MASENO UNIVERSITY UNIVERSITY EXAMINATIONS 2021/ 2022 FOURTH YEAR FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF SCIENCE IN MATHEMATICS STATISTICS AND ACTUARIAL SCIENCES WITH INFORMATION TECHNOLOGY MAIN CAMPUS MAC 403: ACTUARIAL LIFE CONTINGENCIES Time: 3.30 - 6. 30pm Date: 14" March, 2022 INSTRUCTIONS: © Do not write anywhere on this Question paper * Answer Question ONE and any other TWO. Kee safe “Ser mask property, sur hands with woter and soap or sanitize and keep social distance wash youMAC 403: Actuarial Life Contingencies Question One (30 marks) {a) Define the following: (i) Gross Policy value Show that rVy = (Prac — Prdéixte (ii) Show that Vy = 1 — S## ae (iv) Show that ,V, = 0, if force of mortality is constant. (4 marks) (b) State the difference between eqiy and :P8? (2 marks) (c) For a fully discrete whole life insurance of 1000 on (50) you are given (0) 1000P,5 = 25. i) 100046, = 440. (iii) 10004¢ = 2.0. i) i =0.06 Calculate the net premium reserve for this policy at time 10. {5 marks) (d) Define the following terms () Profit Vector (ii) Profit signature (iii) Net present Value (iv) Profit Margin (v) Partial NPV (vi) Internal Rate of Return (vii) Discounted Payback period (7 marks) {e) Fora special fully discrete 2-year endowment insurance of 3,000 on (x) you ae given: (i) The first year premium is 668 (i) The second year premium is 258 (iii) d=0.06 el annual premium using the equivalence principle Calculate the lev (4 marks) (f) Define the following terms(i) Unit -linked insurance (i Bid-offer spread (iii) Allocation percentage (iv) Give two differences between Universal Life Insurance and Whole life or ‘endowment policies. (8 marks) Question Two (20 marks) (2) For a special single premium 2-year endowment insurance on (x) ; you are given. (i) Death benefits , payable at the end of year of death are by = 3,000, bz = 2,000 (i) The maturity benefit is 1000. (iil) The expenses, payable at the beginning of the year Taxes at 2% of the expenses loaded premium. ‘Commission are 3% of the expenses loaded premium, Other expenses are 15 in the first and second year. (iv) i= 0.04 (v) P= 0.9, Pe 0.8 (i) Calculate the expenses loaded premium using the equivalence principles. (22 marks) {b) For a fully discrete two year insurance of 400 on (x), (i) FOL (ii) The level annual premium is 74.33 (iil) The net premium reserve at the end of year 1is 16.58 Calculate the variance of the loss at issue (8 marks) Question Three (20 marks) {a) For a fully continuous whole life insurance of 1 on (30), you are given. ‘The force of mortality is 0.05 in the first 10 years and 0.08 thereafter Calculate the net premium reserve at time 10 if the force of interest is 0.06. (10 marks) (2) Fora special fully continuous whole life insurance on (65), you are given (i) The death benefit at time tis by = 1000e°*. (i) Level net premiums are payable for life Hoste = 0.02. 5= 0.04. Calculate the net reserve at the end of year 2 (10 marks)4 toa life (x) produces the profit Question Four (20 marks) (a) Afive year policy ‘with annual cash flows issue vector. Pr (-360.98, 149.66, 14.75, 273.19, 388.04 403.00) ‘The survival model used in the profit testis given bY Gree = 0.085 + 0.0005 aoe ( Calculate the profit signature for this policy. th Coleulate the NPV for this policy using a discount of 10% per Year (ii) Calculate the IRR for this policy: (10 marks) (b) For a fully discrete 2 -year life insurance policy on (40). You are given ()—_Allcash flow are annual. (i) The annual gross premium is 100, (ii) Profit and premiums are discounted at an annual effective rate of F (iv) The profit vector Time in the year 0 a2) Profit -225 80 238 (v) Mortality follow illustrative life table (vi) Profit margin is -8.66% Calculate . Question Five(20 marks) (2) An insurer issues a four year term Insurance contract to a life aged 60. The sum assured 4s 1000,000 payable at the end of year of death. The gross premium in the contract Is ‘the 1100 per year. The reserve at each year to end is 30% of the gross premium You are given: (qo = 0.008, 46 = (i) Interest is 8% ) Initial expense is 30% of the first gross premium iv) Renewal expenses is 2% of each of the gross premium after the first. (¥) Claim expenses 60 Calculate the profit vector, the profit signature and the NPV of the contract usin, discount rate of 12% per year. the .009, 42 = 0.010, 4630-012 (10 marks) (b) An insurance company sell a 5 sella 5 year annual life insurance policy to ati whom the lifetable is given below The interest rates 0.04 The death bee efits are 200,000, The initial expenses are 100 plus 15% of the first premium. The renewal ex 0 pl ce plus 15% of the first. fe renewal costsx xk dy 234 10,000 3.13 ‘35 9,996.87 3.29 236 9,993.58 3.47 337 9,990.10 3.67 438 9,986.44 3.88 539 9,982.56 4.11 Calculate the cashflows associated with the policy if the annual premium is 80, (10 marks)