MSc Actuarial Management ST1 Week Five – Past Exam Questions SOLUTIONS

Comments in RED give an idea of how marks might be allocated in each question.

1. IoA Subject 302 April 2002 Question 6 (amended)

(i) Model points

Definition:
A “model point” is a sample policy (e.g. duration, size, sex, age) that is used to represent
a homogeneous group of policies. The results obtained from each model point are
scaled up to give the result for the group – these are then added together to give an
overall result. [2 marks]

Derivation:
• Divide the business into relatively homogeneous groups
• Number of groups will depend of trade-off between the variety of business / IT
power / accuracy wanted.
• Consider grouping according to premium rating factors, such as age, sex, term,
sum assured, smoker status, year of entry
• Combine relatively homogeneous groups where there are small numbers per
group, e.g. by using age bands rather than separate ages.
• Choose an “average policy” in each group to represent that group.
• This average could be weighted by size of policy, e.g. sum assured
• Record the number of policies and total sums assured in each cell so can scale
up later
• Model points must adequately represent their policies when used in the full
model. Projections based on model points must be sufficiently similar to those
based on full data, so that can make valid decisions.
• Use the checks in part (ii) to ensure model points chosen are appropriate.
[1 mark each]
(ii) Are the model points appropriate
Data checks:
• Check that values such as average age, sum assured, etc are similar for model
points and actual policy data
• Check that the total number of policies represented by the model points equals
the actual number of inforce policies.
• Check that the data used is “clean”, i.e. that data checks have been performed to
remove/change silly records such as zero ages and dates of birth and outliers
such as very large sums insured.
• Compare the model points with those used to price the business.

Other investigations:
• For a sample block of policies, check that using the model points produces an
answer that is sufficiently close to using individual policies
• Try a different grouping of data to generate alternative model points and repeat
the above to see if a closer match is obtained
• Use the model points to recalculate the most recent supervisory reserves and
compare with the numbers used in the actual valuation.
• Use the model points to predict company cashflows, such as premium income,
and compare with actual figures.
[½ mark each]

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2. IoA Subject 302 September 2002 Question 2 (amended)

Morbidity/mortality assumption:
• Might be lower if customers more financially aware and better educated
• Might be heavier due to limited underwriting

Initial and renewal expenses assumptions:

• Lower initial expense as lower underwriting and policy processing costs.
• Renewal expense might be a bit lower due to some admin savings
• High development costs will need to be recouped – e.g. by higher initial expense
assumption, or by accepting lower profitability
• May be a different assumed share of overheads

Initial and renewal commission

• Normally zero as no commission paid for internet sales

Withdrawal rates
• Could be higher, as financially-aware customers look out for the policy becoming
expensive
• Could be lower, as customer-initiated sales more likely to meet need
• Can be affected by lack of face-to-face contact at time of sale
• Different relationship built up with company may affect withdrawal rates

Risk discount rate

• Probably higher reflecting greater uncertainty of profit from this channel

Profit criterion
• May accept lower per-policy profit criterion in order to price competitively, or if
higher volumes are (ultimately) expected.
• Criterion may be increased at later date if channel is successful

New business volumes and mix

• Maybe similar average case size due to underinsurance – no face-to-face advice
• Probably assume gradually increasing volume from launch date

Other assumptions
• Investment and tax assumptions should not be different
[¼ mark for naming each assumption, ½ mark per point made]

3. IoA Subject 302 April 2004 Question 5

(i) Factors in setting the assumptions

General:
• Compare past two years’ experience with original pricing assumptions
• Identify differences emerging
• Identify developing trends
• Make adjustments to pricing basis to reflect differences/trends
• Take into account desire for increased profitability or competitiveness of new
rates
• Take account of any changes in product features (e.g. options) needed in order
to keep competitive.

Mortality and morbidity:

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 • Any improvements in mortality can be factored in to the new rates
• Critical illness rates likely to come from industry and reinsurers
• Take account of changes, e.g. diagnosis rates and medical advances
• Take account of any changes in reinsurance terms
• Check if market/class of life is same as expected
• Allow for any changes in underwriting and its effectiveness

Expenses
• Unlikely to be much change to the initial assumptions
• Very little data yet on claims expenses
• Adjust for both past and future inflation
• Commission assumptions should reflect rates expected to be paid.

Volume and mix of business

• Better idea of volumes may lead to adjusting loading for overheads
• Analyse average policy size to adjust loading for per-policy expenses
• Look at other areas of cross-subsidy: adjust rating structure if adverse effects on
marketability or profit.

Withdrawals
• Look at lapse rates for all business in the target market
• Look at effect of actual market being different from target
• Adjust for effects of any unusual economic circumstances

Tax
• Adjust for any changes in rates, basis of tax calculation or tax position

Risk discount rate and profit criteria

• Experience may lead to changes in risk margins in RDR
• Changes in market risk-free rates and cost of capital may affect RDR
• Competition might affect profit criteria to use.

[¼ mark for mentioning each assumption, ½ mark per point, max 8]

[Note: investment was not a key assumption so was not included in the solution]
(ii) Assessing profitability
• Perform profit tests using revised rates then current rates, and compare
• Choose suitable model points to reflect mix and volume of business – amend
original model points to reflect business sold.
• Choose appropriate assumptions for future experience – modify assumptions
made initially in light of past experience
• Margins for risk in the basis may be reduced as now have own data.
• Project expected cashflows for each model point
• Include reserves and required solvency margin to give profit signature.
• Calculate e.g. NPV, IRR, DPP – check meet profit objectives
• Calculate aggregate profit measures by scaling up for expected future new
business volumes and mix – e.g. by incorporating into model office
• Look at aggregate impact on embedded value, check capital adequacy
• Sensitivity test by varying model points and parameters
• Check that the product is suitably marketable and competitive.
[½ mark each, max 4]

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4. IoA Subject ST1 April 2005 Question 4 (part)

(ii) Assumptions for the pricing basis

Mortality:
• Necessary to construct likely experience of the policy.
• Reinsurance data might be available
• Underwriting criteria
• Effects of changes to past and future underwriting criteria/strategy
• Add prudent margin – since survival reduces profits, assume variations in
mortality experience

Expenses:
• Own data not available, so compare with existing products
• Assign costs according to policy type/class, initial/renewal, fixed/variable, per
policy/% premiums
• Include prudent inflation assumption
• Allowance for fixed expense contribution depends on future new business so
consider future sales volume

Interest:
• Depends on future investment strategy (assets invested in and extent of
matching assets and liabilities)
• As non-profit, likely to be fixed interest assets
• Take a view as to likely return from fixed interest assets
• Add prudent margin: depends on extent of reinvestment income (as a proportion
of total future income and profit) as this is much more uncertain

Taxation:
• Make allowance for future tax incidence at current and/or expected rates

Other factors:
• Solvency margin and reserving basis
• Risk discount rate and profit criteria
• Competitor’s rates
• Sensitivity analyses and realignments
[¼ mark per assumption listed, ½ mark per point, max 8]

5. IoA Subject ST1 September 2005 Question 8

(i) Sources of data

As it is a new contract, the following items would not be available:
• Own data (claims and premiums)
• Competitors’ prices
• Company accounts
• Regulatory returns
• Local industry statistics

However, data on claims incidence and on treatment costs may be available from
separate sources:
• Reinsurer’s data / knowledge
• Data from actuarial and other consultants
• Data from other countries such as USA, UK, other European countries
• Other local experience e.g. data from XYZ hospital sector

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 • Publicly collected healthcare experience (population data, articles/research)
[1 mark for indicating which sources would and would not be available, ½ mark per point, max
5]
(ii) Adjustments
In all cases, may need to adjust for the known differences between XYZ and the data
source. These might include:
• Different lives insured compared to base data
• Different coverages (exclusions, limits, procedures etc)
• Different propensity to claim (e.g. more prone to do so in US)
• Different rating factors (vs. proposed)
• Different underwriting and claims management
• Different market conditions e.g. state provision, market definitions, claim
acceptance criteria

Would also need to make adjustments/allowances for:

• Expected future trends
• Margin for prudence
[½ mark each]
(iii) Allowance for reduced incidence of smoking
Reinsurer’s data/knowledge:
• Data likely to come from major insurance markets; ascertain smoking prevalence
in these territories
• Split data in risk segments to identify those most affected by smoking, e.g.
medical treatment, cost of nursing/doctor care, cost of accommodation, cost of
initial consultation, recuperation/outpatient needs
• Apply adjustments to both incidence and severity

Data from other consultants, if available:

• Data from similar sources to reinsurers, follow same procedures as for
reinsurance data
• May also have population and case study information

Overseas countries
• National statistics should indicate proportion of smokers
• May need to be age-related in order to link to cost of treatment
• Apply as for last 2 points for reinsurance data

Hospital information from XYZ:

• May not know if smoker, but this is own country statistics, so no smoker
adjustment needed

Population healthcare statistics:

• May need some age adjustment if smoking prevalence varies by age and
insurance does not cover all ages
• Adjust data for age differential (frequency and severity separately)

Research/Charities/Journals
• This is assumed to be XYZ based; as long as underlying population is
representative, no further adjustment needed
• If population is representative of all XYZ inhabitants, then adjust as per public
health statistics above
• Data may be available separately for smokers and non-smokers, in which case
no adjustments need to be made

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 [¼ mark per point, max 3]
(iv) Restricting cover to treatment in XYZ
Advantages:
• Caters for existing hospitals
• Claim control easier with local claims
• Single currency only
• No additional transport costs
• No language/interpretation problems
• Different medical protocols possibly abroad
• Overseas may be higher tech and more expensive

Disadvantages:
• Does not cater for the requirements of some likely policyholders
• Treatment may be more cost effective in other countries
• Introduction of restriction my lose customers, so self insure
• Not clear on status of consultations abroad
• Disadvantages to providers abroad
[½ mark per point, max 4]

6. IoA Subject ST1 April 2006 Question 6 (part)

(ii) Premium basis

Sources of data:
• Industry data (such as CMI reports in the UK) for IP
• Data from reinsurers or consultants for IP
• Data from overseas
• Population data (e.g. hospital episode data)

Adjustments:
• Published data needs adjustment for the particular circumstances of the
company and its products
• Consider trends in experience, especially for morbidity in IP
• Rates included in reassurance terms would probably be followed
• Data needs to be interpreted with care
• Comparison of the proposed target market and that in the data is important
• Likely to use the experience from the data to generate an adjustment to a
standard table.
[½ mark each]

7. IoA Subject ST1 September 2006 Question 7

(i) Data required

Employees:
• The 2,000 employees may or may not have a similar profile to the original
scheme
• Profile may differ by:
- Sex
- Age
- Occupation mix
- Location
- Stability of in-force

New scheme:

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 • Will there be any medical selection procedure for former employees?
• Will there be other local recruitment?
• Will other employees have a different level of initial health screening?
• Info about the people who will manage the new operation, e.g. experience while
working at parent company
• Employee selection procedures
• What activities are being continued?
• What occupations are involved?
[½ mark per point, max 6]
(ii) Additional details
• Past claims experience from insurer records
- Exposure for past and coming year
- Movement statistics for past and coming year
- Benefit details
- Past claims
• Calculate historic burning cost
• Need info to analyse trends in:
- Inflation
- Legislation
- Recruitment/dismissal
• Any info on employer’s attitude to employees’ health
[½ mark per point, max 5.5]
• For quote, require details on:
- Expenses
- Commission
- Margins
- Cost of capital
- Profit
- Cost of reinsurance
- Tax
- Medical inflation
- Book rates
- Competition
[¼ mark per point, max 2.5]
(iii) Possible actions
(a) Lower premium that previously quoted:
• Quote the premium requested in hope that any surplus gained may be use as a
reserve to produce a more competitive quote at a later date when there might be
more competition
• Provide lower quote or enhance benefits to encourage customer loyalty
• Depends on whether there is a broker involved and on extent to which the
employer regards themselves as a customer of the broker rather than the insurer

(b) Higher premium than previously quoted

• Reduce premium, cutting margins where appropriate, to justify potential loss
• Hope to regain deficit over future renewals
• Take care if such a cut reduces premium below its potential burning cost + direct
expenses
• Could refuse to quote, writing polite letter of explanation
• Mention in letter extent to which premiums need to be increased, in your view, to
maintain same level of benefits, and the extent to which benefits need to be
reduced to be funded from the same level of premium

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 • May split the scheme e.g. blue collar/white collar or regionally, so that “main”
scheme can meet price/benefit criteria
• Might recommend small contribution from employees (since currently non-
contributory), so that premium requirement can still be met for the insurer
• May consult with reinsurer
• If reinsurer has more optimistic attitude towards the cost of risk, a large quota
share with commission compensation for expenses might enable you to meet the
employer’s criteria
• Negotiate commission cost with broker. Only likely to work if all competitors are
similarly unable to meet premium requirement
• Offer profit share
[½ mark per point, max 5]

8. IoA Subject ST1 April 2007 Question 9 (part)

(ii) Investigations to determine price

General considerations:
• If currently offer the product then use that experience as a base
• If not, then look at experience for similar product e.g. group IP or Group Personal
Accident
• Or look at other markets’ data, adjusted for market and product differences
• Generally price using unit rate for the scheme (i.e. one premium for the whole
scheme) as too complex for more detailed rates
• Unit rate based on expected experience, adjusted for profile of pension scheme
member (e.g. age, sex, occupation)
• For particularly large pension schemes, might be possible to use a single
premium calculated from rates which are calculated for each individual covered

Morbidity
• Lack of detailed exposure data, detailed claims analysis is more difficult
• Analyse own claims experience of similar schemes
• Potentially use loss ratio analysis
• Adjust data for other possible influences which will affect immediate usage, e.g.
past changes in underwriting standards or claims management
• Compare own data with that from other sources over the same time period, e.g.
- Industry data, e.g. from insurers’ associations
- Data from reinsurers
- Published tables based on insurance experience
- Population figures and government health statistics
• Assess adjustment needs for any published data, which may not be underwritten,
to the particular circumstances of the company, its products and target market
• Analyse experience by age, sex, smoker status
• Analyse claim inception and claim termination rates. If data permits, investigate
by occupational classes and deferred period
• Investigate availability and cost of reinsurance arrangements of different sorts
(e.g. risk premium, original terms)
• May base premiums on reinsurance rates, subject to above analysis
• Further adjustment needed to align different target market with that underlying
the data used

Investment
• Short term contract, so limits potential for investment of premiums

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 Expenses
• Start with company’s most recent in house expense analysis
• Allow for trends if this is an annual exercise
• Allow separately for acquisition (sales, marketing and underwriting), servicing
and claims costs
• Claims costs will be split between initial claim validation and ongoing claim
maintenance
• Split policy costs into those that are premium related and those that are per-
policy
• Need to understand the extent to which specific one-off costs (e.g. overheads)
and expected additional costs (e.g. regulation) are to be costed against individual
policies
• Related to potential volumes of business for spreading fixed costs
• Degree of detail will depend on size of company and volume of expense
information
• Inflation may need to be split between manpower costs, future equipment costs
and others
• Projected inflation may possibly be measured as difference between government
fixed interest and index-linked securities
• Adopt consistency of assumptions between investment returns and expense
inflation

Commission
• Commission as paid – load directly into premium basis

Lapses
• Analyse experience for pensions lapse experience
• Ensure appropriate to the distribution channel
• Adjust data if target market is different from those underlying the above
researches
• Generally 2 yearly renewable contract

Tax
• Make suitable assumptions as to the insurer’s current and future tax position

Profit
• Include company profit criteria, commensurate with underlying risk of venture –
risk discount rate, PVFP, payback period

Other:
• Consider competitor’s rates if any
• Carry out sensitivity analysis
[½ mark per point, max 12]

9. IoA Subject ST1 September 2007 Question 4

(i) Definition of terms

(a) Experience rating – the practice whereby the healthcare premium for a group
contract depends wholly or partially on the past experience of the group

(b) Credibility – relates to the factor, lies between 0 and 1, which represents the
proportion of the final risk premium which is derived from past experience, the
balance coming from book rates

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 (c) Burning cost is the estimated cost of claims in the forthcoming insurance period,
calculated from previous years’ experience, adjusted for changes in the numbers
insured, the nature of cover and medical inflation. The term can be used to describe
the historic cost of claims only. The burning cost should include estimates of all
claims reported but not settled and claims incurred but not reported
[1 mark each definition]
(ii) Why past claims experience not good proxy for future
• Significant changes in personnel
• Economic changes
• Benefit inflation
• Changes of location
• Changes of work practices
• Changes in cover required
• Claim volatility
• Political conditions
• Unusual large claims
[½ mark each, max 3]
(iii) Why simple comparison doesn’t give proper view of profitability
• Premiums need to be earned (no allowance for unearned premiums)
• Premium may be estimated as full profile not known until end of scheme year
• Claims need to be incurred (no allowance for IBNR)
• Must capitalise future claims costs
• Incurred but not reported terminations
• Claim payment delays
• Expenses
• Investment return
• Tax
• Impact of reinsurance on bottom line (aka profit figure)
• Cost of capital (or suitable comment on supervisory reserves)
[½ mark each, max 4]

10. IoA Subject ST1 September 2007 Question 7 (updated)

(i) Key features for UK health cash plan

• Defined-benefit, defined-premium insurance product
• For premiums as low as £2 per week, policyholder (and family) are entitled to a
range of specific payouts dependent on certain healthcare related events
• These include dental, optical, physiotherapy, maternity, hospitalisation,
recuperation, hearing aids and consultation
• Schedules of benefits are bought in “units” with equivalent levels of contribution
increase
• Purpose of the arrangement is cash in hand as opposed to reimbursement, thus
reducing anti-selection
• Limits may apply to ensure that the payout is no more than say 50% of the
medical bill.
[1 mark each, max 4]
(ii) Loss ratio
The following gives 2 possible solutions - marks are given for other appropriate
approaches

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Scheme Inflation Rate Premium index Original Original Inflated Inflated Loss Weighted
Year index change premium losses premium losses ratio
%
2006 1.01 0 1 140 130 140.0 131.3 93.8% 123.141
2005 1.0201 0 1*(1+0) = 1 120 110 120.0 112.2 93.5% 104.928
2004 1.0303 10 1*(1+0) = 1 100 105 100.0 108.2 108.2% 117.033
2003 1.0406 0 1*(1+0.1) = 1.1 160 145 176.0 150.9 85.7% 129.358
2002 1.051 n/a 1.1*(1+0) = 1.1 150 130 165.0 136.6 82.8% 113.14

701.0 639.2 91.2% 587.6

Weighted average loss ratio 91.9%

Assumptions:
• Similar policy conditions/coverages
• Incurred losses include IBNR
• Years are complete so 2006 losses have not been scaled up from a partial year
figure
• No change in business mix
• No “one-offs” in the data
[2 marks for assumptions, 6 marks for calculations]
(iii) Rate increase required
Increase needed if actual loss ratio used = 91.2/85 = 1.0728
Increase need if weighted loss ratio used = 91.9/85 = 1.0815
[Marks given for either approach as long as calculation correct, max 1]
(iv) Other information required
• Projected volumes of business in 2007 (written premium)
• Information on unusual exposures, if any
• IBNR, particularly 2006
• If inflation will continue to be 1% pa
• Loadings for internal expenses both fixed and variable
• Taxes and any other levies
• Investment income...
• ... for this will need to know payout pattern and premium receipt pattern as well
as investment yields on suitable assets
• Any changes to the product
• Impact of reinsurance
• Economic outlook
• Political change
• Cost of capital
[½ mark each, max 4]
(v) Reasons for low claim inflation rate
• Fixed benefits
• Low benefits
• Low maximum payout in each class
• Possible increase in small amounts not being claimed
• Good claim control
• Cap on overall benefits
• Effect of increases in excesses (not raised every year, rounded figures)
[½ mark each, max 3]

11. IoA Subject ST1 April 2010 Question 2

(i) General considerations when setting assumptions
• Consider use to which assumptions will be put
• Consider needs of the user

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 • Take particular care over the choice of assumptions which will have the most
financial significance
• Allow for any consistency which should exist between the various assumptions
• Ensure that the parameters derived from data are done so as accurately as the
body of data will permit
• Ensure that the data used to derive these assumptions are relevant to the risks
which the policies encompass
• Ensure that bases used for periodic valuations and reserves are flexible to reflect
changing risk circumstances
• Consider any legislative or regulatory constraints
[½ mark each]
(ii) Why wide communication needed
• Lapse assumptions may be used for reserving, pricing and embedded value
purposes, amongst others
• Communication across the company ensures consistency between these metrics
– so that actuaries calculating all metrics make the appropriate updates. This
ensures that good management decisions are made
• In particular, if pricing assumptions are not updated to reflect the latest lapse
assumptions the prices may be set incorrectly
• Similarly, if reserving assumptions are not updated then reserves may be
inadequate
• If EV assumptions are not updated then the EV may be misreported
• It also ensures consistency between products, for example, an actuary working
on a new product development may wish to make allowance for the changes
when estimating their future lapse assumptions
• The lapse assumptions will interact with other assumptions: if lapse assumptions
increase, we might expect to need to review morbidity assumptions also, due to
the effect of selective lapsing
• Lapse rates may also impact per-policy expense assumptions
• If the review highlights a problem with persistency, may be able to take action to
address it, e.g. change commission structure
• Professional guidance relevant to that country is likely to encourage open
communication
• Reinsurers may also require regular experience updates, so the actuaries that
liaise with them will need to be kept up-to-date
[½ mark each, max 5]

12. IoA Subject ST1 October 2010 Question 4

(i) Profit criteria

(a) Net present value (NPV)
• Calculated by discounting the profit signature/cashflows at the risk discount rate
• Given a choice between future cashflows from 2 different investments, investor
should choose the one with the higher NPV
• This implies that the NPV is the best profit criteria to use and if any other profit
criteria disagrees with it a company should go with the NPV
• However this assumes that there is a perfectly free and efficient capital market
and that when two risky investments are compared, each is discounted at a risk
discount rate appropriate to its riskiness
• NPV is subject to the law of diminishing returns
• It says nothing about competition and marketability.
• One approach to express NPV in a way which reflects the initial sales effort is to
express as a percentage of commission

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 • Alternatively it can be expressed as a percentage of the present value of
premiums that will be paid under the policy
[½ mark each, max 3]
(b) Internal rate of return (IRR)
• Defined as the rate of return at which the discounted value of the cashflows is
zero
• All other things being equal, a company should prefer a contract with a higher
IRR
• However IRR does not always agree with NPV and NPV may be more reliable
• If there is more than one change in sign in profit stream then there is not
generally a unique IRR
• NPV can be related to useful indicators e.g. sales effort or market share but
there’s no way to do this with IRR
• If a policy makes profits from the outset then the IRR may not even exist
[½ mark each, max 3]
(c) Discounted payback period (DPP)
• Defined as the policy duration at which the profits which have emerged so far
have present value of zero
• It is the time it takes for the company to recover its initial investment with interest
at the risk discount rate
• Company with limited capital might prefer to sell contracts with as short payback
period as possible
• DPP may not agree with the NPV as it ignores completely all the cashflows after
the DPP.
[½ mark each, max 2]
(ii) Profit criteria calculation
Any sensible approach will be given full marks, the following is an outline of some
acceptable approaches.
(a)
NPV calculations should be performed by multiplying each cashflow by the appropriate
probability inforce and by the appropriate discount factor, then summing. Discounting
should be from each year end, given that the profit cashflows are described as arising at
the year end. Probabilities of inforce should either be as at start of year (e.g. 1.0 for the
first cashflow) or as at the end of each year (e.g. 0.9 for the first cashflow). This would
give NPV = 23.88 or 17.81 respectively.
[1 mark]
PV future premiums (PVFP) calculations could have been performed using the same
approach, noting premiums are payable at the start of year so should be multiplied by
probabilities inforce at start of year and discounted by one year less than the profit
cashflows above. This approach gives PVFP = 351.59

Alternatively, it might be deduced that PVFP for Product A should be the same as for
Product B, given the same probabilities inforce and premium amounts. This approach
gives an alternative PVFP of 285.62
[1 mark]
Any ratio of NPV/PVFP using a combination of the above results gets full credit (5.1% /
6.2% / 6.8% / 8.4%)
[1 mark]
(b)
DPP calculations required calculation of the cumulative discounted profit to each time
period. Under the 2 approaches acceptable for NPV calculations, this would give either
of the following patterns:

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 Period 1 2 3 4 5
Cumulative discounted profit
v1 -92.59 -54.01 -22.26 3.47 23.88
v2 -83.33 -49.04 -21.26 0.80 17.81
[1 mark]
For either approach, this gives a DPP of 4 years (the first year in which the cumulative
discounted profit is positive)
[1 mark]
(iii) Comments on relative financial attraction
• Product A has higher NPV/PVFP ratio
• DPP for Product B is shorter due to fact that initial loss is shorter
• As NPV is normally the best profit criteria to use, Product A is preferable
• However Product B may be preferred if the company has limited capital to write
new business
[½ mark each point]
Full credit also given if used approach in part (ii) which gave ratio of 5.1% and
commented that NPV/PVFP ratios are the same hence need to consider DPP as
possible deciding factor, which would favour Product B.

13. IoA Subject ST1 October 2010 Question 5

(i) Should products offer lump sum cash value on surrender

• Need to investigate position of competitors in market and check whether their
products have features different from this company which encourage or
discourage them from having a cash value
• Demand for cash value may come from:
- Policyholder wishing to spend the cash value on other projects
- Policyholder’s health deteriorating and, as a result, requiring immediate
funds, but not to a sufficient degree to be able to make a LTCI claim
- May be significant change in state provision which reduces or negates
the requirement for personal provision
- May be attractive due to changes in policyholder’s circumstances
• Reserves do accrue under these policies so a cash value might be justified
• ... but only if policyholder is competent to give a valid agreement to the
transaction
• Considerable anti-selection risk as those who perceive themselves as very
healthy are more likely to surrender
• Also need to consider level of death benefit within contract
• Insurance adviser needs to review the impact of a cash value transaction on tax
position
• For the annual premium version, demand for a cash value is going to come from
the insured being unable to afford the premium in full.
• In this situation, a paid-up policy or a reduced premium with reduction in benefits
could be offered
• Company may wish to obtain input from reinsurers
• Marketing position and distributor opinion needs to be considered
• Offering surrender values could improve the attractiveness of the product
• Policyholders might also perceive it as unfair that no cash sum is received on
surrender, particularly later on in the funding period
• The premium would need to be increased if cash values were offered, e.g. to
cover expected losses from early lapses for which initial expenses have not yet
been recouped

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 • The pricing would need to allow for the anti-selective effect although may now
attract more healthy lives on average
• Changes in admin systems may be required
• May be professional guidance/regulatory constraints
• Doing this may pre-empt/mitigate anticipated future legal or regulatory changes
• Can the lump sums be costed so as not to generate losses?
• Need to consider liquidity requirements/may need more liquid investments
• Would also need to take into account the likely strict initial underwriting, which
would tend to select healthier lives (i.e. those more likely to lapse)
[½ mark each main point, ¼ mark each minor point, max 7]
(ii) Data and assumptions required
• Age
• Sex
• Term/duration
• Premium frequency
• Premium
• Benefit amount
• Options
• Underwriting status/rated life
• Expected mortality during funding period
• Expected mortality during claim
• Expected morbidity
• Expected future renewal expenses
• Expected surrender claim expenses
• Expected future expense inflation
• Future commission
• Expected future benefit inflation (if relevant)
• Yields on corresponding existing assets and the yield which it is expected will be
obtained on sums to be invested in the future
• Assumptions on take up
• Tax
• Any profit margin required on surrenders
[¼ mark each, max 3]

14. IoA Subject ST1 April 2011 Question 5

(i) Data required to assess claims liability

• Data is required for each claim
• ...both in payment and under consideration
• Data is also required for past claims
• ...in order to assess likely duration of current claims
• Each claim should be assigned a unique identifier
• The equivalent information for domestic claims would also be needed
• ...in order to assess the differences
• ...and there may be little data for overseas claims
• Need data on reporting delays to help assess IBNR
Splits required:
• Country / territory / region
• Age / date of birth
• Sex
Information for each claim:
• Date payment started

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 • Date payment ended if applicable
• Reason for claim
• Reason for termination of claim
• Date of moving in and out of Actuaria, if claim is partly overseas
[½ mark each, max 4]
(ii) Checks for benefit claimants outside Actuaria
• Unlikely to be practical to impose the same checks as are done in Actuaria
• However, checks should be consistent with those applied to claimants living
within Actuaria
• ...so that each group is treated fairly
• Could check the claimant was not dead
• ...e.g. from national death records or require self certification
• ...or carry out spot checks
• Government could require a local doctor in the country where the claimant is
currently residing to sign a special benefit note
• Consideration of past experience in Actuaria can establish which incapacities
have relatively quick recovery
• Cases with incapacities where there may be a quick recovery should receive a
medical questionnaire to be completed by the claimant
• This should be adjudicated by the normal income benefit assessment panel
• Alternatively it may be possible to arrange a telephone interview
• Compliance can be encouraged by stopping the payment of benefit for all cases
not replying
• Appeals process will be required
• Normal Actuaria guidelines should be followed wherever possible to resolve
query cases
• Scrutiny on longer term income benefit cases can then be rolled out to all
• ...taking into account information derived from initial screenings
• If possible, the qualifications and reputation of the permitted signing doctors
should be controlled
[½ mark each, max 4]
(iii) Problems with physical examination requirement
• May be a large number of claimants that need to be investigated
• Claimants may be spread over a large number of different countries
• Government will need to go through diplomatic channels to inform the country
concerned of its checking on income benefit claimants
• Government may need to hire local medical staff to undertake the screening of
existing claimants
• There may be language barriers if local staff are used
• In some countries, it may be difficult to ensure that the medical staff are of
sufficient quality and probity
• In those cases the government may need to bring in its own specialists
• Costs of checking may be higher than the expected benefit saving
• May be problems in getting access e.g. if living in remote areas
[½ mark each, max 3]

15. IoA Subject ST1 September 2011 Question 2 (part)

(i) How CMIBA could create occupational classification

• Could be similar but not identical to that used on income protection business, if
such an investigation has already been performed by CMIBA
• A survey of data kept by existing CI insurers will be needed
• There may already be consensus of opinion or consistency of approach

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 • Classification may be weighted by size of CI claims for each insurer
• Data collected should be sufficient to give credible experience
• Advice and information may also be needed from reinsurers or consultants
• CMIBA could consider similar classifications used by experience investigation
bureaux in other countries
• May be a regulatory standard or guidance that should be followed
• Occupations would need to be grouped into classes so that there is relatively
homogenous experience in each class
• Need to generate an appropriate number of classes
• The draft occupation classification can then be developed and circulated for
approval
• Will be necessary to create a 1-to-1 conversion table from each contributing
office’s data to the CMIBA classification
[½ mark each, max 3]
(ii) How experience can be split by sex and marital status, and difficulties
• Recording of sex in the data and investigations should be straightforward
• Marital status should be broken down into: [¼ mark each status listed]
- Single
- Married/civil partnership
- Divorced/separated
- Widowed / widowered
- Living together but not married
• Need to decide if required at inception or at claim
Difficulties:
• Data may be incomplete on marital status
• ...for e.g. for joint life policies
• May be lack of data in some cells
• ...therefore not credible
• Changes in classification (predominantly of marital status) may lead to
compromises on what can be used.
[½ mark each point except where indicated, max 3]
(iii) Whether CMIBA should publish combined experience
• Would provide useful information for other insurance companies writing small
amounts of this business
• However, the CMIBA will need to obtain the permission of each office to publish
• Main issue is that the two offices will be able to estimate their competitor’s
experience knowing the complete experience and their own data
• Data may not be homogeneous,
• ...e.g. the two companies may have different definitions
• ...and difficult for other users to make the appropriate adjustments
• Should seek the views of the regulator and other interested parties
• ...e.g. other smaller insurers
[½ mark each point, max 2]

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