised whilst year 1 will become:
362.307 − 281.538 = 80.769
Page 12
Hence the table below can now be completed for the revised profit
margin.
revised end of
year cash flow 80.769 0 0 0
probability in
force 1 0.898226 0.806195 0.723288
discount factor 0.921659 0.849455 0.782908 0.721574
expected p.v. of
profit 74.442
profit margin 3.22%
Page 13
EXAMINATION
22 September 2008 (am)

Core Technical
booklet.
supervisor.
question paper.
1 Calculate (to the nearest integer) the lower quartile of the complete future lifetime of a
person aged 25 exact who is subject to mortality according to ELT15 (Females). [3]
2 The profit signature of a 3-year assurance contract issued to a life aged 57 exact, with a
premium payable at the start of each year of £500 is (−250, 150, 200).
Calculate the profit margin of the contract.
Basis:

Lapses None
Risk discount rate 12% per annum [3]
3 In order to value the benefits in a final salary pension scheme as at 1 January 2008, a
s
salary scale, s x , has been defined so that x +t is the ratio of a member’s total
sx
earnings between ages x + t and x + t + 1 to the member’s total earnings between ages
x and x + 1. Salary increases take place on 1 July every year. One member, whose
date of birth is 1 April 1961, has an annual salary rate of £75,000 on the valuation
date.
Write down an expression for the member’s expected earnings during 2008. [3]
4 Write down an alternative expression for each of the following statements. Use
notation as set out in the “International Actuarial Notation” section of the “Formulae
and Tables for Examinations” where appropriate and express your answer as concisely
as possible.
(i) Probability[maximum{Tx, Ty} ≤ n] [1]
(ii) E[ g ( K x )] where g ( K x ) = v K x +1 for K x < n and 0 for K x ≥ n [1]
(iii) Probability{n < Tx ≤ m} [1]
1
(iv) Limit dt →0 Probability[minimum{Tx , Ty } ≤ t + dt | Tx > t , Ty > t ] [1]
dt
(v) E[aminimum( n−1, K + 1] [1]

x)
[Total 5]
CT5 S2008—2
5 (i) Explain what is meant by sx : n [2]
(ii) Calculate s50:20 . [3]
Basis:
[Total 5]
6 A select life aged 62 exact purchases a 3-year endowment assurance with sum assured
£100,000. Premiums of £30,000 are payable annually in advance throughout the term
of the policy or until earlier death. The death benefit is payable at the end of the
policy year of death.
Calculate the expected value of the present value of the profit or loss to the office on
the contract, using the following basis:
Interest 7.5% per annum

Expenses Ignore
1
Mortality q[ x −t ]+t = qx for all x and for t = 0, 1 or 2.
4−t
q62 = 0.018, q63 = 0.02 and q64 = 0.022
[6]
7 A certain population is subject to three modes of decrement: α, β and γ.
(i) Write down an expression for (aq)αx in terms of the single decrement table
probabilities qxα , qβx , and qxγ , assuming each of the three modes of decrement
is uniformly distributed over the year of age x to x + 1 in the corresponding
single decrement table. [2]
(ii) Suppose now that in the single decrement table α, t pxα = 1 − t 2 qxα (0 ≤ t ≤ 1),
while decrements β and γ remain uniformly distributed. Derive a revised
expression for (aq )αx in terms of the single decrement table probabilities
qxα , qβx , and qxγ . [4]
[Total 6]

8 A life insurance company sells 1,000 whole life annuities on 1 January 2007 to
policyholders aged 65 exact. Each annuity is for £25,000 payable annually in arrear.
5 annuitants die during 2007.
The office holds reserves using the following basis:
Mortality PFA92C20
(i) Calculate the profit or loss from mortality for this group for the year ending
31 December 2007. [4]
(ii) Explain why the mortality profit or loss has arisen. [2]
[Total 6]
9 A new member aged 35 exact, expecting to earn £40,000 in the next 12 months, has
just joined a pension scheme. The scheme provides a pension on retirement for any
reason of 1/60th of final pensionable salary for each year of service, with fractions
counting proportionately. Final pensionable salary is defined as the average salary over
the three years prior to retirement.
Members contribute a percentage of salary, the rate depending on age. Those under
age 50 contribute 4% and those age 50 exact and over contribute 5%.
The employer contributes a constant multiple of members’ contributions to meet

exactly the expected cost of pension benefits.
Calculate the multiple needed to meet this new member’s benefits.
All elements of the valuation basis are contained in the Example Pension Scheme
Table in the Formulae and Tables for Examinations. [6]
10 Calculate the variance of the present value of benefits under an annuity payable to a
life aged 35 exact. The annuity has payments of 1 per annum payable continuously
for life.
Basis:
Mortality μ = 0.02 throughout

Interest δ = 0.05 [7]
11 A life insurance company has reviewed its mortality experience. For each age, it has
pooled all the deaths and corresponding exposures from its entire portfolio over the
previous ten years, and derived a single mortality table.
List three types of selection which might be likely to produce heterogeneity in this
particular investigation. In each case, explain the nature of the heterogeneity and how it
could be caused, and state how the heterogeneity could be reduced. [9]
CT5 S2008—4
12 A life insurance company is considering selling with-profit endowment policies with
a term of twenty years and initial sum assured of £100,000. Death benefits are payable
at the end of the policy year of death. Bonuses will vest at the end of each policy year.
The company is considering three different bonus structures:
(1) Simple reversionary bonuses of 4.5% per annum.
(2) Compound reversionary bonuses of 3.84615% per annum.
(3) Super compound bonuses where the original sum assured receives a
bonus of 3% each year and all previous bonuses receive an additional
bonus of 6% each year.
(i) Calculate the amount payable at maturity under the three structures. [4]
(ii) Calculate the expected value of benefits under structure (2) for an individual
aged 45 exact at the start, using the following basis:

Expenses ignore
[4]
(iii) Calculate the expected value of benefits, using the same policy and basis as in
(ii) but reflecting the following changes:
(a) Bonuses vest at the start of each policy year (the death benefit is
payable at the end of the policy year of death).
(b) The death benefit is payable immediately on death (bonuses vest at the
end of each policy year).
(c) The death benefit is payable immediately on death, and bonuses vest
continuously. [3]
[Total 11]

13 Two lives, a female aged 60 exact and a male aged 65 exact, purchase a policy with
the following benefits:
(i) an annuity deferred ten years, with £20,000 payable annually in advance for as
long as either of them is alive
(ii) a lump sum of £100,000 payable at the end of the policy year of the first death,
should this occur during the deferred period
Level premiums are payable monthly in advance throughout the deferred period or
until earlier payment of the death benefit.
Calculate the monthly premium.
Basis:
Mortality Female PFA92C20

Male PMA92C20

Renewal 2.5% of each monthly premium excluding the first.
[14]
14 A life insurance company issues a decreasing term assurance policy to a life aged 55
exact. The death benefit, which is payable immediately on death, is £100,000 in the
first policy year, £90,000 in the second year thereafter reducing by £10,000 each year
until the benefit is £10,000 in the 10th year, with cover ceasing at age 65.
The policy is paid for by level annual premiums payable in advance for 10 years,
ceasing on earlier death.
The life office uses the following basis for calculating premiums and reserves:
Basis:
Expenses Initial £300 plus 25% of the first premium
Renewal 5% of all premiums excluding the first and £50*(1.04)t

on each policy anniversary where t is the exact duration
of the policy on the anniversary
Claim £200*(1.04)u where u is the exact duration of the policy

at death, measured in years with fractions counting
CT5 S2008—6
(i) Write down the gross premium future loss random variable at the start of the
policy. Use P for the annual premium. [4]
(ii) Calculate the premium, using the equivalence principle. [10]
(iii) Calculate the gross premium prospective reserve after 9 years. [2]
[Total 16]
END OF PAPER
CT5 S2008—7

Core Technical
EXAMINERS’ REPORT
September 2008
Introduction
R D Muckart
November 2008
1 Let t equal future lifetime. Lower quartile means that 25% of people have future
lifetime less than t.
l25+t l25+t
t q25 = 0.25 ⇒ = 0.75 = 0.75 ⇒ l25+t = 74, 098
l25 98, 797
l73 = 74, 287 l74 = 72, 048,
So 73–25 = 48 is lower quartile future lifetime to nearest integer.
2 Profit margin = (EPV profit / EPV premiums)
EPV profit = -250v + 150v2 + 200v3 = 38.72
EPV premiums = 500(1 + 1p57v + 2p57v2) = 500(1 + 0.8878125 + 0.7876546)

= 1,337.73
Profit margin = 38.72/1,337.37 = 2.89%
3 £75,000 represents earnings from 1/7/2007 to 1/7/2008
i.e. from age 46.25 to 47.25
2008 is the period from age 46.75 to 47.75
s46.75
2008 expected earnings = 75, 000
s46.25
(s46 + 3s47) is a satisfactory alternative to the numerator above and (3s46 + s47) a
satisfactory alternative for the denominator.
s47.25
Alternative: 75, 000{0.5 + 0.5( )}
s46.25
Page 2
4 (i) n q xy
(ii) A1x:n
(iii) n|m − n q x
(iv) μ x +t: y +t or μ x +t + μ y +t
(v) ax:n
5 It is the accumulation of an n-year annuity due i.e. the expected fund per survivor
after n years, from a group of people, initially aged x, who each put 1 at the start of
each of the n years, if they are still alive, into a fund earning interest at rate i per
annum.
a50:20
s50:20 =
v 20 20 p50
1
= 20
(a50− v 20 20 p50 a70 )
v 20 p50
1
= (17.444) − 10.375 = 35.715
(0.45639)(0.82928)
6
x q[x] q[x-1]+1 q[x-2]+2 q[x-3]+3 qx
62 0.0045 0.006 0.009 0.018 0.018

63 0.005 0.006667 0.01 0.02 0.02
64 0.0055 0.007333 0.011 0.022 0.022
EPV premiums = 30,000{1 + v*p[62] + v2* p[62]*p[62]+1}
= 30,000{1 + v*(1 - 0.0045) + v2*(1 - 0.0045)*(1 - 0.006667)}
= (30,000)(2.781742) = 83,452.27
EPV benefits = 100,000{v*q[62] + v2*p[62]*q[62]+1 + v3*p[62]*p[62]+1*(q[62]+2

+ p[62]+2)} = 80,592.50
EPV profit = 83,452.27 - 80,592.50 = 2,859.77
Page 3
Cash flow approach:
Year Premium Interest Death Cost Maturity Cost Profit Vector Profit Signature NPV
1 30,000.00 2,250.00 450.00 31,800.00 31,800.00 29,581.40

2 30,000.00 2,250.00 666.67 31,583.33 31,441.21 27,207.10
3 30,000.00 2,250.00 1,100.00 98,900.00 -67,750.00 −66,995.49 −53,928.73
2,859.77
7 (i) (aq )αx = q xα {1 − 12 (qβx + q xγ ) + 13 (qβx q xγ )}
1
(ii) (aq)αx = ∫ t pxα t pβx t p xγ μαx +t dt
0
d
t pxα = 1 − t 2 qxα ⇒ t pxα μαx +t = − α α
t p x = 2tq x
dt
With β and γ uniformly distributed, then
1 1
(aq)αx =∫ α
t px t pβx t p xγ μαx +t dt = ∫ 2tqxα (1 − tqβx )(1 − tq xγ )dt
0 0
1
= qxα ∫ {2t − 2t 2 (qβx + qxγ ) + 2t 3 (qβx qxγ )}1dt
0
2 2
= qxα {1 − (qβx + qxγ ) + (qβx q xγ )}
3 4
8 (i) The Death Strain at risk per policy is

[0 − (payment due 31.12 + reserve @ 31.12] = - 25, 000a66
Expected DS =
− q65 *1, 000* 25, 000a66 = −(0.004681)(25, 000, 000)(14.494) = −1, 696,160
Actual DS = −5* 25, 000a66 = −1,811, 750
Profit = EDS − ADS = -1,696,160 + 1,811,750 = 115,590 profit
(ii) We expected 4.681 deaths and had more than this with 5. There is no death
benefit, just a release of reserves on death, so more deaths than expected leads
to profit.
Page 4
z ra z ia
40, 000 R35 + R35 40, 000 3,524,390 + 1,187, 407
9 EPV of benefits: s
= = 98, 730
60 D35 60 31,816
PV of contribution:
s s
(0.04) N 35 + (0.01) N 50 (0.04)502,836 + (0.01)163, 638
40, 000 s
= 40, 000 = 27,345
D35 31,816
Employer’s proportion = (98,730-27345)/27,345 = 2.61 times employee’s

contribution.
2
Ax − ( Ax )2
10 Variance of aT =
x δ2
∞ ∞ ∞
−δt −δt −μt μ ∞ μ
Ax = ∫ e t p x μ x +t dt = ∫ e e μdt =μ ∫ e−t (δ+μ ) dt = − (e − t ) = − (0 − 1)
μ+δ 0 μ+δ
0 0 0
μ 0.02
= =
μ + δ 0.07
∞ ∞
μ 0.02
Similarly, A x = ∫ e −2δt t px μ x +t dt = ∫ e−δt e−μt μdt =
2
=
μ + 2δ 0.12
0 0
0.02 0.02 2
−( )
Variance of aT = 0.12 0.07 = 34.01
x 0.052
Alternatively
Variance of X = E[ X 2 ] − {E[ X ]}2
1 − e −δTx
Here X= a =
Tx | δ
∞ ∞ ∞
1 − e −δt 1 − e−δt −μt 1
E[ X ] = ∫ p μ
t x x +t dt = ∫ e μdt = ∫ (e−μt μ) −(e− (δ+μ )t μ)dt
δ δ δ
0 0 0
1 −μt ∞μ 1 μ − ( δ+μ )t ∞
= {(−e )−( )(−e )} = {(0 − (−1)) − ( )(0 − (−1))}
δ 0 δ+μ 0 δ δ+μ
1 μ 1 δ+μ−μ 1 1
= {1 − ( )} = { }= = = 14.2857
δ δ+μ δ δ+μ δ + μ 0.07
Page 5
∞ ∞
1 − e −δt 2 1 − 2e−δt + e−2δt −μt
E[ X ] = ∫ (
2
) t px μ x +t dt = ∫ ( )e μdt
δ δ2
0 0
∞
1 −μt
= ∫ (e μ) −(2e−(δ+μ)t μ) + (e− (2δ+μ )t μ)dt
δ 2
0
1 μ ∞ ∞ μ ∞
= {(−e −μt ) − (2)(
)(−e−(δ+μ )t ) + ( )(−e− (2δ+μ )t )}
δ 2 0 δ+μ 0 2δ + μ 0
1 μ μ
= 2 {(0 − (−1)) − 2( )(0 − (−1)) + ( )(0 − (−1))}
δ δ+μ 2δ + μ
1 2μ μ 1 0.04 0.02
= 2 {1 − ( )+( )} = {1 − + } = 238.0952
δ δ+μ 2δ + μ 0.052 0.07 0.12
Variance = 238.0952-(14.2857)2 = 34.01
11 Class selection
People with same age definition will have different underlying mortality due to
particular permanent attributes, e.g. sex. The existence of such classes would be
certainly found in these data: e.g. male / female smoker / non-smoker, people having
different occupational and/or social backgrounds, etc.
Solution would be to subdivide the data according to the nature of the attribute.
Time selection
Where mortality is changing over calendar time, people of the same age could
experience different levels of mortality at different times. This might well be a
problem here, as data from as much as ten years apart are being combined.
Solution would be to subdivide the data into shorter time periods.
Temporary initial selection
Mortality changes with policy duration and the combination of subgroups of

policyholders with different durations into a single sample will cause heterogeneity.
Lives accepted for insurance have passed a medical screening process. The longer that
has elapsed since screening (i.e. since entry) the greater the proportion of lives who
may have developed impairments since the screening date and hence the higher the
mortality. Mortality rates would then be expected to rise with policy duration, and
hence result in heterogeneous data.
The solution would be to perform a select mortality investigation, that is one in which
the data are subdivided by policy duration as well as by age.
Page 6
Self selection
By purchasing a particular product type, policyholders are putting themselves in a

particular group. People expecting lighter than normal mortality might purchase
annuities and experience better mortality rates than, for example, term assurance
buyers.
The solution would be to subdivide the data by product type.
12 (i) (a) 100,000{1 + (20)(0.045)) = 190,000
(b) 100,000(1.0384615)20 = 212,720
6%
(c) 100,000{1 + 0.03 s20 } = 210,357
(ii) EPV maturity benefits:
1.08
100, 000 A 1
= 100, 000v 20 20 p[45] @ − 1 = 4%
[45]:20 1.0384615
= 100,000*(0.45639)(8,821.2612/9,798.0837) = 0.41089*100,000 = 41,089
EPV death benefits:
100, 000 1 100, 000

A[45]:20 @ 4% = ( A[45]:20 − A[45]:201 )
1.0384615 1.0384615
100, 000
= (0.46982 − 0.41089)
1.0384615
= (100,000)(0.05893 / 1.0384615) = 0.05675*100,000 = 5,675
EPV total benefits = 41,089 + 5,675 = 46,764
(iii) Making appropriate adjustments to (ii)
(a) 1.0384615*5,675+41,089 = 46,982
(b) (1.08)0.5*5,675+41,089 = 46,987
(c) = (1.04)0.5*1.0384615*5,675 + 41,089 = 47,099
Page 7
Alternatively, just starting a fresh for each condition:
(a) A[45]:20| at 4%
1
(c) A[45]:20| at 4% = A[45]:20| + A[45]:20|1 = {(1.04)0.5 A[45]:20|
1
} + A[45]:20|1
13 Let P be the monthly premium
12 Pa(12) = 350 + 0.025P(12a(12) − 1) + 100, 000 AP

1
+ 20, 00010| a65:60 :
65:60:10 65:60:10 65:60:10
a65:60:10 = a65:60 − v10 10 p65 10 p60 a75:70
= 12.682 − (0.67556)(0.87120)(0.95372)(8.357)
= 12.682 − (0.56131)8.357 = 7.991
11
a(12) = a65:60:10 − (1 − v10 10 p65 10 p60 )
65:60:10 24
= 7.991 − (0.458)(1 − 0.56131)
= 7.991 − 0.201 = 7.790
AP
1
= A65:60:10 − v10 10 p65 10 p60 = 1 − da65:60:10 − v10 10 p65 10 p60
65:60:10
0.04
= 1− (7.991) − 0.56131 = 0.13134
1.04
AP
1 10|
= A65:60 − v10 10 p65 10 p60 A75:70 = 1 − da65:60 − v10 10 p65 10 p60 (1 − da75:70 )
65:60
0.04 0.04
or = 1− (12.682) − (0.67556)(0.87120)(0.95372)(1 − 8.357
1.04 1.04
= 0.51223 − 0.38089 = 0.13134
65:60
10| a = v10 10 p65 10 p60 a75:70 + v10 10 p65 (1 − 10 p60 )a75 + v10 (1 − 10 p65 ) 10 p60 a70
= v10 10 p65 10 p60 (a75 + a70 − a75:70 ) + v10 10 p65 (1 − 10 p60 )a75 + v10 (1 − 10 p65 ) 10 p60 a70
= (0.67556)(0.87120)(0.95372)(9.456 + 12.934 − 8.357)
+(0.67556)(0.87120)(1 − 0.95372)(9.456)
+(0.67556)(1 − 0.87120)(0.95372)(12.934)
= 7.877 + 0.258 + 1.073 = 9.208
Page 8
or
65:60
10| a = a65:60 − a65:60:10| = (a65 + a60 − a65:60 ) − (a65:10| + a60:10| − a65:60:10| )
= (a65 + a60 − a65:60 ) − (a65 − v10 10 p65a75 + a60 − v10 10 p60 a70 − a65:60 − v10 10 p65:60 a75:70
= 13.666 + 16.652 − 12.682
−{13.666 − (0.67556)(0.87120)(9.456)}
−{16.652 − (0.67556)(0.95372)(12.934)}
+{12.682 − (0.67556)(0.87120)(0.95372)(8.357)
= 17.636 − 8.101 − 8.319 + 7.991 = 17.636 − 8.429 = 9.207
12 P(7.790) = 350 + 0.025 P(12*7.790 − 1) + 100, 000(0.13134) + 20, 000*9.208

⇒ P(93.480 − 2.312) = 350 + 13,134 + 184,160
⇒ P(91.168) = 197, 644 ⇒ P = 2,168 per month
14 (i) GFLRV=
300 + 0.25 P + 0.05 P * amin(
4%
+ 50* amin(
0%
− P * amin(
4%
K [55] ,9) K [55] ,9) [55] +1,10)
K
T[55]
+ (if K[55] < 10 only ) v (100, 000 − 10, 000* K[55] ) + 200
(ii) 4%
P * a[55]:10 = 250 + 0.20 P + 0.05 P * a[55]:10
4%
+ 50a[55]:10
0%
1
+110, 000 A − 10, 000( I A)1[55]:10 + 200* 10 q[55]
[55]:10
4%
a[55]:10 = 8.228
0%
a[55]:10 = (1 + e[55] ) − 10 p[55] (1 + e65 )
⎛ 8,821.2612 ⎞
= 26.037 − ⎜ ⎟17.645
⎝ 9,545.9929 ⎠
= 26.037 − (0.92408)17.645
= 9.732
1
A = (1.04)0.5 ( A[55]10 − v10 10 p[55] )
[55]:10
= (1.04)0.5 (0.68354 − 0.67556*0.92408)

= 0.06044
Page 9
( I A)1[55]:10 = (1.04)0.5[( IA)[55] − v10 10 p[55] (10 A65 + ( IA)65 ]
= (1.04)0.5 [8.58908 − 0.67556*0.92408(10*0.52786 + 7.89442)]

= 0.37278
P *8.228
= 250 + 0.20 P + 0.05 P *8.228 + 50*9.732 + 110, 000*0.06044
−10, 000*0.37278 + 200*(1 − 0.92408)
⇒ P *7.6166 = 250 + 486.60 + 6, 648.40 − 3, 727.80 + 15.18
⇒ P = 3, 672.38 / 7.6166 = 482.15
(iii) 9V = q64v 0.5[10, 000 + 200*(1.04)9.5 ] − [0.95 P − 50*(1.04)9 ]

= (0.012716)(0.980581)[10, 000 + 290.30] − [0.95* 482.15 − 71.17]
128.31 − 386.87 = −258.56
Page 10
EXAMINATION
24 April 2009 (am)

Core Technical
booklet.
supervisor.
question paper.
1 Define and calculate 5|10q[40]+1.
Basis: AM92 Select [4]
2 Calculate the following functions:
1
(i) A40:20 [3]
(ii) A40:20 [1]
Basis: lx = 110 − x (for x ≤ 110).

Interest 4% per annum. [Total 4]
3 Employee contributions to a pension fund are paid continuously at the rate of 4% of

salary per annum after a fixed deduction from salary of £5,000 per annum paid
continuously.
Determine an expression using commutation functions for the present value of the
future contributions by a member aged x with salary S in the previous 12 months.
[4]
4 Explain, in the context of the lapse rates of life insurance policies, what is meant
by:
(a) class selection

(b) temporary initial selection
(c) time selection
Give an example in each case. [5]
1 1
5 A population is subject to two modes of decrement α and β where qβx = + qxα .
3 4
β
Derive from first principles (aq) x .
State clearly any assumptions you make. [5]
6 The random variable Txy represents the time to failure of the joint-life status (x y).
(x) is subject to a constant force of mortality of 0.02 and (y) is subject to a
constant force of mortality of 0.03. (x) and (y) are independent with respect to
mortality.
Calculate the value of E[Txy]. [5]
CT5 A2009—2
7 A life insurance company issues a special annuity contract to a male life aged 70
exact and a female life aged 60 exact. Annuity payments are due on the first day
of the month.
Under the contract an annuity of £50,000 per annum is payable monthly to the female
life, provided that she survives at least 5 years longer than the male life. The annuity
commences on the monthly policy anniversary next following the fifth anniversary
of the death of the male life and is payable for the balance of the female's lifetime.
Calculate the single premium required for the contract.
Basis: Mortality: PMA92C20 for males, PFA92C20 for females

Expenses: Nil [5]
8 (i) Describe three distinct methods of averaging salary that might be defined in
the scheme rules of a pension fund. [3]
(ii) Define sx and zx in the context of a pension fund. [2]

[Total 5]
9 A life insurance company sells a policy with a 10 year term to a healthy life aged 55
exact. The policy provides the following benefits:
• £25,000 payable immediately on death

• £1,000 per annum payable continuously during illness
The company prices the policy using the following multiple state model:
σx
Able (a) Ill (i)
ρx
µx νx
Dead (d)
Give a formula for the expected present value of the benefits under the policy. [5]

10 A life insurance company issues a term assurance policy for a term of 10 years to two
lives whose ages are x and y, in return for the payment of a single premium. The
following benefits are payable under the contract:
• In the event of either of the lives dying within 10 years, a sum assured of
£100,000 is payable immediately on the first death if it is the life aged x or
£50,000 if the life aged y.
• In the event of the second death within the remainder of the 10 year term, a
further sum assured of twice the original claim previously paid is payable
immediately on the second death.
Calculate the single premium.
Basis: Mortality: μx = 0.02 constant throughout life and μy = 0.03 constant

throughout life
Interest: δ = 4% per annum
Expenses: Nil
[8]
11 A life insurance company issues the following policies:
• 20-year endowment assurance with a sum assured of £75,000 payable at maturity

or at the end of the policy year of death if earlier. Level premiums for this
contract are paid annually in advance.
• 20-year single premium temporary immediate annuity with an annual benefit

payable in advance of £18,000.
On 1 January 2001, the company sold 5,000 endowment assurance policies and 2,500
temporary immediate annuity policies, all to lives aged 45 exact.
(i) Calculate the death strain at risk for each type of policy during 2008.
Basis: Mortality: AM92 Select

Expenses: Nil
[4]
During the first seven policy years, there were 65 deaths from the endowment
assurance policies and 30 deaths from the temporary immediate annuity policies.
During 2008, there were 10 deaths from the endowment assurance policies and 5
deaths from the temporary immediate annuity policies.
(ii) Calculate the total mortality profit or loss to the company during 2008 using
the basis in (i) above.
[5]
[Total 9]
CT5 A2009—4
12 (i) Explain the terms “unit fund” and “non-unit fund” in the context of a unit-
linked life assurance contract. [4]
(ii) Explain why a life insurance company might need to set up reserves in order
to zeroise future expected negative cashflows in respect of a unit-linked life
assurance contract. [2]
(iii) A life insurance company issues 4-year unit-linked contracts to a male lives
aged 50 exact. The following non-unit fund cash flows, NUCFt, (t = 1, 2, 3, 4)
are obtained at the end of each year t per contract in force at the start of the
year t:
Year t 1 2 3 4
NUCFt 375.4 −152.0 −136.2 −118.0
The rate of interest earned on non-unit reserves is 5.5% per annum and
mortality follows the AM92 Select table.
Calculate the reserves required at times t = 1, 2 and 3 in order to zeroise future

negative cash flows. [4]
[Total 10]
13 A life insurance company issues a 3-year savings contract to unmarried male lives
that offers the following benefits:
• On death during the 3 years, a sum of £15,000 payable immediately on death.
• On surrender during the 3 years, a return of premiums paid, payable immediately

on surrender.
• On marriage during the 3 years, a return of premiums paid accumulated with

compound interest at 4% per annum, payable immediately on marriage.
• On survival to the end of the 3 years, a sum of £5,000.
The contract ceases on payment of any benefit.
Calculate the level premium payable annually in advance for this contract for a life
aged 40 exact.
Basis: Independent rate of mortality AM92 Ultimate

Independent rate of surrender 10% per annum
Independent rate of marriage 5% per annum
Expenses 0.5% of each premium
[12]

14 A life insurance company issues a 5-year with profits endowment assurance policy to
a life aged 60 exact. The policy has a basic sum assured of £10,000. Simple
reversionary bonuses are added at the start of each year, including the first. The sum
assured (together with any bonuses attaching) is payable at maturity or at the end of
year of death, if earlier. Level premiums are payable annually in advance throughout
the term of the policy.
(i) Show that the annual premium is approximately £2,476.

Initial expenses: 60% of the first premium
Renewal expenses: 5% of the second and subsequent premiums
Bonus Rates: A simple reversionary bonus will declared each
year at a rate of 4% per annum
[5]
The office holds net premium reserves using a rate of interest of 4% per annum and
AM92 Ultimate mortality.
In order to profit test this policy, the company assumes that it will earn interest at 7%
per annum on its funds, mortality follows the AM92 Ultimate table and expenses and
bonuses will follow the premium basis.
(ii) Calculate the expected profit margin on this policy using a risk discount rate
of 9% per annum.
[14]
[Total 19]
END OF PAPER
CT5 A2009—6

Core Technical
EXAMINERS’ REPORT
April 2009
Introduction
R D Muckart
June 2009
Comments
Where relevant, comments for individual questions are given after each of the solutions that
follow.
Subject CT5 (Contingencies Core Technical) — April 2009 — Examiners’ Report)
1 5⏐10 q[40]+1 is the probability that a life now aged 41 exact and at the beginning of the
second year of selection will die between the ages of 46 and 56 both exact.
Value is:
(l46 − l56 ) / l[40]+1

= (9786.9534 − 9515.104) / 9846.5384
= 0.02761
2 lx = 110 − x
⇒ dx = lx − lx + 1
= (110 − x) − (110 − x − 1)
= 1 for all x
⎛ 19 ⎞
(i) A1 = ⎜ ∑ vt +1 * d 40 + t ⎟ / l 40
40:20 ⎜ ⎟
⎝ 0 ⎠
⎛ 19 ⎞
= ⎜ ∑ vt +1 ⎟ / l 40
⎜ ⎟
⎝ 0 ⎠
= a20 / l 40
= 13.5903 / (110 − 40)
= 0.19415
(ii) A40:20 = A 1 + v 20 * l60 / l40

40:20
= 0.19415 + 0.45639*(110 − 60) / (110 − 40)
= 0.52014
3 Assuming contributions are payable continuously we make the approximation that

they are payable on average half-way through the year. The present value of
contributions in the year t to t + 1 is:
⎛ s ⎞ v x +t +0.5 l x +t +0.5
(0.04).⎜ S x +t − 5000 ⎟ . .
⎝ s x −1 ⎠ vx lx
Page 2
Define the following parameters and commutation functions:
s x +t
represents the ratio of a member’s earnings in the year of age x+ t to x+t+1 to
sx
their earnings in the year x to x+1.
Dx +t = v x +t l x +t
D x +t = v x +t +0.5l x +t +0.5
s
Dx = s x −1v xl x
D x +t = s x +t v x +t +0.5lx +t +0.5
s
t = NRA− x −1
Nx = ∑ D x +t
t =0
t = NRA− x −1
∑
s s
Nx = D x +t
t =0
Then the present value of all future contributions is:
⎛ sN Nx ⎞
(0.04).⎜ S s ⎟
x
− 5000
⎜ Dx Dx ⎟
⎝ ⎠
4 (a) Different groups or classes of policyholders may have higher or lower

lapse rates for all major risk factors (age, duration, gender etc.) than other
classes. An example would be where a class of policyholders is defined as
those who purchased their policies through a particular sales outlet (e.g.
broker versus newspaper advertising).
(b) Lapse rates may vary by policy duration as well as age for shorter durations.
At shorter durations lapse rates may be the result of “misguided” purchase
by policyholder whereas at longer durations the policy has become more
stable.
(c) Lapse rates vary with calendar time for all major risk factors, e.g.
economic prosperity varies over time and this results in a similar variation in
lapse rates.
Other valid comments were credited. Many students ignored lapses altogether attempting to
answer the question from a mortality standpoint only. No credit was given for this.
Page 3
5 Assumptions
• Equal forces in the multiple and single decrement tables

• Uniform distribution of all decrements across year of age
Then
1 1
pβx (ap) x
(aq)βx =∫ β
t ( ap ) x .μ x +t .
t
.dt = ∫ ( t pβx μβx +t ). t .dt
0 t pβx 0 t pβx
Our assumptions give us:
t pβx μβx +t = qβx

t ( ap ) x
β
= t pxα = 1 − t.qxα
t px
Therefore:
1
(aq)βx = ∫ qβx .(1 − t.qxα ).dt
0
1
⎡ t2 α ⎤ β⎛ 1 α⎞
= qβx ⎢t − q x ⎥ = q x ⎜ 1 − q x ⎟
⎣⎢ 2 ⎥⎦ 0 ⎝ 2 ⎠
⎛ 1 1 ⎞⎛ 1 ⎞ 1 1 1
( )
2
= ⎜ + qxα ⎟ ⎜1 − qxα ⎟ = + qxα − qxα
⎝ 3 4 ⎠ ⎝ 2 ⎠ 3 12 8
Alternatively the solution can be expressed in terms of q xβ :
⎛ 1 ⎛ 1 ⎞⎞
= qxβ ⎜1 − * 4* ⎜ qxβ − ⎟ ⎟
⎝ 2 ⎝ 3 ⎠⎠
⎛5 ⎞
= qxβ ⎜ − 2qxβ ⎟
⎝3 ⎠
This question was essentially course bookwork plus a substitution. To gain good credit it
was necessary to work though the solution as above.
Page 4
∞
6 E[Txy ] = ∫ t.tpx.tpy (μx + t + μy + t )dt
0
∞
= ∫ t.e−.02t e−.03t (0.02 + 0.03)dt
0
∞
= 0.05∫ t.e−.05t dt
0
Integrating by parts:
∞
= 0.05([−t.e −.05t / .05]0∞ + 1/ .05* ∫ e −.05t dt )
0
= 0.05(0 − 20 / .05[e −.05t ] ∞

0)
= 20
Alternatively:
∞
E[Txy ] = ∫ tpx.tpydt
0
∞
= ∫ e −.02t e −.03t dt
0
∞
= ∫ e −.05t dt
0
= [−1/ .05* e −.05t ]0∞

= 20
The alternative solution above in essence belongs to the Course CT4 but students who used
this were given full credit. The first solution is that which applies to the CT5 Course.
7 Consider the continuous version
This would be
∞
50000 ∫ vt +5 (1 − t p70
m f
) t +5 p60 dt
0
∞
= 50000v5 5 p60 ∫ v (1 − t p70 ) t p65dt
f t m f
0
= 50000v5 5 p60
f
(a65f − a70:
m f
65)
Page 5
The monthly annuity equivalent SP is:
= 50000v5 5 p60
f (12) f
(a65 − a(12)70:65
m f
)
= 50000v5 5 p60
f f
(a65 − a70:65
m f
) (note the monthly adjustment cancels out)
= 50000*0.82193*9703.708 / 9848.431*(14.871 − 10.494)
= 177236
Other methods were credited. Students who developed the formulae without recourse to
continuous functions were given full credit.
8 (i) Final salary – rate of salary at retirement
Final average salary – salary averaged over a fixed period (usually 3 to 5

years) before retirement
Career average salary – salary averaged over total service
.
s x +t
(ii) represents the ratio of a member’s earnings in the year of age x+ t to
sx
x+t+1 to their earnings in the year x to x+1.
s x −1 + s x −2 + ..... + s x − y
zx = is defined as a y-year final average salary scale.
y
Other versions credited. Strictly speaking Final Salary is not an average but this caused no
confusion and was fully credited
10
9 25000 ∫ e−δt ( t p55
aa
μ55+t + t p55
ai
ν55+t )dt
0
10
+ ∫ e −δt (0. t p55
aa
+ 1000 t p55
ai
)dt
0
where:
δ= the force of interest

t p 55 = the probability that an able life age 55 is able at age 55 + t
aa
t
ai
p55 = the probability that an able life age 55 is ill at age 55 + t
Page 6
10 This is the same as:
If y dies in 10 years, then 50000 is paid if x is alive, 200000 if x is dead,

If x dies in 10 years, then 100000 is paid
So the expected present value =
10
−δt
∫ t p yμ y+t (50000 t px + 200000 t qx ).e dt
0
10
+100000 ∫ t p x .μ x +t .e−δt dt
0
t
− ∫ 0.02 dr
t px = e
0 = e −.02t
t
− ∫ 0.03dr
t py = e 0 = e −.03t
Therefore value =
10
−.03t
∫e 0.03(50000e −.02t + 200000(1 − e −.02t )).e −.04t dt
0
10
+100000 ∫ e −.02t 0.02.e −0.4t dt
0
10 10 10
−.07t −.06t
= 6000 ∫ e dt + 2000 ∫ e dt − 4500 ∫ e −.09t dt
0 0 0
6000 ⎡ −0.7 ⎤ 2000 ⎡ −0.6 ⎤ 4500 ⎡ −0.9 ⎤
= e −1 + e −1 − e −1
−0.07 ⎣ ⎦ −0.06 ⎣ ⎦ −0.09 ⎣ ⎦
= 28,518
Page 7
11 (i) Annual premium for endowment with £75,000 sum assured given by:
75, 000 A[45]:20 75, 000 × 0.46982

P = = = 2556.15
a[45]:20 13.785
Reserves at the end of the eighth year:
for endowment with £75,000 sum assured is given by:
8V = 75, 000 × A53:12 − 2556.15a53:12
= 75, 000 × 0.63460 − 2556.15 × 9.5 = 23,311.58
for temporary annuity paying an annual benefit of £18,000 is given by:
8V = 18, 000a53:12 = 18, 000 × 9.5 = 171, 000.00
Death strain at risk:
Endowment: DSAR = 75,000 − 23,311.58 = 51,688.42

Immediate annuity DSAR = – 171,000.00
(ii) Mortality profit = EDS – ADS
For endowment assurance
EDS = (5000 − 65) × q52 × 51, 688.42

= 4935 × 0.003152 × 51, 688.42 = 804, 019.58
ADS = 10 × 51, 688.42 = 516,884.20
For immediate annuity
EDS = (2500 − 30) × q52 × −171, 000.00

= 2470 × 0.003152 × −171, 000.00 = −1,331,310.24
ADS = 5 × −171, 000.00 = −855, 000.00
mortality profit = − 476,310.24
Hence, total mortality profit = 287,135.38 – 476,310.24 = –189,174.86

(i.e. a mortality loss)
Page 8
12 (i) For a unit-linked life assurance contract, we have:
the unit fund that belongs to the policyholder. This fund keeps track of the
premiums allocated to units and benefits payable from this fund to
policyholders are denominated in these units. This fund is normally subject to
unit fund charges.
the non-unit fund that belongs to the company. This fund keeps track of the
premiums paid by the policyholder which are not allocated to units together
with unit fund charges from the unit-fund. Company expenses will be charged
to this fund together with any non-unit benefits payable to policyholders.
(ii) It is a principle of prudent financial management that once sold and funded at
outset, a product should be self-supporting. However, some products can give
profit signatures which have more than one financing phase. In such cases,
reserves are required at earlier durations to eliminate future negative cash
flows, so that the office does not expect to have to input further money in the
future.
(iii)
Year t q[50]+t−1 p[50]+t−1
1 0.001971 0.998029
2 0.002732 0.997268
3 0.003152 0.996848
4 0.003539 0.996461
118.0
3V = = 111.85
1.055
2V ×1.055 − p52 × 3V = 136.2 ⇒ 2V = 234.78
1V × 1.055 − p[50]+1 × 2V = 152.0 ⇒ 1V = 366.01
Page 9
13 Multiple decrement table constructed using (aq ) dx = qxd ⎡1 − 1 2 (qxs + qxm ) + 13 q xs × q xm ⎤

⎣ ⎦
etc. which assumes that the decrements in each single decrement table are uniformly
distributed over each year of age
x q xd qxs qxm (aq) dx (aq) sx (aq ) m

x
40 0.0009370 0.10 0.05 0.0008683 0.0974547 0.0474781
41 0.0010140 0.10 0.05 0.0009396 0.0974510 0.0474763
42 0.0011040 0.10 0.05 0.0010230 0.0974466 0.0474742
Using an arbitrary radix of 1,000,000, we can construct the following multiple

decrement table
X (al ) x (ad ) dx (ad ) sx (ad ) m

x
40 1,000,000 868.3 97,454.7 47,478.1
41 854,198.9 802.6 83,242.5 40,554.2
42 729,599.6 746.4 71,097.0 34,637.2
43 623,119.0
Let P be the annual premium for the contract.
Then equation of value gives:
PV of premiums = PV of death benefits + PV of surrender benefits + PV of survival

benefits + PV of expenses
PV of premiums
⎛ 854,198.9 729,599.6 2 ⎞
= P ⎜1 + × v0.05 + × v0.05 ⎟
⎝ 1, 000, 000 1, 000, 000 ⎠
= P (1 + 0.813523 + 0.661768 ) = 2.475291P
PV of expenses = 0.005 × 2.475291P = 0.0123765P
PV of death benefits
1 ⎛ 868.3 802.6 2 746.4 3 ⎞

= 15, 000 × (1.05) 2 × ⎜ × v0.05 + × v0.05 + × v0.05 ⎟
⎝ 1, 000, 000 1, 000, 000 1, 000, 000 ⎠
= 15,370.4262 ( 0.00082695 + 0.00072798 + 0.00064477 ) = 33.8103
PV of withdrawal benefits =
⎛ 97, 454.7 83, 242.5 2 71, 097.0 3 ⎞ 1

= P ⎜ 1× v0.05 + 2 × v0.05 + 3 × v0.05 ⎟ × 1.05 2
⎝ 1, 000, 000 1, 000, 000 1, 000, 000 ⎠
= P ( 0.092814 + 0.1510068 + 0.1842488 ) × 1.024695 = 0.4386408 P
Page 10
PV of marriage benefits =
1
⎛ 47, 478.1 0.04 40,554.2 34, 637.2 3 ⎞ ⎛ 1.05 ⎞
2
= P⎜ × s1 × v0.05 + × s20.04 × v0.05
2
+ × s30.04 × v0.05 ⎟ × ⎜ 1.04 ⎟
⎝ 1, 000, 000 1, 000, 000 1, 000, 000 ⎠ ⎝ ⎠
= P ( 0.0470259 + 0.0780406 + 0.0971372 ) ×1.0047962 = 0.2232694 P
PV of survival benefits =
623,119.0 3
5000 × v0.05 = 2691.3681
1, 000, 000
Equation of value becomes
2.475291P = 33.8103 + 0.4386408P + 0.2232694P + 2,691.3681 + 0.0123765P
=> P = 2725.1784/1.801004 = 1513.14
14 (i) Let P be the annual premium payable. Then equation of value gives:
PV of premiums = PV of benefits + PV of expenses
i.e.
Pa[60]:5 = 10, 000 A[60]:5 + 400( IA)60:5 + 0.05 Pa[60]:5 + 0.55 P at 6%
l65 l
where ( IA)[60]:5 = ( IA)[60] − 5
× v0.06 ( 5 A65 + ( IA)65 ) + 5 × 65 × v0.06
5
l[60] l[60]
= 5.4772 − 0.7116116(5 × 0.40177 + 5.50985) + 5 × 0.7116116 = 3.684864
l65 8821.2612
and =
l[60] 9263.1422
⇒ P(0.95a[60]:5 − 0.55) = 10, 000 A[60]:5 + 400( IA)60:5
⇒ P(0.95 × 4.398 − 0.55) = 10, 000 × 0.75104 + 400 × 3.684864
8984.3456
P= = 2476.32
3.6281
Page 11
(ii) Reserves required on the policy at 4% interest are:
1V60:5 = 10, 400 A61:4 − NPa61:4

⎛ a ⎞ ⎛ 3.722 ⎞
= 10, 000 ⎜1 − 61:4 ⎟ + 400 A61:4 = 10, 000 ⎜1 − ⎟ + 400 × 0.85685 = 2162.52
⎜ a ⎟ ⎝ 4.550 ⎠
⎝ 60:5 ⎠
⎛ a62:3 ⎞ ⎛ 2.857 ⎞
2V60:5 = 10, 000 ⎜ 1−
⎜ a
⎟ + 800 A62:3 = 10, 000 ⎜ 1 −
⎟ ⎟ + 800 × 0.89013 = 4432.98
⎝ 60:5 ⎠ ⎝ 4.550 ⎠
⎛ a63:2 ⎞ ⎛ 1.951 ⎞
3V60:5 = 10, 000 ⎜ 1−
⎜ a
⎟ + 1200 A63:2 = 10, 000 ⎜1 −
⎟ ⎟ + 1200 × 0.92498 = 6822.06
⎝ 60:5 ⎠ ⎝ 4.550 ⎠
⎛ a64:1 ⎞ ⎛ 1.000 ⎞
V = 10, 000 ⎜1 − ⎟ + 1600 A64:1 = 10, 000 ⎜1 − ⎟ + 1600 × 0.96154 = 9340.66
4 60:5 ⎜ a ⎟ ⎝ 4.550 ⎠
⎝ 60:5 ⎠
Year t Prem Expense Opening Interest Death Mat Closing Profit

reserve Claim Claim reserve vector
1 2476.32 1485.79 0 69.34 83.43 0 2145.17 −1168.73
2 2476.32 123.82 2162.52 316.05 97.30 0 4393.04 340.73
3 2476.32 123.82 4432.98 474.98 113.25 0 6753.08 394.13
4 2476.32 123.82 6822.06 642.22 131.59 0 9234.20 450.99
5 2476.32 123.82 9340.66 818.52 152.59 11847.41 0 511.68
Year t t −1 p Profit signature Discount NPV of profit

factor signature
1 1.0 −1168.73 .91743 −1072.23
2 0.991978 338.00 .84168 284.49
3 0.983041 387.45 .77218 299.18
4 0.973101 438.85 .70843 310.89
5 0.962062 492.27 .64993 319.94
NPV of profit signature = £142.28
Year t Premium t −1 p Discount NPV of premium

factor
1 2476.32 1.0 1 2476.32
2 2476.32 0.991978 .91743 2253.63
3 2476.32 0.983041 .84168 2048.92
4 2476.32 0.973101 .77218 1860.73
5 2476.32 0.962062 .70843 1687.74
NPV of premiums = £10,327.34
142.28
Profit margin = = 0.0138 i.e. 1.38%
10,327.34
Page 12
EXAMINATION
5 October 2009 (am)

Core Technical
booklet.
supervisor.
question paper.
2
1 Evaluate 20 q[45]:[45]
Basis: AM92 Select for both lives. [3]
2 Give an expression for the expected present value of a benefit of 1 under a

critical illness assurance contract for a healthy life aged x for term of n years. [3]
3 Calculate 0.5q72.25 using the assumption of a constant force of mortality.
Basis: PMA92Base [3]
4 Using the following data:
Age Population Number of deaths
40 121,376 104
41 134,292 127
42 133,277 132
(i) Calculate the crude mortality rate for the total population. [1]
(ii) Calculate the standardised mortality ratio for this population using AM92
Ultimate. [3]
[Total 4]
5 Derive an expression for the variance of the present value of a temporary annuity-
due in terms of assurance functions for a life aged x with a term of n years. [4]
6 A life insurance company sells annual premium whole life assurance policies with
benefits payable at the end of the year of death. Renewal expenses are incurred at the
start of each year, and claim expenses are nil.
(a) Write down a recursive relationship between the gross premium reserves at
successive durations, calculated on the premium basis. Define all symbols
used.
(b) Explain the meaning of this formula in words.

[4]
CT5 S2009—2
7 (a) State what is meant by direct expenses incurred by a life insurance company in
respect of a life insurance contract.
(b) Describe three different categories of direct expenses and give an example of
each.
[5]
8 (i) Identify three classes of pensioner in receipt of a benefit from a pension fund.
[3]
(ii) Give two examples of selection that might be exhibited by these pensioners.[2]
[Total 5]
9 (i) Describe how insurance companies use responses to questions from

prospective policyholders to ensure the probability of a profit is set at an
acceptable level. [5]
(ii) Explain why an insurance company might not use questions requesting genetic
information from prospective policyholders? [3]
[Total 8]
10 A pension fund provides a pension from normal retirement age of £1,000 per annum
for each complete year of service. The pension is payable monthly in advance for 5
years certain and for the whole of life thereafter and is only paid if the life remains in
service to normal retirement age of 65.
Calculate the expected present value of the pension for a new entrant aged 62 exact.
Basis: Interest: 4% per annum

Mortality after retirement: PMA92C20
Independent decrement rates before retirement
Age x q xd qxw
62 0.005650 0.015672
63 0.006352 0.078441
64 0.007140 0.055654
[8]

11 A life insurance company offers special endowment contracts that mature at age 65.
Premiums are payable annually in advance on 1 January each year. The sum assured
payable at the end of year of death during the term is one half of the sum assured that
will be paid if the policyholder survives until maturity.
Details of these contracts in force on 31 December 2007 are:
Exact age Total sums assured Total annual premiums (£)

payable on maturity (£)
60 12,250,000 440,000
The claims in 2008 were on policies with the following total sums assured and annual
premiums:
Total sums assured Total annual premiums (£)

payable on maturity (£)
200,000 7,000
Calculate the mortality profit or loss in 2008 given that the company calculates
reserves for these contracts using the gross prospective method.
Basis: Mortality: AM92 Ultimate

Expenses: Nil
[9]
2
12 (i) Define in words 1000 A x: y . [3]
(ii) Calculate:
2
(a) 1000A30:40
(b) The annual premium payable continuously until the 2nd death for the
above assurance in (a) with a sum assured of £1,000.
Basis: μ = .02 for a life aged 30 exact at entry level throughout their life
μ = .03 for a life aged 40 exact at entry level throughout their life
δ = .05 throughout
Expenses: Nil
[7]
(iii) Outline the main deficiency of the above premium paying scheme and suggest
an alternative. [3]
[Total 13]
CT5 S2009—4
13 A life insurance company issues a 35-year non profit endowment assurance policy to
a life aged 30 exact. Level premiums are payable monthly in advance throughout the
term of the policy. The sum assured of £75,000 is payable at maturity or at the end of
year of death of the life insured, if earlier.
(i) Show that the monthly premium is approximately £74.

Initial expenses: £250 plus 50% of the gross annual premium
Renewal expenses: £75 per annum, inflating at 1.92308% per
annum, at the start of the second and subsequent
policy years and 2.5% of the second and
subsequent monthly premiums
Claims expense: £300 inflating at 1.92308% per annum
Inflation: For renewal and claim expenses, the amounts
quoted are at outset, and the increases due to
inflation start immediately.
[7]
(ii) The insurance company calculates a surrender values equal to the gross
retrospective policy value, assuming the same basis as in (i) above.
Calculate the surrender value at the end of the 30th policy year immediately
before the premium then due. [7]
[Total 14]

14 A life insurance company issues a special term assurance policy for a 3-year term.
Under the policy, a sum assured of £10,000 is paid at the end of the year of death. In
addition on survival to the end of the term 50% of total premiums paid are returned.
Basis: Initial expenses: 20% of the first year’s premium

Renewal expenses: 5% of 2nd and 3rd years’ premiums
Reserves: Net Premium using AM92 Ultimate at 4% interest
(allowing for return of 50% of net premiums paid on
survival)
Mortality experience: 80% AM92 Select
Withdrawals: 20% in year 1, 10% in year 2 (with all withdrawals
assumed to occur at end of year)
Surrender Value: Nil
Interest earned: 6% per annum
Risk discount rate: 10% per annum
(i) On the basis of the above information, calculate the level annual premium
payable in advance for a life aged 57 exact to achieve the required rate of
return. [12]
(ii) Discuss the effect of increased withdrawal rates on the rate of return to the
company from this policy. [2]
Following comments from the marketing department, it has been decided to allow a
surrender value at the end of years 1 and 2 equal to 25% of total premiums paid.
(iii) Calculate the revised annual premium using the basis above. [3]
[Total 17]
END OF PAPER
CT5 S2009—6
Subject CT5 — Contingencies.

Core Technical
September 2009 Examinations
EXAMINERS’ REPORT
Introduction
R D Muckart
December 2009
Comments for individual questions are given with the solutions that follow.
Subject CT5 — Contingencies Core Technical - September 2009 – Examiners’ Report
1
2
20 q[45]:[45] 1 / 2 * 20 q[45]:[45]
2
1 / 2 * (1 20 p[45] )
l65
1 / 2 * (1 )2
l[45]
1 / 2 * (1 8821.2612 / 9798.0837) 2
.00497
In general well this question was well done.
2
Define
k (ap) x = the probability that a life aged x is alive and not diagnosed as critically ill at
time k
(aq)tx k = the probability that a life aged x + k is diagnosed as critically ill in the
following year
Then the value is
n 1
vk 1 t
k ( ap ) x .( aq ) x k
k 0
Where the benefit is payable at the end of the year of diagnosis
Students often failed to define symbols adequately. The continuous alternative was
also fully acceptable
3
For contant force of mortality at age 72:
1
dt
p72 (1 q72 ) .969268 e 0 e
Hence ln(.969268) .031214
0.75
.031214 dt .015607
0.5 p72.25 e e
0.25
.984514
0.5 q72.25 1 .984504
.015486
Page 2
Generally well done. The alternative very quick answer of 1 ( p 72)1/2 was fully
acceptable
4
(i) Crude rate = (104+127+132)/(121376+134292+133277)=0.000933
(ii)
Age Population qx Expected
Number of
deaths
40 121,376 0.000937 114
41 134,292 0.001014 136
42 133,277 0.001104 147
SMR = actual deaths / expected deaths
= (104+127+132) / (114+136+147) = 0.914
Generally well done.
5
1 v min( K x 1,n )
var amin( K x 1,n ) var
d
1
2
var v min( K x 1,n )
d
1 2
2
Ax:n ( Ax:n )2 where 2 Ax:n is at rate (1 i )2 1
d
Straightforward bookwork where considerable information was given in Handbook.

The Examiners were looking to see students knew how to derive the relationship.
6
a. ( tV ' GP-et )(1 i ) qx t S px t ( t 1V ' )
Page 3
'
where tV gross premium reserve at time t
GP office premium
et renewal expenses incurred at time t
i interest rate in premium/valuation basis
S Sum Assured
qx t probability life aged x t dies within one year on premium/valuation basis
px t probability life aged x t survives one year on premium/valuation basis
b. Income (opening reserve and excess of premium over renewal expenses)

plus interest equals outgo (death claims and closing reserve for
survivors) if assumptions are borne out.
7
Direct expenses are those that vary with the amount of business written. Direct
expenses are divided into:
Initial expenses
Renewal expenses
Termination expenses
Examples of each:
Initial expenses – those arising when the policy is issued e.g. initial commission
Renewal expenses – those arising regularly during the policy term e.g. renewal
commission
Termination expenses – those arising when the policy terminates as a result of an
insured contingency (e.g. death claim for a temporary life insurance policy)
Generally well done and other valid comments and examples were credited.
8
(i) Pensioners retiring at normal retirement age
Pensioners retiring before normal retirement age
Pensioners retiring before normal retirement age on the grounds of ill-health
(ii) Class selection – ill-health pensioners will have different mortality to other
retirements.
Temporary initial selection – the difference between these classes will
diminish with duration since retirement
Page 4
Anti-Selection and Time Selection were credited provided they were properly justified.
9
(i) To set premium rates to ensure the probability of a profit is set at an
acceptable level then the insurer takes advantage of the Central Limit Theorem
while pooling risks which are independent and homogeneous.
Independence of risk usually follows naturally.
Homogeneity is ensured by careful underwriting. Risk groups are separated
by the use of risk factors, such as age and sex.
The life assurance company uses responses to questions to allocate prospective
customers to the appropriate risk group.
Enough questions should be asked to ensure that the variation between
categories is smaller than the random variation that remains but in practice
there will be limits on the number and type of questions that can be asked.
(ii) Equity – insurance is about pooling of risks and the use of genetic information
reduces that pooling.
Ethics – use of genetic information could create an “underclass” of lives who
are not able to obtain insurance products at an affordable price, given the
results of their genetic tests.
In some countries legislation may prohibit genetic testing or there might be

political or social reasons why it is avoided.
Generally part (i) was done poorly with students failing to appreciate the key points. Part (ii) was
done better but in this case also most students failed to obtain all the main valid points.
10
Pension at retirement = 3 1000 = 3000
Annuity at retirement
ä (12) v5 . 5 p 65 ä70
(12)
5
i (12)
a5 . (12)
v5 . 5 p 65 ä70
d
9238.134
4.4518 1.021537 0.82193* . 11.562 11 13.28659
9647.797 24
Multiple decrement table

Use the formula
Page 5
(aq) x qx qx qx .qx
To derive the following
(aq)62= 0.021233, (aq)63= 0.084295, (aq)64= 0.062397

And 3(ap)62 = (1 0.021233).(1 0.084295).(1 0.062397)= 0.840338
So value = 3000 13.28659 0.840338 (1.04) 3 = 29778
A large proportion of students whilst understanding how to approach this question failed
to calculate some or all of it correctly. In some cases certain parts were omitted or
calculated wrongly. Credit was given where parts of the solution were correct.
11
Let EDS and ADS denote the expected and actual death strain in 2008. Then
l65 4
EDS q60 Si Si ( A61:4 i 61:4
v ) Pa
i l61
where S i is the death benefit per policy and the summation is over all policies in force
at start of the year i.e. (where figures are in £000’s)
l65 4
EDS q60 Si Si ( A61:4 v ) Pi a61:4
l61
8821.2612
0.008022 6125 6125 0.85685 0.854804 440 3.722
9212.7143
0.008022 6125 8623.75 20.045
The actual death strain is obtained by summation of the death strains at risk over the
policies that become claims. Therefore
l65 4
ADS Si Si ( A61:4 i 61:4
v ) Pa
claims l61
l65 4
Si Si ( A61:4 v ) Pi a61:4
claims claims l61 claims
100 167.5333 26.054 41.479
Therefore, mortality profit = -20.045 + 41.479 = 21.434 (i.e. a profit of £21,434).
Page 6
This question was very poorly done. Students failed to properly identify the data and
the subtleties of a Pure Endowment contract.
12
(i) The expected present value of a continuous assurance for a sum assured of
1000 calculated at a force of interest on 2 lives aged x and y whereby the
sum is paid on the death of x only if life aged x dies after life aged y.
(ii) For both parts (a) and (b):
for the life aged 30

t t
rdr 0.02 dr 0.02t
tp 30 e 0 e 0 e
Similarly for the life 40

0.03t
tp 40 e
_ 2 t
(a) 1000 A 30 : 40 1000 0 v tp30(1 tp 40) t dt
.05t .02t .03t
1000 0 e *e *(1 e ) *.02dt
.07t .1t
1000 0 .02*(e e )dt
.07t .1t
1000[ .02 / .07 * e .02 / .1* e ]0
1000(.02 / .07 .02 / .1)
85.714
____
(b) To calculate premium we need a30:40
____
a30:40 0 vt *(1 (1 tp30)(1 tp 40))dt
.05t .02t .03t .05t
0 e (e e e )dt
.07t .08t 1.t
0 (e e e )dt
.07t .08t .1t
[ e / .07 e / .08 e / .1]0
(1/ .07 1/ .08 1/ .1)
16.786
So the required premium = 85.714 /16.786

5.11
(iii)If the life age 30 dies first the policy ceases without benefit yet the premium is
expected to be maintained by the life aged 40 so long as they survive. There is
no incentive to continue.
The sensible option would be to establish the premium paying period as
ceasing on the death of the life aged 30.
Page 7
A single premium is possible as an alternative if affordable.
In general terms this question was reasonably well done although a large number of
students failed to obtain all of the required numerical solutions (the main error being
failure to calculate the joint life last survivor annuity). In part (iii) a student who
suggested a joint life first death approach was given credit although this is an
expensive option.
13
(i) Let P be the monthly premium for the contract. Then:
EPV of premiums valued at rate i where i = 0.06 is:
11 l
12 Pa(12) 12 P(a[30]:35 (1 v35 65 ))
[30]:35 24 l[30]
l65 8821.2612
where v35 0.13011 0.11566
l[30] 9923.7497
11
12 P(15.152 (1 .11566)) 12 P 14.74668 176.9601P
24
EPV of benefits valued at rate i where i = 0.06 is:
75, 000 A[30]:35 75, 000 0.14234 10, 675.5
EPV of expenses not subject to inflation and therefore valued at rate i where i
= 0.06 is:
0.025 12 Pa(12) 0.025 P 250 0.5 12 P

[30]:35
250 10.399 P
EPV of expenses subject to inflation and therefore valued at rate j where

1.06
1 j 1.04 is:
1.0192308
75(a[30]:35 1) 300 A[30]:35 75 18.072 300 0.26647 1435.341
Equating EPV of premiums and EPV of benefits and expenses gives:
176.9601P = 10,675.5 + 250 + 10.399P + 1,435.341

=> P = 12,360.841/166.5611 = £74.21
(ii) Gross retrospective policy value is given by:
V retrospective
Page 8
l 12 P 0.975a(12) @ i % 0.025 P 12 0.5 P 250 75, 000 A[30]:30

1
@ i%
30 [30] [30]:30
(1 i )
l60 75(a@ j % 1
1) 300 A[30]:30 @ j%
[30]:30
where,
l[30] 9923.7497
1.06854
l60 9287.2164
and at rate i = 0.06
11 l 11
a(12) a[30]:30 1 v30 60 14.437 (1 0.16294) 14.0533
[30]:30 24 l[30] 24
1 l60
A[30]:30 A[30]:30 v30 (0.18283 0.16294) 0.0198
l[30]
and at rate j = 0.04
a[30]:30 17.759
1 l60
A[30]:30 A[30]:30 v30 0.31697 0.30832 0.93586 0.02843
l[30]
V retrospective
6.13715 12, 201.876 1.8553 445.26 250 1, 491.75 1, 256.925 8.529
£53,707.84
Generally part (i) was done well. Students did however often struggle to reproduce
part (ii) which is often the case with retrospective reserves.
In this case because the reserve basis matched the premium basis the retrospective
reserve equalled the prospective reserve. If the student realised this, fully stated the
fact and then calculated the prospective reserve full credit was given.
Minimal credit was however given if just a prospective reserve method was attempted
without proper explanation.
14
(i) First calculate net premium NP and reserve tV 57:3 for t = 1 and 2
Page 9
l60 l
NPa57:3 10000( A57:3 v3 ) 0.5 3 NP v3 60
l57 l57
NP 2.870 8896.3 10000 0.889 9287.2164 / 9467.2906
1.5 NP 0.889 9287.2164 / 9467.2906
175.394 NP 1.308
NP 112.29
1V57:3 (112.29 (1.04) 10000 q 57) /(1 q 57)
(116.782 56.50) / 0.99435
60.62
2V57:3 ((112.29 60.62) (1.04) 10000 q 58) /(1 q 58)
(179.826 63.520) / 0.993648
117.05
The end 3rd year reserve needs to be 1.5 times the office premium to be
calculated so as to meet the return guarantee.
We can complete the following table (denoting the office premium by P).
Note as withdrawals are assumed at the end of the year the decrements of
mortality and withdrawal are not dependent.
Year 1 Age 57 Year 2 Age 58 Year 3 Age 59
80% AM92 q select 0.0033368 .004944 .005712

Withdrawal .19933264 .0995056 0
In force factor 1 .79733056 .7140497
begin year
Premium P P P
Expenses 0.2P 0.05P 0.05P
Death Claims 33.368 49.440 57.120
Opening Reserve 0 60.62 117.05
Closing Reserve 48.334 104.824 1.4914P
Interest .048P .057P+3.6372 .057P+7.023
Profit vector .848P 81.702 1.007P 90.007 0.4844P+66.953

Profit signature .848P 81.702 .8029P 71.7653 0.3459P+47.808
Alternatively the Closing Reserve at End Year 3 can be taken as zero and an
additional item termed “Maturity Value” can be shown in Year 3 only equal to
1.4914P.
To obtain 10% return the equation is:
P [.848/(1.1) + 0.8029/(1.1)2 0.3459/(1.1)3] – [81.702/(1/1)
+ 71.7653/(1.1)2 47.808/(1.1)3] = 0
Page 10
1.1746 P 97.6659 = 0 P = 83.15 say £83

(ii) The impact of increasing withdrawal rates depends primarily on the
relationship between expenses, reserves and any surrender value. In this case
there is no surrender value, a substantial reserve for a maturity benefit and low
expenses.
In that scenario, increasing the lapse rates actually improves the return to the
company as it retains a substantial premium and reserve with low expected
death costs and returns nothing to the policyholder. This return comes earlier
also and benefits from the high risk discount rate.
(iii) A revised office premium is now required say P’.
In this case a life who surrenders obtains 0.25P’ at the end of year1 and 0.5P’
at the end of year 2.
On the same parameters the present value of these 2 cash flow items are:
P’ [0.25 0.19933264/(1.1)+0.5 0.0995056 0.79733056/(1.1)2]
= 0.07809P’
Hence from above with adjustment:
1.1746 P’ 97.6659 0.07809P’ = 0 P’ = 89.07 say £89
Most students found this a very daunting question and overall performance was lower
than expected. Certain comments are appropriate:
Because of the stated fact that withdrawals happened at the end of the year
calculating dependent decrements was not necessary. Many students wasted
much time attempting to perform this.
Many students did not know how to calculate a net premium for this contract.
The reserve process was very straightforward if done on a recursive basis (see
question 6)
Once these facts were realised the question was then a relatively simple
manipulation of cash flows.
Credit was given to students who gave some reasonable verbal explanation of what
needed to be done even if calculations were incomplete.
Page 11

Examination: Subject CT5 Contingencies Core Technical

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Faculty of Actuaries Institute of Actuaries

6 April 2005 (pm)

Subject CT5 Contingencies

Time allowed: Three hours

INSTRUCTIONS TO THE CANDIDATE

3. Mark allocations are shown in brackets.

5. Candidates should show calculations where this is appropriate.

Graph paper is not required for this paper.

AT THE END OF THE EXAMINATION

2 A 20-year temporary annuity-due of 1 per annum is issued to a life aged 50 exact.

(b) Explain in words the meaning of the relationship.

Calculate the annual annuity payment.

Mortality AM92 Ultimate

Interest 6% per annum

8 A pension scheme provides a pension on ill-health retirement of 1/80th of Final

CT5 A2005 3 PLEASE TURN OVER

Age band Exposed to Observed Exposed to Observed

20 29 125,000 0.00356 100,000 0.00125

Interest 6% per annum

Mortality AM92 Select

Initial commission 87.5% of the total annual premium

Initial expenses £175 paid at policy commencement date

Claim expense 2.5% of the claim amount

Interest 4% per annum

Mortality AM92 Select

CT5 A2005 5 PLEASE TURN OVER

Rate of growth on assets in the unit fund 6% per annum

Rate of interest on non-unit fund cashflows 4% per annum

Independent rates of mortality AM92 Select

Initial expenses £150 plus 100% of the amount of initial

Renewal expenses £50 per annum on the second and

Initial commission 10% of first premium

Renewal commission 2.5% of the second and subsequent

Risk discount rate 8% per annum

(ii) Suppose the office does zeroise future negative cashflows.

(ii) A life insurance company issues the following policies:

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

5-year single premium temporary immediate annuities with an annual

Interest 4% per annum

Mortality AM92 Ultimate for term assurances and pure endowments

Subject CT5 Contingencies

(b) A50:20 A50 v 20 20 p50 (1 A70 )

3 (a) ( tV ' OP et )(1 i ) qx t ( S ) p x t ( t 1V ' )

et expenses incurred at time t

i = interest rate in premium/valuation basis

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

4 The value of a pension of £1 p.a. is

So value of a pension of £1 p.a. is

7.59720 + v10 0.867219 8.682 = 11.801

So annuity purchased by £200,000 is 200000/11.801 = £16,948

6 Require to calculate 14½ p45½ ½ p45½ .14 p46

(a) Assume deaths uniformly distributed so t p x . x t constant

So 14½ p45½ (1 .001332) 0.91023 0.909018

(b) Assume that force of mortality is constant across year of age 45 to 46

45 ln(1 q45 ) ln(1 0.00266) 0.002664

So 14½ p45½ 0.998669 0.91023 0.909018

The expected value at a rate of interest i is

11 Let P be the monthly premium. Then:

.... 24 q[40] (1 b)25 v 25 } 100, 000 25 p[40] (1 b) 25 v 25

100, 000 D65

.875 12 P 175 0.025 12 P(a (12) a (12) ) 65[a[40]:25 1] 14.086 P 973.85

EPV of claim expense:

.025 38949.9 =973.748