MA922

Q1

6 marks book

 Competence. No actuary should accept an assignment unless they have good reason to
believe they have the necessary knowledge and skill to complete the assignment
successfully, or are working at all times directly under the control of an actuary who does
have the necessary knowledge and skill.

This will include determining whether the assignment requires input from other professions
to complete the assignment successfully.

 Integrity and honesty. This includes respecting the client and the confidentiality of all
information gathered during the assignment unless disclosure is permitted under the law
and is in the public interest.
Additionally, the actuary will be open, honest and truthful about the work the actuary is
able to perform.

 Impartiality. This includes avoiding all appearance of bias by not taking on assignments
where there is any conflict of interest between the interests of the actuary and the
interests of the client which cannot be reconciled to ensure the results of the investigation
are not compromised.

Additionally, the actuary will take active steps to seek out any area of potential bias.

 Compliance. This will be a three-fold requirement to ensure the outcome of the assignment
will comply with relevant laws of the land and professional standards as well as
ensuring that the actuary will not be in a position to condone unethical action and practice

The actuary will speak up to the client and authorities if he or she becomes aware of any
breaches of ethical or lawful practices.
 Communication. Members will communicate the results of the investigation either written or
oral having regard to whom the communication is being made in such a way to ensure that
the results are understood correctly and that those results are accurate.

1.5 marks each

Q2
Purpose of valuation eg funding, regulatory. Different levels of prudence should be used for
different purposes
..and different levels of prudence required depending on client views?
What guidance/requirements/regulations are provided by profession/law? They may be
different to the UK
Size of subsidiary relative to parent? This will determine required accuracy/ time spent
Assets held – will impact expected return. Return seeking/matching?
Tax on investments, and other costs. Are these included explicitly elsewhere?
Previous assumption and method. If a different methodology is used then this needs to be
justified
What is currently used by other actuaries. Again any differences need to be reviewed and
justified
May also wish to consider if different to your advice for the UK pension scheme and be able
to justify these
Needs to be reasonable/consistent when compared to other assumptions used eg inflation
Possibly depends on the stage of negotiations – at first you may be suggesting a range of
possible rates

12 marks appln
2 marks for any well made point
Q3.
(a)

4 marks appln
Specific risk arises from insuring an individual life – this risk can be reduced by diversifying it
away by insuring lots of independent lives.
However all lives may be affected from one event eg global disease, so many lives die from this
event. This cannot be removed by diversification within life assurance – and is a systematic
risk. However we could diversify by venturing into other areas such as general insurance or
banking
2 marks for defns, 2 marks for reducing them

(b)Capital Insurance Ltd (“CIL”)is a small life insurer.

(i)

8 marks higher
Don’t agree with the statement although it may have some merits (see below) 1 mark
Just by selling policies which are uncorrelated doesn’t mean they will be profitable – they need
to be sold at an appropriate price given the risks taken on 2 marks
Unlikely to have direct impact on expected claims (although there could be detrimental
effect if staff spread more thinly) and may make management more difficult thus reducing profits
2 marks
However diversification should result in more predictable costs 1 mark
Will reduce the likelihood of insolvency provided pricing is correct,..
..so less capital required 1 mark
reduce the reliance on reinsurance, and hence better profits 1 mark
be popular with investors, regulators, creditors as results are more predictable, 1 mark
may result in increased share price/cheaper loans/easier to raise share capital as a result and
hence better profits 1 mark
In the context of diversifying by selling different types of products this could lead to lack of
focus/spread too thinly/insufficient knowledge in new area, and significant costs

Max 8

(ii)
6 marks appln

May be considered a good price hence enhancing future profits/share price,

greater diversification and hence more predictable results,
may take on staff which could be used in existing company (it’s within the same finance sector)
and vice versa,
Problems are mainly strategic risks –
existing management not an expert in pensions; get diversification but may not understand
company risks, potential for growth etc
costly to integrate and a lot of time/resources diverted away from existing business,
more monitoring required post purchase,
loss of focus on current business,
may be poorly viewed by market – fall in share price,
management/staff of purchased company may be poor quality/unhappy with takeover
may be major issues with purchases uncovered post sale
1 mark for each
(iii)

6 marks
Book/appln
Interview key managers – time consuming, targets those staff who may have most to add
Surveys of all staff – time efficient, difficult to word questions
Email hotline – confidential, cheap, not focussed, may get poor responses
Hire external consultants – may not be appreciated by exiting staff, objective/independent/new
view, expensive for small companies
Run group session meetings – can generate more ideas, doesn’t suit some staff, dominated by
some individuals/groupthink, needs skilled moderator
Use own experience of current management – cheap,quick, bias, limited to own experience

1.5 marks for each well made point

4. (a)

Cashflow solvency
[½]
Measures whether a company will be able to pay its short-term obligations as and
when they fall due.
[1]

Discontinuance solvency
[½]
Measures whether a company would be able to cover its obligations if it ceased
doing business today.
[1]

Going concern solvency

[½]
Measures whether a company that remains in business following a specified
business plan will continue to be able to meet its liabilities in the future.
[1½]

(b)
Product design
• Avoid selling products with built-in liquidity options such as the right to
cancel a policy at any time
[1]
 • Introduce penalties for early cancellation [½]

Pricing
• Ensure pricing of product reflects costs of providing liquidity options
[1]
• e.g. holding high proportion of liquid assets with low
returns[½]
• paying a fee to maintain a line of credit [½]
• forced sales of illiquid assets at below market value
[½]
Appropriate investment
• Maintain sufficient liquid assets [½]
• Assess liquidity of overall portfolio to assess how much would be lost
by selling on short notice/possible sources of collateral for borrowing.
[½]
• Consider impact of financial crisis on apparently liquid assets. [½]
Asset/Liability matching
• Avoid a timing mismatch between assets and liabilities [1]
Contingency sources
• Companies should have plans for accessing additional liquidity in an
emergency, e.g. reliable lines of credit. [1]

5 (a)

Process (or random) error 1

Random variation which the model is supposed to capture

Parameter error 1
Error in the estimation of the parameters in the model

Model error 1
The model uses the wrong form of function for its underlying
formulae eg assumption of normal distribution when the correct
distribution is fat tailed

Operational error 1
Mistakes from the modelling process such as software error,
 incorrect data, incorrect copying of information

Survivorship bias 1
The managers select the model from a wide range of models
which gives a target answer in line with a business plan say

(b)

Process (or random) error 2

Must expect that process errors will occur – it is the nature of
what we do. Can re-run models (if stochastic) to understand
typical results and the extent of the ‘random’ error. Larger data
sets may reduce this random error.

Parameter error 2
Identify: that the model appears to produce largely the correct
results, but wrong in some areas (the error parameter).

Correct: Use larger data sets, ensure the data being used is
representative for the use for future data. Try alternative
parameterisation approaches (ie different combinations of
variables) to understand best view of specific assumptions

Model error 2
Identify: several aspects of the model results appear to be
incorrect. Re-parameterisation of that model doesn’t address the
problem

Correct: start again, trying different models, formulae etc

Operational error 2
Identify: elimination of other factors, still leaves a model which
doesn’t produce expected results

Correct: review coding, test small elements at a time, review data

and processes used

Survivorship bias 2
Identify: model does not produce correct results

Correct: reconsider rejected models

6
(a)

 The company will seek to compare the actual deaths it has experienced with the
expected death rates when the contracts were sold, or with those in the current pricing
basis for whole life contracts.
[1]
 The basic calculation is to divide the number of deaths by the matching exposed to risk.
[½]
 The aim will to be split the data into the homogeneous groups while keeping the volume
of data within each group credible. [1]
 Experience should be looked at net and gross of reinsurance.
[½]
 It is important to be clear about the definition of the exposed to risk for the denominator
of the ratio. [½]
 Normally this will be the average of the in-force policies at the year start and the year
end (but more accurate if the data is available).
[½]
 Data should only reflect the contracts that are being considered so some data checks
should be done.
[½]
 The most important levels at which to carry out the investigation are:
−Sex [½]
− Age – i.e. is any age band dominating the number of deaths
[½]
− Size of sum assured – is the experience dominated by one or two individuals
with very large sums assured dying and hence not reflective of the whole
scheme [½]
− Location (if available) – given that the manufacturing company is based in
several different countries, is the number of deaths based in any particular
location and how does the experience differ in other locations
[½]
− Demographic factors – e.g postcode
[½]
− Time since policy was purchased [½]
− Smoker/Health status (if the policies were underwritten [½]
 May want to consider if any experience of the contracts before the three years is
available and see if this is in line with the experience over the past three years.
[½]
 If available may want to consider causes of death of policyholders. [½]
(b)

 Whether or not the analysis can be applied to a new country will depend on how the
demographics of that country compare to those of the current country of business e.g.
analysis of mortality in one Western European country might be useful in indicating
 possible mortality assumptions for another Western European country.
[1]
 However, if the new country has very different demographics then the analysis might not
be suitable for use in the new country (e.g. mortality in an Asian country is likely to be
different to in an African country).
[½]
 The existing analysis could only be used in conjunction with any available data relating
to the new country.
[½]
 Need to consider impact of sums assured (those with smaller sum assured likely to be
less well-off so may have heavier mortality) again this could possibly be used in the new
schemes pricing basis.
[1]
 Need to consider demographics of likely customers.
[½]
 Risk of selection - those interested in annuities likely to have higher life expectancies
(and therefore want to reduce their exposure to longevity risk) than those interested in
life insurance (who are more likely to expect to die earlier).
[1]
 Margins for prudence will be the wrong way around – for Whole Life Insurance contracts
heavier than expected mortality will result in a loss whereas for annuities it will result in a
profit. Appropriate margins for insurance will increase mortality assumption whereas for
annuities margins should reduce mortality assumption.
[1]
 Use will also be dependent on how many lives (years of exposed to risk) is available – if
only a small number of whole life policies have been sold then the data is unlikely to be
credible and hence using for future contracts may not be suitable.
[½]
 The experience has only been analysed over three years which may not be long enough
to assess long-term trends for future pricing.
[½]
 Future medical advances may lead to a reduced number of deaths (mortality
improvements) and hence the experience may not continue so choosing to use for new
schemes may not be suitable.
[½]
 If the experience has been affected by one-off events (e.g. a flu epidemic or very cold
winter) then again this may not make it suitable for pricing new contracts.
[½]
 Should also consider the competitive position, the information that has been obtained
could be used to the company’s advantage.
[½]

7.
(a)

It will start from the results of a historic expense analysis 0.5

of the current policy 0.5

The results should be split into different types: in this case, by 1

‘cause’ of cost

The analysis will give the costs on average in middle of the 0.5
analysis period

Will project forward each of the expense types to mid 2019, 0.5

so need some years of known inflation (which may be different for 0.5
different elements)

inflation to date will be (approximately) known. To date until mid 0.5

2019 will require an assumption

will add in any desired margins / other changes to assumptions it 1

expects to apply

will then ignore any costs that will not apply in the new policy eg 1
underwriting, cost of consolidator website

will need assumptions for any new expenses, not in the previous 1
analysis eg development costs for own website.

Select appropriate model points, reflecting a range of typical 1

policies we expect to sell. Consider different policyholder ages,
sums assured

Consider expected overall sales numbers, and the spread across 1

the different model points. Each model point will therefore
represent many individual, similar, policies

Staff costs: 1
Will need to decide expected amount of staff needed / hours for
the new policy. Can then add allowance for staff costs as: hours
needed x cost per hour (based on adjusted survey information) /
the expected number of policies that this model point will
represent.

Indirect costs: 1
make allowance for floorspace, IT costs, electricity etc in respect
of the new policies. This may be by taking ratio: number of
policies in the model point / total number of policies expected
 across the office * total allowance for indirect costs needed.

Fixed expenses (eg central departments) 1

Consider how much of the total expected fixed expenses we wish
to allocate to the new polices, and then split this total amongst the
model points.

Marginal expenses 1
For each element of marginal cost (eg initial admin expenses,
claim handling expenses), allocate appropriate cost to the model
point, at the appropriate time (initial, annual, claims etc)

(b)

The ACC is a 4-step cycle:

The work outlined in (a) can be considered as the current 0.5

‘problem’.

1. Understanding the environment 0.5

Requires understanding the policy we are modelling, the sales 1

method, the context etc,that will be relevant to the problem. In
particular, any changes to the policy or sales method since the
policy was launched.

2. Define the problem 0.5

consider the costs currently being assumed. What are looking to 1

achieve? – best estimate of future costs, some level of prudence
etc How long should the new costs be valid for?

3. Design the solution 0.5

undertake analysis of experience to find recent past experience of 0.5

actual costs for this policy.

make allowance for any desired adjustments for prudence, or 0.5

where future experience is expected to be different from past
experience

implement the new cost allowances 0.5

4. Monitoring the results 0.5

Continue to review the actual experience in future, and where 1

there are significant changes to costs, the policy or the market (eg
number of policies sold) change the pricing again

Comment: students could relate starting with the costs used

for the launch of the new product to either stage 1 (context)
or 2 (define the problem) of the ACC. Either is acceptable; the
key is to demonstrate understanding of the review process.

Max 6