CP2 Study Material-1

Modelling Practice
Combined Materials Pack

for exams in 2019
The Actuarial Education Company

on behalf of the Institute and Faculty of Actuaries
All study material produced by ActEd is copyright and is sold for
the exclusive use of the purchaser. The copyright is owned by
Institute and Faculty Education Limited, a subsidiary of the
Institute and Faculty of Actuaries.
Unless prior authority is granted by ActEd, you may not hire out,
lend, give out, sell, store or transmit electronically or photocopy
any part of the study material.
You must take care of your study material to ensure that it is

not used or copied by anybody else.
Legal action will be taken if these terms are infringed. In

addition, we may seek to take disciplinary action through the
profession or through your employer.
These conditions remain in force after you have finished using

the course.
© IFE: 2019 Examinations The Actuarial Education Company

CP2: Study Guide Page 1
Subject CP2
2019 Study Guide
Introduction
This Study Guide has been created to help guide you through Subject CP2. It contains all the
information that you will need before starting to study Subject CP2 for the 2019 exams and you
may also find it useful to refer to throughout your Subject CP2 journey.
The guide is split into two parts:

 Part 1 contains general information about the Core Principles subjects
 Part 2 contains specific information about Subject CP2.
Please read this Study Guide carefully before reading the Course Notes, even if you have studied
for some actuarial exams before.
Contents
Part 1 Section 1 Before you start Page 2

Section 2 Core study material Page 3
Section 3 ActEd study support Page 4
Section 4 Study skills Page 8
Section 5 Queries and feedback Page 12
Part 2 Section 1 Subject CP2 – background Page 13
Section 2 Subject CP2 – Syllabus Page 14
Section 3 Subject CP2 – the course structure Page 17
Section 4 Subject CP2 – summary of ActEd products Page 18
Section 5 Subject CP2 – skills and assessment Page 20
Section 6 Subject CP2 – frequently asked questions Page 21
Section 7 Subject CP2 – marking deadlines Page 26
The Actuarial Education Company © IFE: 2019 Examinations

Page 2 CP2: Study Guide
Before you start

When studying for the UK actuarial exams, you will need:
 a copy of the Formulae and Tables for Examinations of the Faculty of Actuaries and the
Institute of Actuaries, 2nd Edition (2002) – often referred to simply as the Tables
 a ‘permitted’ scientific calculator – you will find the list of permitted calculators on the
profession’s website. Please check the list carefully, since it is reviewed each year.
These are both available from the Institute and Faculty of Actuaries’ eShop. Please visit
www.actuaries.org.uk.

Core study material

This section explains the role of the Syllabus and ActEd material. It also gives guidance on how to
use these materials most effectively in order to pass the exam.
Syllabus
The Syllabus for Subject CP2 has been produced by the Institute and Faculty of Actuaries. The
relevant individual Syllabus Objectives are included at the start of each course chapter and a
complete copy of the Syllabus is included in Section 2.2 of this Study Guide. We recommend that
you use the Syllabus as an important part of your study.
Background reading and Guide to CP2

The Institute and Faculty of Actuaries produce background reading for Subject CP2 which can be
found in A Guide to CP2 Modelling Practice available on the IFoA website:
www.actuaries.org.uk
Students should ensure that they have read and understood the background reading before their
CP2 examination.
A Guide to CP2 Modelling Practice also includes more detailed information relating to the CP2
exam, including the objectives and format of the exam and links to sample projects.
ActEd text
All of the CP2 Course Notes are ActEd material, in that students would not be expected to quote the
material in the examination. It is intended to support the syllabus and background reading
published by the IFoA.
Copyright
All study material produced by ActEd is copyright and is sold for the exclusive use of the
purchaser. The copyright is owned by Institute and Faculty Education Limited, a subsidiary of the
Institute and Faculty of Actuaries. Unless prior authority is granted by ActEd, you may not hire
out, lend, give out, sell, store or transmit electronically or photocopy any part of the study
material. You must take care of your study material to ensure that it is not used or copied by
anybody else.
Legal action will be taken if these terms are infringed. In addition, we may seek to take
disciplinary action through the Institute and Faculty of Actuaries or through your employer.
These conditions remain in force after you have finished using the course.

ActEd study support

This section gives a description of the products offered by ActEd.
Successful students tend to undertake three main study activities:

1. Learning – initial study and understanding of subject material
2. Revision – learning subject material and preparing to tackle exam‐style questions
3. Rehearsal – answering exam‐style questions, culminating in answering questions at exam
speed without notes.
Different approaches suit different people. For example, you may like to learn material gradually
over the months running up to the exams or you may do your revision in a shorter period just
before the exams. Also, these three activities will almost certainly overlap.
We offer a flexible range of products to suit you and let you control your own learning and exam
preparation. The following table shows the products that we produce. Note that not all products
are available for all subjects.
LEARNING LEARNING & REVISION REVISION & REHEARSAL

REVISION REHEARSAL
Course Notes X Assignments (Flashcards) (Revision Notes) Mock Exam
Combined (ASET) Mock Exam

Materials Pack Marking
(CMP)
X Assignment
Marking
Tutorials
Online
Classroom
The products and services are described in more detail below.

‘Learning’ products
Course Notes
The Course Notes will help you develop the basic knowledge and understanding of principles
needed to pass the exam. They include full explanation of all the syllabus objectives, with worked
examples and questions to test your understanding.
Each chapter includes:

 the relevant syllabus objectives
 a chapter summary
 practice questions with full solutions.
‘Learning & revision’ products

X Assignments
The Series X Assignments can be used to both develop and test your understanding of the
material.
Combined Materials Pack (CMP)
The Combined Materials Pack (CMP) comprises the Course Notes and the Series X Assignments.
The CMP is available in eBook format for viewing on a range of electronic devices. eBooks can be
ordered separately or as an addition to paper products. Visit www.ActEd.co.uk for full details
about the eBooks that are available, compatibility with different devices, software requirements
and printing restrictions.
X Assignment Marking
We are happy to mark your attempts at the X assignments. Marking is not included with the
Assignments or the CMP and you need to order it separately. You should submit your script by
email. Your script will be marked electronically and you will be able to download your marked script
via a secure link on the internet.
Don’t underestimate the benefits of doing and submitting assignments:

 Question practice during this phase of your study gives an early focus on the end goal of
answering exam‐style questions.
 You’re incentivised to keep up with your study plan and get a regular, realistic assessment
of progress.
 Objective, personalised feedback from a high quality marker will highlight areas on which
to work and help with exam technique.
In a recent study, we found that students who attempt more than half the assignments have
significantly higher pass rates.

There are two different types of marking product: Series Marking and Marking Vouchers.
Series Marking
Series Marking applies to a specified subject, session and student. If you purchase Series Marking,
you will not be able to defer the marking to a future exam sitting or transfer it to a different subject
or student.
We typically send out full solutions with the Series X Assignments. However, if you order Series
Marking at the same time as you order the Series X Assignments, you can choose whether or not
to receive a copy of the solutions in advance. If you choose not to receive them with the study
material, you will be able to download the solutions via a secure link on the internet when your
marked script is returned (or following the final deadline date if you do not submit a script).
If you are having your attempts at the assignments marked by ActEd, you should submit your scripts
regularly throughout the session, in accordance with the schedule of recommended dates set out in
information provided with the assignments. This will help you to pace your study throughout the
session and leave an adequate amount of time for revision and question practice.
The recommended submission dates are realistic targets for the majority of students. Your scripts
will be returned more quickly if you submit them well before the final deadline dates.
Any script submitted after the relevant final deadline date will not be marked. It is your
responsibility to ensure that we receive scripts in good time.
Marking Vouchers
Marking Vouchers give the holder the right to submit a script for marking at any time, irrespective of
the individual assignment deadlines, study session, subject or person.
Marking Vouchers can be used for any assignment. They are valid for four years from the date of
purchase and can be refunded at any time up to the expiry date.
Although you may submit your script with a Marking Voucher at any time, you will need to adhere
to the explicit Marking Voucher deadline dates to ensure that your script is returned before the date
of the exam. The deadline dates are provided with the assignments.
Tutorials
Our tutorials are specifically designed to develop the knowledge that you will acquire from the
course material into the higher‐level understanding that is needed to pass the exam.
We run a range of different tutorials including face‐to‐face tutorials at various locations, and Live
Online tutorials. Full details are set out in our Tuition Bulletin, which is available on our website at
www.ActEd.co.uk.
Preparation Days
For Subject CP2 we offer a one‐day Preparation Day. In advance of the tutorial day, we expect
you to have read the Course Notes so that the group can spend time on discussion to develop
understanding.

Online Classroom
The Online Classroom acts as either a valuable add‐on or a great alternative to a face‐to‐face or
Live Online tutorial.
At the heart of the Online Classroom in each subject is a comprehensive, easily‐searched

collection of tutorial units. For Subject CP2, the Online Classroom follows a very similar structure
to the Preparation Day.
The best way to discover the Online Classroom is to see it in action. You can watch a sample of
the Online Classroom tutorial units on our website at www.ActEd.co.uk.
‘Rehearsal’ products
Mock Exam
The Mock Exam consists of two 100‐mark mock exam papers that provide a realistic test of your
exam preparation.
Mock Marking
We are happy to mark your attempts at the mock exams. The same general principles apply as for
the X Assignment Marking. In particular:
 Mock Exam Marking is available for the Mock Exam and it applies to a specified subject,
session and student
 Marking Vouchers can be used for the Mock Exam.
Recall that:
 marking is not included with the products themselves and you need to order it separately
 you should submit your script by email
 your script will be marked electronically and you will be able to download your marked
script via a secure link on the internet.

Study skills
The Subject CP2 exams

In testing your ability to communicate clearly rather than to recall and apply technical knowledge,
Subject CP2 is very different to the other actuarial exams. Your approach to study and
preparation for the examination may also be quite different. Learning to communicate effectively
is a gradual process – you will need to practise a great deal and be open to constructive criticism.
The aim of the Subject CP2 exams is to ensure that students can model data, document their
work, analyse results and communicate the approach, results and conclusions. Some of these
areas may take a lot of practice for you to develop the necessary skills to demonstrate to the
examiners in order to pass the exam.
Study skills
Overall study plan
We suggest that you develop a realistic study plan, building in time for relaxation and allowing
some time for contingencies. Be aware of busy times at work, when you may not be able to take
as much study leave as you would like. Once you have set your plan, be determined to stick to it.
You don’t have to be too prescriptive at this stage about what precisely you do on each study day.
The main thing is to be clear that you will cover all the important activities in an appropriate
manner and leave plenty of time for revision and question practice.
Aim to manage your study so as to allow plenty of time for the concepts you meet in this course
to ‘bed down’ in your mind. Most successful students will probably aim to complete the course at
least six weeks before the exam, thereby leaving a sufficient amount of time for revision. By
finishing the course as quickly as possible, you will have a much clearer view of the big picture. It
will also allow you to structure your revision so that you can concentrate on the important and
difficult areas of the course.
You can also try looking at our discussion forum on the internet, which can be accessed at
www.ActEd.co.uk/forums (or use the link from our home page at www.ActEd.co.uk). There are
some good suggestions from students on how to study.
Study sessions
Only do activities that will increase your chance of passing. Try to avoid including activities for the
sake of it and don’t spend time reviewing material that you already understand. You will only
improve your chances of passing the exam by getting on top of the material that you currently
find difficult.
Ideally, each study session should have a specific purpose and be based on a specific task,
eg ’Finish reading Chapter 3 and attempt Practice Questions 1.4, 1.7 and 1.12 ’, as opposed to a
specific amount of time, eg ‘Three hours studying the material in Chapter 3’.

Try to study somewhere quiet and free from distractions (eg a library or a desk at home dedicated
to study). Find out when you operate at your peak, and endeavour to study at those times of the
day. This might be between 8am and 10am or could be in the evening. Take short breaks during
your study to remain focused – it’s definitely time for a short break if you find that your brain is
tired and that your concentration has started to drift from the information in front of you.
Order of study
We suggest that you work through each of the chapters in turn. To get the maximum benefit from
each chapter you should proceed in the following order:
1. Read the Syllabus Objectives. These are set out in the box at the start of each chapter.
2. Read the Chapter Summary at the end of each chapter. This will give you a useful overview
of the material that you are about to study and help you to appreciate the context of the
ideas that you meet.
3. Study the Course Notes in detail, annotating them and possibly making your own notes. Try
the self‐assessment questions as you come to them. As you study, pay particular attention
to the listing of the Syllabus Objectives.
4. Read the Chapter Summary again carefully. If there are any ideas that you can’t
remember covering in the Course Notes, read the relevant section of the notes again to
refresh your memory.
5. Attempt the Practice Questions that appear at the end of the chapter.
It’s a fact that people are more likely to remember something if they review it several times. So,
do look over the chapters you have studied so far from time to time. It is useful to re‐read the
Chapter Summaries or to try the Practice Questions again a few days after reading the chapter
itself. It’s a good idea to annotate the questions with details of when you attempted each one. This
makes it easier to ensure that you try all of the questions as part of your revision without repeating
any that you got right first time.
Once you’ve read the notes and attempted the Practice Questions (and attended a Preparation
Day, if appropriate) you should attempt the assignments. If you submit your assignment for
marking, spend some time looking through it carefully when it is returned. It can seem a bit
depressing to analyse the errors you made, but you will increase your chances of passing the
exam by learning from your mistakes. The markers will try their best to provide practical
comments to help you to improve.
To be really prepared for the exam, you should be aware of what the examiners will expect. Your
revision programme should include plenty of question practice so that you are aware of the typical
style, content and marking structure of exam questions. You should attempt as many past exam
questions as you can.

As ActEd tutors, it is very illuminating to see/hear how different students study for the exams.
We hear quite a few students make comments such as:
 Assignment questions are not relevant to the exam.
 It’s quicker just to read through the assignment questions and solutions.
 There isn’t enough time to get the assignments done.
Sound familiar?
It may be worth thinking again for Subject CP2 as, when we look at the pass lists, we are finding
that there is a correlation between students who are making the effort to do assignment, mock
exam and past exam questions, and those who are happy on exam results day.
Active study
Here are some techniques that may help you to study actively.
1. Don’t believe everything you read! Good students tend to question everything that they
read. They will ask ‘why, how, what for, when?’ when confronted with a new concept,
and they will apply their own judgement. This contrasts with those who unquestioningly
believe what they are told, learn it thoroughly, and reproduce it (unquestioningly?) in
response to exam questions.
2. Another useful technique as you read the Course Notes is to think of possible questions
that the examiners could ask. This will help you to understand the examiners’ point of
view and should mean that there are fewer nasty surprises in the exam room! Use the
Syllabus to help you make up questions.
3. Annotate your notes with your own ideas and questions. This will make you study more
actively and will help when you come to review and revise the material. Do not simply
copy out the notes without thinking about the issues.
4. Attempt the questions in the notes as you work through the course. Write down your
answer before you refer to the solution.
5. Attempt other questions and assignments on a similar basis, ie write down your answer
before looking at the solution provided. Attempting the assignments under exam
conditions has some particular benefits:
 It forces you to think and act in a way that is similar to how you will behave in the
exam.
 When you have your assignments marked it is much more useful if the marker’s
comments can show you how to improve your performance under exam conditions
than your performance when you have access to the notes and are under no time
pressure.
 The knowledge that you are going to do an assignment under exam conditions and
then submit it (however good or bad) for marking can act as a powerful incentive to
aid your studies.
 It is quicker than trying to write perfect answers.

6. Sit a mock exam four to six weeks before the real exam to identify your weaknesses and
work to improve them. You could use an ActEd Mock Exam, past exam papers and/or the
specimen exam paper.
You can find further information on how to study in the profession’s Student Handbook, which
you can download from their website at:
www.actuaries.org.uk/studying

Queries and feedback
Questions and queries

From time to time you may come across something in the study material that is unclear to you.
The easiest way to solve such problems is often through discussion with friends, colleagues and
peers – they will probably have had similar experiences whilst studying. If there’s no one at work
to talk to then use our discussion forum at www.ActEd.co.uk/forums (or use the link from our
home page at www.ActEd.co.uk).
Our online forum is dedicated to actuarial students so that you can get help from fellow students
on any aspect of your studies. ActEd Tutors will visit the site from time to time to ensure that you
are not being led astray and we also post other frequently asked questions from students on the
forum as they arise.
If you are still stuck, then you can send queries by email to CP2@bpp.com (but we recommend
that you try the forum first). We will aim to reply as soon as possible after receiving your query
but you should be aware that it may take some time to reply to queries, particularly when tutors
are away from the office running tutorials. At the busiest teaching times of year, it may take us
more than a week to get back to you.
If you have many queries on the course material, you should raise them at a tutorial or book a
personal tuition session with an ActEd Tutor. Information about personal tuition is set out in our
current brochure. Please email ActEd@bpp.com for more details.
Feedback
If you find an error in the course, please check the corrections page of our website
(www.ActEd.co.uk/paper_corrections.html) to see if the correction has already been dealt with.
Otherwise please send details via email to CP2@bpp.com.
Each year our tutors work hard to improve the quality of the study material and to ensure that
the courses are as clear as possible and free from errors. We are always happy to receive
feedback from students, particularly details concerning any errors, contradictions or unclear
statements in the courses. If you have any comments on this course please email them to
CP2@bpp.com.
Our tutors also work with the profession to suggest developments and improvements to the
Syllabus. If you have any comments or concerns about the Syllabus, these can be passed on via
ActEd. Alternatively, you can address them directly to the Institute and Faculty of Actuaries’
Examination Team by email to education.services@actuaries.org.uk.

2.1 Subject CP2 – background
History
The Core Practices subjects (Subjects CP1, CP2 and CP3) are new subjects in the Institute and
Faculty of Actuaries 2019 Curriculum.
Subject CP2 is Modelling Practice.
Predecessors
The topics covered in the Core Practices subjects (Subjects CP1, CP2 and CP3) cover content
previously in Subjects CA1, CA2 and CA3:
 Subject CP1 replaces Subject CA1.
Exemptions
You will need to have passed or been granted an exemption from Subject CA2 to be eligible for a
pass in Subject CP2 during the transfer process.
Links to other subjects

 Subjects CM1 and CM2 – Subject CP2 builds on the concepts introduced in these subjects.
 Subjects CS1 and CS2 – Material from these subjects can also be used in Subject CP2.
 Subjects CP1 and CP3 – The principles introduced in Subject CP1 and some features of
communication development in Subject CP3 are also used.

2.2 Subject CP2 – Syllabus
Syllabus
The Syllabus for Subject CP2 is given here. To the right of each objective are the chapter numbers
in which the objective is covered in the ActEd course.
Aim
The aim of the Modelling Practice subject is to ensure that the successful candidate can model
data, document the work (including maintaining an audit trail for a fellow student and senior
actuary), analyse the methods used and outputs generated and communicate to a senior actuary
the approach, results and conclusions.
Competences
On the successful completion of this subject, the candidate will be able to:
1. prepare and summarise data, and undertake exploratory data analysis and visualisation
2. construct an actuarial model to solve a realistic problem
3. document the model by constructing an audit trail
4. analyse the methods used and outputs generated
5. apply and interpret the results
6. communicate the results.
Links to other subjects
This subject builds upon concepts introduced in CM1 (Actuarial Mathematics) and CM2 (Financial
Engineering and Loss Reserving). It can also use material from CS1 (Actuarial Statistics) and
CS2 (Risk Modelling and Survival Analysis).
This subject also uses the principles in CP1 (Actuarial Practice) and some features of the
communications development in CP3 (Communications Practice).
Syllabus topics
1. Preparation and exploratory analysis of data (2%) (0% – 10%)

2. Development of a model (18%) (15% – 20%) with clear documentation (30%) (25% – 35%)
3. Analysis of methods and model outputs (10%) (10% – 20%)
4. Application and interpretation of results (20%) (15% – 25%)
5. Communication of results and conclusions (20%) (20% – 35%)
The mean weightings are indicative of the approximate balance of the assessment of this subject
between the main syllabus topics, averaged over a number of examination sessions, and taking
into account of how the subject is to be examined in future.

In addition to the mean weightings, a range for the weightings has been provided to indicate how
the typical weightings of main syllabus topics may vary in a given examination session. This
reflects the variation resulting in the underlying models used and the questions asked in a given
examination session.
The weightings also have a correspondence with the amount of learning material underlying each
syllabus topic. However, this will also reflect aspects such as:
 the relative complexity of each topic, and hence the amount of explanation and support
required for it
 the need to provide thorough foundation understanding on which to build the other
objectives
 the extent of prior knowledge which is expected
 the degree to which each topic area is more knowledge or application based.
Skill levels
The use of a specific command verb within a syllabus objective does not indicate that this is the
only form of question which can be asked on the topic covered by that objective. The Examiners
may ask a question on any syllabus topic using any of the agreed command verbs, as are defined
in the document ‘Command verbs used in the Associate and Fellowship written examinations’.
Questions may be set at any skill level: Knowledge (demonstration of a detailed knowledge and
understanding of the topic), Application (demonstration of an ability to apply the principles
underlying the topic within a given context) and Higher Order (demonstration of an ability to
perform deeper analysis and assessment of situations, including forming judgements, taking into
account different points of view, comparing and contrasting situations, suggesting possible
solutions and actions, and making recommendations).
In Subject CP2, the approximate split of assessment across the three skill types is:
 20% Knowledge
 50% Application
 30% Higher Order skills.

Detailed syllabus objectives
1. Preparation and analysis of data (10%)
1.1 Use appropriate tools for cleaning, restructuring and transforming data to make it
suitable for analysis.
1.2 Summarise data using appropriate analysis, descriptive statistics and graphical
representation.
1.3 Select and carry out appropriate statistical tests of reasonableness.
1.4 Make appropriate assumptions about the data provided.
1.5 Repair corrupt or missing data.
2. Development of a model with clear documentation (30%)
2.1 Plan and produce a spreadsheet model to solve a specified problem.

2.2 Document the results of the model including justification of key assumptions,
detailing the methodology adopted, an appropriate level of reasonableness
checks, sensitivities and limitations.
2.3 Produce and audit trail enabling detailed checking and high‐level scrutiny of the
model by a fellow student and a senior actuary.
3. Analysis of methods used and model outputs (15%)
3.1 Perform checks on the results of a model, including applying sensitivity and/or
scenario tests.
3.2 Comment on the reasonableness of the results under different scenarios.
4. Application and interpretation of results (20%)
4.1 Apply the results to the problem set, suggesting solutions.

4.2 Summarise the results using appropriate charts and tables.
4.3 Consider possible next steps.
5. Communication of results and conclusions (25%)
5.1 Plan and draft a summary document to cover the data, approach, assumptions,
results, conclusions and suggested next steps for presentation to a senior actuary.
5.2 Create appropriate data visualisations to communicate the key conclusions of an
analysis.
Assessment
Two computer‐based modelling assignments.

2.3 Subject CP2 – the course structure

The Course Notes for Subject CP2 have been written to teach you the general principles and
technical knowledge you need for CP2, and to give guidance on passing the exam. The chapters
are arranged as follows:
 Chapter 1 provides an introduction to CP2.

 Chapter 2 to 6 cover the theory relating to the main syllabus areas.
 Chapters 7 to 8 describe the use of Excel and Word in CP2.
 Chapter 9 covers exam technique.
 Chapters 10 and 11 contain worked example projects for Papers 1 and 2.
The following table shows how the Subject CP2 chapters relate to the syllabus. We have also
given you a broad indication of the length of each chapter. This table should help you plan your
progress across the study session.
No of
Chapter Title Syllabus objectives
pages
1 Introduction to Subject CP2 10
2 Analysing data 12 1.1 – 1.5

3 Developing a model 11 2.1
4 Creating an audit trail 15 2.2, 2.3
5 Creating a project summary 21 3.1 – 3.2, 4.1 – 4.3, 5.1
6 Presenting results 16 5.2
7 Using Excel 49
8 Using Word 15
9 Exam technique 6
10 Worked example Paper 1 21

11 Worked example Paper 2 16
You should work through the notes fully before attempting any exam‐style questions and
assignments. As the notes are relatively short, you should be able to read them several times
before the exam. However, the main way to develop the skills you need for the CP2 exam is to
practise.

2.4 Subject CP2 – summary of ActEd products

In addition to the CP2 Course Notes, ActEd offer a set of Assignments and Mock Exam papers,
which give you an opportunity to practise the skills needed for the CP2 exams.
Series X Assignments
There are three Assignments:

 Assignment X1 (1¾ hours) focuses on the Excel aspects of CP2
 Assignment X2 (1¾ hours) focuses on the audit trail, summary report and charts
 Assignment X3 (3¼ hours) is similar to a CP2 Paper 2 exam.
Assignments X1 and X2 require you to submit written answers (similar to the assignments in the
other subjects).
Assignment X3 requires you to produce a spreadsheet model (using MS Excel) and an audit trail
(using MS Excel or MS Word).
To attempt Assignment X3, you will need to download a data file from the ActEd website.
Mock Exams
There are two Mock Exam papers:
 Paper 1 (3¼ hours) is similar to a CP2 Paper 1 exam

 Paper 2 (3¼ hours) is similar to a CP2 Paper 2 exam.
To attempt each of the Mock Exam papers, you will need to download a data file from the ActEd
website.
ActEd’s Mock Exams are intended to be attempted under exam conditions and then sent to ActEd
for marking. You can use these to help you identify any areas you need to focus on in your
preparation for the exam itself. The two papers must be purchased together, but you do not
need to submit both at the same time.
Have you done these before?
Please note that Assignment X3 and the two Mock Exam papers are updated versions of the Mock
Exams we offered previously for Subject CA2. So these may not be suitable for you if you have
attempted these previously.

Tutorials (face-to-face and live online)
We also offer a Preparation Day tutorial for Subject CP2 with a choice of attending face‐to‐face or
attending a live online webinar.
Our CP2 Preparation Day tutorials are designed to build upon your learning from the CP2 Course
Notes and help develop the key communication skills you need to pass the exam. The tutorial
includes short exercises providing opportunities to practise these skills. You will leave the tutorial
with your own personal action plan so that you know how you need to improve before the exam.
Face‐to‐face tutorials are offered at various locations. Full details of face‐to‐face and live online
tutorials, including how to apply, are set out in our Tuition Bulletin, which is available from our
website at www.ActEd.co.uk.
Online classroom
We also provide a CP2 Online Classroom, which covers similar material to the Preparation Day
tutorial. For further details, see our Tuition Bulletin, which is available from our website at
www.ActEd.co.uk.

2.5 Subject CP2 – skills and assessment
Exam skills
Exam question skill levels
The use of a specific command verb within a syllabus objective does not indicate that this is the
only form of question which can be asked on the topic covered by that objective. The Examiners
may ask a question on any syllabus topic using any of the agreed command verbs, as are defined
in the document ‘Command verbs used in the Associate and Fellowship written examinations’.
Questions may be set at any skill level:

 Knowledge (demonstration of a detailed knowledge and understanding of the topic)
 Application (demonstration of an ability to apply the principles underlying the topic
within a given context)
 Higher Order (demonstration of an ability to perform deeper analysis and assessment of
situations, including forming judgements, taking into account different points of view,
comparing and contrasting situations, suggesting possible solutions and actions, and
making recommendations).
In the CP2 subject, the approximate split of assessment across the three skill types is:
 20% Knowledge
 50% Application
 30% Higher Order skills.
Assessment
Assessment consists of:
 Paper 1 – a 3¼‐hour computer‐based online examination requiring a model and audit trail
to be completed.
 Paper 2 – a 3¼‐hour computer‐based online examination requiring a spreadsheet to be
updated and a summary report completed.
These two examinations must be sat (and passed) together.
Each paper will be marked out of 100 and the scores for the two papers will be aggregated. There
will be no requirement to pass or to reach a minimum standard on either paper on a stand‐alone
basis.

2.6 Subject CP2 – frequently asked questions

Q: What differences will there be between CP2 and CA2?
A: The CP2 exam is expected to be very similar to the CA2 exam, which it replaces. The only
significant area of change is that the examiners have indicated that there will be more
emphasis in the CP2 exam on data issues than there were in CA2.
Q: I have a different version of Excel and Word on my computer. Will this be a problem?
A: The version of Microsoft Office used in the exam is under constant review, so you should
check on the IFoA website which version is specified for your exam. Using a later version
than the one specified should not be a problem, but if you are using an older version,
there is a risk that your version may not be able to handle some of the features used in
the files provided.
Q: What happens if my computer crashes?
A: To minimise the damage if your computer crashes, you should save your files at regular
intervals during the exam, so that you don’t lose the work you’ve done.
Q: What happens I can’t upload my files for marking at the end of the exam, eg if the
internet goes down?
A: The examiners have said that, provided the time stamp on your files falls within in the
permitted time window, you don’t need to worry if you cannot upload your files straight
away. If you have problems, just make sure that you submit them as soon as possible
after the end of the exam.
Q: Am I allowed to use my CP2 ActEd notes in the exam?
A: Yes, you can refer to any printed reference material you want to use, including the ActEd
Notes, the feedback from your Mock Exams and the checklists from the ActEd CP2
Preparation Day. You can also use any notes you have made yourself.
Q: Am I allowed to set up templates for my spreadsheet, audit trail and summary and start
from these in the exam?
A: No. You must create all your electronic files from scratch during the exam (or, in Paper 2,
start from the spreadsheet provided). However, there’s nothing to stop you preparing a
handwritten or printed ‘crib sheet’ to work from. This could include the worksheet names
and colour conventions for your spreadsheet, the section headings for the audit trail and
summary, as well as any preferred wording you like to use and lists of the ‘usual suspects’
for points that often feature in the data, assumptions and next steps sections.
Q: Will I need a copy of the ‘orange’ tables as well?
A: It’s a good idea to have your Tables to hand during the exam in case you want to check a
formula or one of the tabulated values.

Q: The specimen projects I have seen have mainly involved data analysis, manipulation and
calculations. Are there any other different types of projects that could come up?
A: The projects can take any form. Other possibilities might, for example, include:
 carrying out a simulation
 comparing the results obtained using different models.
Q: Doesn’t spending time at the start of the Paper 1 exam writing a plan for the project just
use up valuable time?
A: As with any project, planning what is required at the outset allows the work itself to be
carried out more efficiently later on. Experience has shown that students who launch
straight into their spreadsheet often end up backtracking later on and then find that they
have to rush to complete their audit trail.
Q: A lot of the specimen projects seem to involve calculations for several different
scenarios. What is the best way to deal with this in the exam?
A: There are two approaches you can use here, depending on the volume and complexity of
the calculations involved.
If the different scenarios are just a small part of the model and involve straightforward
calculations, you can just calculate the scenarios in parallel columns on the same
worksheet, so that they appear as a table. But if the calculations are more wide‐ranging
or more complicated, you should carry out the calculations for each scenario on a
separate worksheet (‘tab’). In this case, the parallel worksheets should be the same,
apart from the aspects that differ between the scenarios.
Q: Why do some of the specimen projects mention extra data for an additional task or
scenario given halfway through the assessment?
A: Previously (before July 2014), the exams were supervised by a CA2 assessor and part of
the exam involved testing whether students could deal with an unexpected additional
task (which frequently happens in real life). With the current exam format, any ‘extra’
tasks you may need to do will be specified in the initial instructions.
Q: I don’t use Excel much at work. What should I do in the exam if I don’t know how to do
something in Excel?
A: If you have an Excel question that isn’t covered in the ActEd Notes, you can use the Excel
help feature, which you can access by pressing the F1 key.
If you can’t think of a way to automate a particular calculation, you can use a
‘placeholder’, where you temporarily type in the answer (marking clearly that you’ve
done this). You can then continue and come back later to try to automate it.

Q: Can I use features such as pivot tables and auto‐filter in my spreadsheet? I use these a
lot at work.
A: It’s best to avoid using pivot tables in the CP2 exam because you would need to write a lot
more in your audit trail to describe how to use these, compared with an approach that
uses standard functions such as COUNTIF and SUMIF.
The auto‐filter feature can be useful for spotting rogue entries in columns of data and for
reconciling totals. If you use this, make sure you describe how you have used it in your
audit trail, as it is an interactive feature that leaves no permanent record in your
spreadsheet.
Q: Should I do my audit trail using Excel or Word?
A: The CP2 examiners have said that you can use either in the assessment. The important
thing is that your audit trail is complete and in one place.
If you use an Excel worksheet for your audit trail, you might find it helpful to turn off the
gridlines to make it easier to read. To do this, untick the Gridlines box on the View menu.
This setting will be stored with the worksheet, but won’t affect the other worksheets in
your workbook.
Q: Why do you recommend using a ‘descriptive’, rather than a ‘narrative’ style, for the
audit trail?
A: The CP2 examiners have stated that both approaches are acceptable. However, the
descriptive approach has the advantage that it is ‘driven by’ the spreadsheet, which
makes it easier for a reviewer to check specific parts of the calculations. Another
advantage of the descriptive style from a student’s point of view is that it encourages you
to focus on the aspects of the project that will gain marks in the exam.
Q: I am never sure whether to reproduce equations and Excel functions in my audit trail.
Can you give any guidance on this?
A: When you are describing the technical aspects of your model in the audit trail, the
important thing is to describe how your model works. If another user is looking at your
audit trail and has the spreadsheet open, they should be able to understand how you did
the calculations without needing to go ‘into’ the Excel formulae. Usually the best way to
do this is to give a description of the calculation method in words (as in the audit trail in
the Worked Example). It is fine to include the occasional equation if this is an effective
way of clarifying some of the steps, but ‘avoidance of excessive reproduction of Excel
formulae’ is something that scores marks.
Q: The marking schedule refers to ‘appropriate language’. What does this mean?
A: The summary in Paper 2 is written for a senior actuary to read and the audit trail is
written for a fellow student and/or senior actuary. So you should use the kind of
language and terminology that they would expect to see. You should also make sure that
you use technical terminology correctly. For example, you should not refer to parameters
as ‘data values’.

Q: There seem to be quite a lot of marks for the assumptions, checks, comments and next
steps. How many of these do we need to include?
A: These do indeed carry a lot of marks. So it is important to include enough of them.
The number of marks you will score for each point you make will depend on whether it is
a key point or a more minor one (and whether you have stated it clearly). As a rough
guideline, to score full marks a good candidate might typically include:
 5 different automated checks in the spreadsheet for Paper 1 (including some
checks on the calculations as well as the data)
 3 different reasonableness or independent checks in the audit trail for Paper 1
 7 or 8 assumptions in the audit trail for Paper 1 (which need to be genuine
assumptions, not statements relating to the parameter values or the results)
 3 or 4 additional assumptions in the summary for Paper 2
 5 or 6 comments or reasonableness checks on the results for Paper 2 (which
should ‘add value’, rather than just repeat the results of the calculations)
 12 to 15 next steps in the summary for Paper 2 (which should also briefly mention
the reason why each suggestion would be helpful).
Q: When I’m doing the summary in Paper 2, can I just copy the assumptions from the audit
trail provided?
A: If the assumptions in the audit trail provided are appropriate for the summary (ie if they
are important for the senior actuary to know), you can repeat these, rewording them
where necessary. But, to score full marks, the examiners will expect you to add some
more assumptions, again remembering that these are intended for the senior actuary
overviewing the project.
Q: The background mentions ‘technical standards’. Do I need to address these in my audit

trail or my summary?
A: You won’t be expected to mention these explicitly in the CP2 exam. However, you should
be aware of them and you should apply them where appropriate.
For example, regarding the data, you should check any data provided and show that you
understand the importance of having complete and accurate data. You could mention
this as one of your assumptions and, if you have any doubts about the quality of the data,
you could include this in the Next Steps section of your summary as something to follow
up on.
For the modelling stage, you need to ensure that the documentation in your audit trail is
‘fit for purpose’. In particular, it must contain sufficient detail and be clear, unambiguous
and complete.
For the reporting stage, you need to ensure that your summary is complete and covers all
material and relevant information that the senior actuary will need.

Q: What have the pass rates and pass marks been for this subject?
A: The pass rates and pass marks for CA2 for the most recent exam sessions were:
 2017: April 59% (pass mark 60%), September 63% (pass mark 60%)
 2018: April 70% (pass mark 62%).
As in the other actuarial exams, you can maximise your chances of passing by preparing
thoroughly beforehand. This includes working through some of the sample projects,
attempting the ActEd mock exams, attending an ActEd Preparation Day, and focusing on
any ‘weak’ areas you have highlighted.
Q: Most of the mark allocations indicated on the CA2 and CP2 exam papers are in blocks of
5 or more. Does this mean that the marking will be largely subjective?
A: The marks shown in the exam questions are in blocks, but the marking schedule used by
the examiners will be broken down further. Since the instructions for the Subject CP2
assessments are usually quite open‐ended, these will allow for a range of different
approaches. However, as for the other actuarial exams, the assessors will take great care
to ensure that they mark the assessments consistently.
Q: Would you recommend doing a Mock Exam and what is the deadline for these?
A: There are two Mock Exams available from ActEd – one for Paper 1 and one for Paper 2.
We encourage candidates to attempt these to help resolve issues commonly experienced
by CP2 candidates in advance of the exam.
The final deadline are shown at the end of this Study Guide, but you should aim to submit
your files for marking at least four weeks before your exam. They will be marked by an
ActEd tutor or by one of ActEd’s external markers. You will receive a detailed breakdown
of your marks and an analysis of your work, highlighting areas you need to focus on.
You will also receive a set of specimen solutions, including the relevant spreadsheet, audit
trail, summary and planning sketch.
Note that if you submit your work for marking very close to your exam date, we may not
be able to mark it and return it to you before your exam.
Q: Is there someone I can email if I have a query?
A: If you have a query about these notes, you can send an email to us at ActEd in the usual
way. The email address for this subject is CP2@bpp.com.
If you have a more general query about the exam or the objectives or the ‘rules’, you
should address this to examination.services@actuaries.org.uk.

2.7 Subject CP2 – marking deadlines
For the session leading to the April 2019 examination – CP2

You should submit your scripts by email. This is in order for us to return your marked script in
plenty of time for you act on the feedback and improve your performance in your
exam. In general, the turnaround of all scripts is likely to be quicker if you submit them well
before the relevant final deadline dates.
Series X Assignments – CP2
To receive your marked script back with adequate time to reflect and improve your
performance, you should follow the recommended submission dates.
Recommended
Series Assignment Final deadline date
submission date
X1 20 February 2019 27 February 2019
X X2 27 February 2019 6 March 2019
X3 6 March 2019 13 March 2019
Your script will not be marked if it is submitted after the relevant final deadline date.
Mock Exams – CP2
To receive your marked script back before your exam, and with adequate time to reflect and
improve your performance, you should follow the recommended submission date.
Recommended submission Final Deadline Date

Subject
date
CP2 20 March 2019 27 March 2019
Your script will not be marked if it is submitted after the final deadline date.
Marking vouchers
Subject Assignments Mocks
CP2 20 March 2019 27 March 2019

For the session leading to the September 2019 examination – CP2

You should submit your scripts by email. This is in order for us to return your marked script in
plenty of time for you act on the feedback and improve your performance in your
exam. In general, the turnaround of all scripts is likely to be quicker if you submit them well
before the relevant final deadline dates.
Series X Assignments – CP2
To receive your marked script back with adequate time to reflect and improve your
performance, you should follow the recommended submission dates.
Recommended
submission date
X1 7 August 2019 14 August 2019
X X2 14 August 2019 21 August 2019
Your script will not be marked if it is submitted after the relevant final deadline date.
Mock Exams – CP2
To receive your marked script back before your exam, and with adequate time to reflect and
improve your performance, you should follow the recommended submission date.
Recommended submission Final Deadline Date

Subject
date
CP2 4 September 2019 11 September 2019
Your script will not be marked if it is submitted after the final deadline date.
Marking vouchers

All study material produced by ActEd is copyright and is sold
for the exclusive use of the purchaser. The copyright is
owned by Institute and Faculty Education Limited, a
subsidiary of the Institute and Faculty of Actuaries.
Unless prior authority is granted by ActEd, you may not hire

out, lend, give out, sell, store or transmit electronically or
photocopy any part of the study material.
You must take care of your study material to ensure that it

is not used or copied by anybody else.

addition, we may seek to take disciplinary action through
the profession or through your employer.
These conditions remain in force after you have finished

using the course.

CP2‐01: Introduction to CP2 Page 1
Introduction to CP2

Page 2 CP2‐01: Introduction to CP2
0 The Subject CP2 exam
0.1 Format of the exam
The CP2 exam consists of two computer‐based assessments, taken online on different days, each
consisting of a 3¼‐hour paper. You must take both parts in the same sitting. Passes are
determined based on the total score for the two parts combined.
For Paper 1 you will be required to construct a spreadsheet model for a project and to write an
audit trail documenting your model.
For Paper 2 you will be given a spreadsheet and an audit trail for a different project. You will be
required to make some changes to the spreadsheet and to write a summary report for the
project.
In the exam, you will be provided with the instructions for the assessment project and (usually) a
data set to work with. Once you have completed your assessment, you upload your files
electronically for marking.
More detailed information relating to the CP2 exam, including the objectives and format of the
exam and links to the sample projects, can be found in the Guide to CP2 Modelling Practice on the
IFoA website.
This guide also describes the professional standards requirements relating to actuarial work,
which include APS X1 and the new TAS framework. Although you will not be directly tested on
these in the CP2 exam, you are expected to be aware of the ones that apply to work you are
doing.
0.2 Objectives of the exam
The key objectives of CP2 are stated as follows:
CP2 objectives
On the successful completion of this subject, the candidate will be able to:
1. prepare and summarise data, and undertake exploratory data analysis and visualisation
2. construct an actuarial model to solve a realistic problem
3. document the model by constructing an audit trail
4. analyse the methods used and outputs generated
5. apply and interpret the results
6. communicate the results.
The full CP2 syllabus is set out in the Study Guide.

The principles underlying these objectives are covered in Chapters 2 to 6 of these notes under the
headings:
 analysing data (Chapter 2)
 developing a model (Chapter 3)
 creating an audit trail (Chapter 4)
 creating a project summary (Chapter 5)
 presenting results (Chapter 6).
The relevant syllabus objectives are shown at the start of each chapter.
0.3 What the exam is about
Looking at the objectives, you can see that the exam is basically testing whether you can carry out
a systematic investigation based on a set of data, documenting your model and presenting your
results and conclusions in a clear way. It complements CP3, which tests whether you can
communicate effectively to a non‐technical audience.
0.4 What the exam is not about
Although the projects in your CP2 exams may be based on an actuarial topic from one of the
earlier subjects, the exam is not testing your detailed knowledge of these subjects. So there’s no
need to dig out the chapter summaries from your old courses and start memorising all the
equations. In the exam you’ll be provided with any relevant sections of Core Reading.
Both Paper 1 and Paper 2 involve working with Excel spreadsheets. However, the exam is not
testing whether you can produce a flashy spreadsheet using advanced features of the software.
In fact, we strongly recommend that you stick to the simpler features.
Also, most employers have in‐house ‘best practice’ guidelines designed to make things run
smoothly in the office and to avoid mistakes. These typically include:
 conventions for naming files, worksheets and variables
 conventions for entering data and formulae
 conventions for fonts, colours and shading
 a list of ‘banned’ functions that have been found to cause problems.
You can continue to use a house style if you wish, but make sure you explain in your audit trail any
features that might not be familiar to the examiner marking your work.
Make sure also that you don’t use any special ‘in‐house’ functions that may not work outside your
organisation.
It’s best to keep your spreadsheet model simple, as this will be quicker to do, it will be easier for
the examiner to follow and it will be easier to explain in the audit trail.

1 CP2 projects
1.1 What the projects might be about
To give you an idea of the types of projects that could come up, here is a list of some example
projects with actuarial themes:
Subject Model Example project

Regression model Modelling personal income and expenditure
CS1 Sampling theory Determining an appropriate sample size
Generalised linear model Modelling claim numbers
Markov chain Comparing No Claims Discount systems
Jump process Pricing income protection insurance
Cox model Investigating the effect of smoking
Parametric graduation Graduating lapse rates
CS2
Loss distributions Reviewing reinsurance arrangements
Time series model Modelling a financial index
Mortality projection Predicting mortality rates for 2030
Machine learning Applying a decision tree
Loan schedule Calculating repayments on a mortgage
Cashflow projection Replacement ratios for a personal pension
CM1 Life tables Projecting population numbers
Discounted cashflow model Calculating transfer values
Profit test model Setting premium rates
Utility theory Predicting sales of lottery tickets
Portfolio theory model Calculating risk levels of managed funds
CM2
Binomial tree Calculating option prices
Black‐Scholes model Hedging a portfolio of shares
CB1 Accounting analysis Comparing different tax rules
CB2 Production function Maximising a company’s profits
These are just examples and this list is by no means exhaustive. In fact many of the past exam
projects have not had an overtly actuarial theme at all. For example, some of them have related
to sporting events, animals and product sales.
You probably do very similar things at work to some of the projects listed here. In fact, it is likely
that you have chosen an actuarial career precisely because you are good at this type of work.
So it should all be familiar stuff.
At this point you can have a look at the project instructions for the Worked Examples
(see Chapters 10 and 11) to give you an idea of what a CP2 project might look like.

1.2 Worked Example projects
Chapters 10 and 11 of these Course Notes contain worked examples. These chapters include the
instructions for example projects for Paper 1 and Paper 2 and a full analysis of the solutions
produced from the viewpoint of a student attempting them under exam conditions.
1.3 Sample projects on the IFoA’s website
Subject CP2 replaces Subject CA2, which was a very similar exam. There are a number of CA2
projects you can use to help prepare for the exams.
At the time of writing, the following sample projects are available on the IFoA website:
Exam session Paper 1 Paper 2

CA2 September 2018 Childcare fees Savings policy
April 2018 Solvency calculations Children’s charity
September 2017 Bakery Health campaign
April 2017 Student loans Pension contributions
September 2016 Investment fund projections Mortgage payments
May 2016 Motor insurance Sheep’s wool
February 2016 Mortgages Children’s playgroup
November 2015 Bird populations Retirement planning
September 2015 Surgeons’ exams Lifetime of dogs
May 2015 Triathlon competition Retirement income
March 2015 Term assurance Annuities
These are actual projects that were used in past assessments. You can download these sample
projects by following the ‘Sample projects and syllabus’ link in the CP2 section on the IFoA
website.
Note
Prior to March 2015, the CA2 exam consisted of a single 7½ hour exam, so these older exams
were in a different format. We haven’t included these in the table, but you can still refer to them
if you feel you need extra practice.
We recommend that you study the sample projects and attempt some of them as practice exams.
Remember that there is no single ‘right’ answer and different approaches are possible. So your
work may look different from the solutions given but still score well. Note also that the
examiners’ solutions are intended to ‘cover all angles’, so in places they may be a lot longer and
include a lot more detail than an individual student would be expected to produce in the exam.

In the CP2 exam you’ll be provided with any relevant Core Reading from the other exam subjects.
However, any detailed formulae that are required for the project will be included in the question
paper, so you should not need to refer to the Core Reading. It is an open‐book exam, so you can
also refer to your own copy of the ‘orange’ Tables book if you need to.
You should also read the Guide to CP2 Modelling Practice on the IFoA website, which includes
other useful information and guidance.
1.4 ActEd Assignments and Mock Exams
In addition to the tutorial support for CP2, ActEd offer a set of Assignments and Mock Exam
papers, which include additional projects to give you an opportunity to practise the skills needed
for the CP2 exams.
Further details of these (including options for marking) are given in the CP2 Study Guide.
1.5 ActEd Preparation Days and Online Classroom
ActEd also offer a CP2 Preparation Day, which can be taken either as a full‐day face‐to‐face
tutorial or as a full‐day live webinar.
This also includes a CP2‐style project, which is used as a case study.
We also provide a CP2 Online Classroom, which covers similar material to the Preparation Day
tutorial.
For further details, see our study brochure or visit our website at www.acted.co.uk.

2 How to use these notes

To get the most out of these notes, we suggest you follow the flow chart shown on the next page.
We estimate that it will typically take at least 50 hours to work through the ActEd Notes and study
a selection of the specimen projects on the IFoA website. If you are also doing the ActEd
Assignments and/or Mock Exams and/or attending an ActEd Preparation Day, you will need to
include extra time for these.
You can send any queries about the ActEd Course Notes to CP2@bpp.com.

After reading the CP2 Study Guide and Chapter 1 (Introduction to CP2),
have a quick look at the instructions for the Worked example projects in
Chapters 10 and 11 to get a feel for what a CP2 project might be like.

Read through Chapters 2 to 6 (which cover the main syllabus areas) and
have a go at the exercises.

Read Chapters 7 and 8 (Using Excel and Word), study the example questions
and have a go at the exercises.

Check that you are familiar with the Syllabus in the CP2 Study Guide.

Read the advice in Chapter 9 (Exam Technique) and then read carefully
through the Worked example projects in Chapters 10 and 11.

Read the Frequently Asked Questions in the CP2 Study Guide.

Read the Guide to CP2 Modelling Practice on the IFoA website.

Study the spreadsheets and specimen solutions for the sample projects on
the IFoA website, using some of them as practice projects to try yourself on
a computer before looking at the specimen solutions.

Attempt ActEd’s Assignments and/or Mock Exams and/or attend a
Preparation Day.
If your work has been marked, study the feedback from your marker
carefully.

You should then be ready to do the actual exam.

Chapter 1 Summary
Key points regarding the CP2 exam
Plan to spend at least 50 hours working through the ActEd Notes and studying the sample
projects on the IFoA website.
Consider:
 attempting the ActEd Assignments
 attempting the ActEd Mock Exams
 attending an ActEd Preparation Day tutorial or doing the ActEd Online Classroom.
Be prepared for any type of project to come up.
Try to get into the particular way of thinking required for this exam. Remember that the
emphasis is on effective communication (via the audit trail and summary), rather than testing
your technical knowledge and spreadsheet expertise.

This page has been included so that you can

keep all the chapter summaries together for revision purposes.

CP2‐02: Analysing data Page 1
Analysing data
Syllabus objectives
1 Preparation and analysis of data
1.1 Use appropriate tools for cleaning, restructuring and transforming data to
make it suitable for analysis.
1.2 Summarise data using appropriate analysis, descriptive statistics and
graphical representation.
1.3 Select and carry out appropriate statistical tests of reasonableness.
1.4 Make appropriate assumptions about the data provided.
1.5 Repair corrupt or missing data.

Page 2 CP2‐02: Analysing data
0 Introduction
In this chapter we will cover the following topics:
 data in CP2
 ‘cleaning’ the data
 summarising a data set
 extracting the relevant information from a data set.

1 Preparing the data
1.1 Data in CP2

A typical assessment project will present you with a data set to work with.
In some cases, however, the data set you are given will not be in the precise form you require.
For example, you might be provided with a set of values of the FTSE 100 index, which you must
first convert into rates of return. As a result, some pre‐processing of the data may be required.
Also, the data you are given might contain errors. If these are not dealt with, the results of the
analysis will be meaningless. So it is important to validate or ‘clean’ the data, ie identify and deal
with any errors.
You may also need to summarise the data set, ie calculate some key statistics that describe the
‘shape’ of the data.
Note that you may be asked to create your own data! This is not as silly as it might sound – you
may be asked to use a particular model to simulate a set of results, which will then form your data
set. We will look at how to do this in Chapter 7 (Using Excel).
Make sure you understand the data you’ve been given. If you don’t take the time to do this,
there is a danger that you will set off on the wrong track.
1.2 Cleaning the data
Types of data errors

Errors in numerical data in computer files usually consist of:
 wrong numbers
 outliers
 omissions or duplicates.
Wrong numbers can occur because of incorrect inputting. Particularly common are:
 omitted digits, eg 21553 instead of 215553
 anagrams, eg 2456 instead of 2546
 mistakes involving repeated digits, eg 1223 instead of 1233.
‘Outliers’ are extreme data values that don’t appear to be consistent with the model – they don’t
fit the pattern. In real life, important data sets are sometimes input twice independently and then
compared by computer. This will identify any inputting problems involving wrong numbers,
omissions and duplicates, but will not pick up outliers.

Question
The data set provided for the worked example we will look at later consists of a list of the claim
amounts in a portfolio of insurance claims.
Suppose that, in subsequent discussions with the client, you discover that the original data
consisted of a set of paper‐based lists taken from international records, which were then input by
hand onto a spreadsheet and ‘cleaned’.
What types of types of data errors do you think might have been present in this data set before it
was cleaned?
Solution
There may have been some wrong numbers because some of the values may have been input
incorrectly, eg omitted digits, anagrams or mistakes with repeated digits.
An inexperienced typist may have accidentally pressed a non‐numeric key or included some letter
O’s instead of zeros.
Claims collated from different countries may be presented in different formats, which may result in
errors. For example, in Europe different ‘separators’ are used, so that the number 12,345.67 would
be written as 12.345,67.
Some claims may have been omitted completely or double counted.
Outliers would be present if the claims were given in a mixture of different currencies (eg £’s versus
$’s) or different currency units (eg pounds versus pence).
The marks shown in the exam question will give an indication of how much data checking (if any)
is expected. If the data set has not been cleaned and could contain errors, you will need to check
the data and make corrections as necessary, then document the checks you have applied and any
corrections you have made.

How can we identify data errors?

In the exam, you will not be able to look for the more subtle types of data error or to go back to the
original documents to check things out. Usually, it will be sufficient to:
 scan through the data by eye to spot any obvious problems (eg missing entries)
 calculate a few summary statistics, such as the number of data values and the
maximum/minimum values
 apply some automated Excel checks (see below)
 apply some reasonableness checks to the summary statistics
 reconcile the summary statistics with any additional information you have been given in
the project specification.
As an initial check, scanning through the data by eye will usually allow you to spot problems such as
missing values or repeated values. However, this may not pick up all the errors, especially if the
data set is large. So you should also apply some automated checks using Excel formulae that will
highlight any errors.
The summary statistics should highlight any outliers, as these may fall outside the normal range of
values. The summary calculations will also throw up an error if you have applied an Excel function
to data that contains invalid characters – for example, a letter O instead of a zero.
Try to incorporate some automated checks on the data and include a description of this in the
audit trail. For large data sets, automated checks are more reliable than reviewing by eye.
Document all the data checks you apply and any remedial action you take (even if no remedial
action is required) and give reasons for your approach.
However, don’t spend too long working on the data. It is important to move on to develop the
rest of the model.
Question
Another method of checking the data that can sometimes be useful is to plot a graph.
Can you think of a situation where this might be an effective way of identifying data errors?
Solution
Plotting a graph can be useful where we have a series of data values that we would expect to show
a consistent progression – for example, a table of mortality rates plotted against age or the values of
a financial index plotted against time. A graph would highlight any spikes or other irregularities that
might be difficult to spot otherwise.

‘Raw’ data and ‘clean’ data

It is good practice to keep the original data set intact and work from a ‘copy’ within Excel. This
means that if a different, or corrected, data set is used later, it will be possible to compare the
two data sets.
Ideally your spreadsheet should show separately the original ‘raw’ data with any warning
messages from the Excel checks that were applied and the modified ‘clean’ data with the
corresponding Excel checks now saying ‘OK’.
How do we fix data errors?

If you spot a data error that you think would significantly affect the results, you should modify the
data as you think best, and document clearly in your audit trail what you have done and why.
We will see an example of this in the Worked Example in Chapter Error! Reference source not
found., where we have to supply some missing data values that were not provided.
Try to set up your spreadsheet so that any changes made to the data at a later stage (possibly by
someone else) will automatically be reflected in the subsequent calculations.
Where possible avoid copying and pasting values since this means that changes to the data will
not be reflected later in the calculations. Use cell references instead.
If, for some reason, you cannot avoid pasting values, document very clearly what you have done
so that someone else would be able to replicate your work.
1.3 Summarising a data set
The purpose of summarising a data set is to get an idea of the distribution of the values – the
‘shape’ of the data. This normally involves finding:
 the number of data values
 the highest and lowest values
 sample moments, such as the mean and standard deviation.
We will look at the Excel functions that can be used for summarising data in Chapter Error!
Reference source not found..
1.4 Extracting the relevant information from a data set
In some cases you may need to convert the data from its original form. For example, you might
need to convert a history of market values of an asset into rates of return or you might need to
convert dates of birth into ages before proceeding.
This conversion should be done after you have sorted out any problems with the original data.

Chapter 2 Summary
Key points regarding data analysis
 Make sure you understand the data you’ve been given.

 ‘Clean’ the data by identifying any obvious errors.
 Include some automated checks.
 Calculate summary statistics, such as totals and averages.
 Apply reasonableness checks to identify any outliers.
 Reconcile the summary statistics with any additional information given.
 Consider plotting a graph to highlight errors when checking a series of data values.
 ‘Prepare’ the data eg calculate any derived quantities and/or subdivide the data.
 Be prepared to create your own data set for a simulation.
 Document all the data checks you apply, even if no remedial action is required.
 Don’t spend too long working on the data, especially if there don’t appear to be any
problems.
 Not all data sets will need all the steps outlined above. You will need to demonstrate
that you can apply the appropriate steps.

The practice questions start on the next page so that you can
keep the chapter summaries together for revision purposes.

Chapter 2 Practice Questions

2.1 Two of the columns of data provided for a valuation of the benefits for employees of a large
company who are members of the company’s pension scheme are:
 sex (with M for male or F for female)
 date of birth (in the format DD/MM/YYYY).
(i) List the checks that you could apply to the data values in these two columns to ‘clean’ the
data.
The valuation involves applying a set of age‐related mortality, retirement and withdrawal rates to
each employee. These rates have been provided in a table in an Excel file.
(ii) List the checks that you could apply to ensure that these rates are correct.
2.2 Give three reasons why it is important to check the data used in an actuarial project to ensure
that it is complete and accurate.

The solutions start on the next page so that you can

separate the questions and solutions.

Chapter 2 Solutions
2.1 (i) Checks on the data
If we are told how many employees there ‘should’ be, we can start by counting the numbers of
M’s and F’s to check that these match the numbers of males and females in the pension scheme
on that date.
For the ‘sex’ column we could:
 scan by eye for any missing entries or ones that are not M’s or F’s
 apply an automated Excel check to ensure that all the entries are either M or F
 use the filter feature in Excel to identify the different entries present in the column (which
should only include M’s and F’s)
 count the number of entries in the column and check that this is consistent with the
number of employees in the pension scheme
 check with the company how many employees there should be.
More advanced checks we could apply (if we had the necessary information) would include:
 compare the numbers of each sex (or the gender ratio) with the corresponding figures
from the previous valuation
 use the employees’ names or employee numbers to check that the entries are consistent
on an individual basis with the previous valuation.
For the ‘date of birth’ column we could:

 scan by eye for any missing entries or obvious errors, eg years containing 5 digits
 apply an automated Excel check to ensure that all the entries are valid dates, eg no 30th
February’s or month 13’s or unpopulated entries such as 00/01/1900 or DD/MM/YYYY
 calculate the minimum and maximum age to check that there are no outliers,
eg employees aged 12 or 105.
More advanced checks we could apply (if we had the necessary information) would include:
 calculate the average age and check that this is consistent with the employee profile
 compare the average age with the corresponding figure from the previous valuation
 use the employees’ names or employee numbers to check that the entries are consistent
on an individual basis
 plot a graph of the number of employees born in each year (or each month) to look for
any irregularities.

(ii) Checks on the decrement rates
For the decrement rates we could:

 plot graphs of the three rates against age to look for any irregularities
 apply an automated Excel check to ensure that the rates at consecutive ages are similar,
eg they don’t change by more than 10% from one age to the next
 calculate the minimum and maximum rates to check that there are no outliers, eg rates
that are 10 times too big
 calculate the average rates over all ages and check that these are roughly what we would
expect
 compare the rates with the decrement rates we have used for other pension schemes.
2.2 Reasons for checking the data
Any material errors in the data will invalidate the results of our calculations.
Some types of errors might actually prevent the software we are using from completing the
calculations, giving us an error message instead.
It is a professional requirement to take appropriate steps to make sure that there are no material
errors or omissions in the data we are using.
Errors in our results caused by data errors could lead to customers being unfairly treated, which
could cause reputational damage, or to legal action being taken against us.

CP2‐03: Developing a model Page 1
Developing a model
Syllabus objectives
2 Development of a model with clear documentation
2.1 Plan and produce a spreadsheet model to solve a specified problem.

Page 2 CP2‐03: Developing a model
0 Introduction
 models in CP2
 setting up the model
 scenarios.

1 Developing a model
1.1 Models in CP2

The principles of actuarial modelling are covered in some detail in Subject CM1, with a particular
focus on stochastic models.
For the purposes of CP2, ‘developing a model’ just involves formulating a mathematical
specification of the situation, as illustrated in the diagram below, and then setting up a
spreadsheet to carry out the required calculations.
MATHEMATICAL / STATISTICAL
MODEL
INPUT (data) OUTPUT
PARAMETERS for the model
EQUATIONS defining the model
ASSUMPTIONS underlying the model
In most cases in the CP2 exam, the project specification will tell you what type of model to use.
So this stage of the process will have largely been done for you. The areas you will need to focus
on are reading the instructions carefully to make sure you understand the components of the
model and how they fit together, and then deciding how you are going to set up a spreadsheet to
do the calculations.
There is an important issue to note regarding the terminology used in CP2.
Note how the word ‘assumption’ is used in CP2. In the office you might hear someone say
‘We need to repeat these calculations using a different assumption’, perhaps referring to a
change in the interest rate. In CP2 we would say ‘We need to repeat the calculations using a
different parameter value’.
Question
Give an example of:

(a) a parameter related to the rate of inflation
(b) an assumption relating to the rate of inflation.
Solution
(a) An example of a parameter might be the numerical value for the rate of inflation assumed
in the calculations, eg 2%.
(b) An example of an assumption might be that this rate of inflation is assumed to remain
constant in the future.

The assumptions are an important part of the model. So it is important that you state these
clearly in your audit trail.
Most of the other components in the diagram are self‐explanatory. However, the distinction
between ‘data’ and ‘parameters’ can be a grey area in some cases.
Question
Give an example of a situation where a set of mortality rates might be considered to be:
(a) a parameter of the model
(b) the data for the model.
Solution
(a) A life insurer or a pension scheme would normally consider the mortality table used in the
calculations to be a parameter of the model. The table is likely to be one of a small
number of standard tables that they have used many times.
The data, on the other hand, would relate to the individual policyholders’ or members’
details, which would require careful checking.
(b) If the model involves an analysis or comparison of the mortality rates themselves, these
might be considered to be the ‘data’ for the model. The rates for each age will be the
main focus of the modelling process and there may be no other variables involved.
Provided you take a sensible approach in the exam, and apply checks where appropriate, it is not
essential what you call these components of the model in such cases.
1.2 Setting up the model
It is important at the outset to decide on a suitable approach to use for the calculations and how
you are going to structure your spreadsheet. You will need to decide the best order in which to
do the tasks, how you are going to break the calculations down into separate worksheets and how
you are going to accommodate the ‘flexible’ elements (the data set and the input parameters).
It is also a good idea to think about ways that you can check your calculations to prevent errors
creeping in.
The aim is to produce a logically‐structured flexible spreadsheet that can produce all the required
results, but is simple and easy to use, and will give confidence to the user that the answers are
correct.
We will discuss in more detail the do’s and don’ts of setting up your spreadsheet later on in
Chapter 7 (Using Excel).

Exam tips
Be clear what the purpose of the investigation is.
Make sure you spend sufficient time thinking about the project and planning the model and
outputs. The examiners have said that many candidates lose a lot of marks by ‘diving’ straight
into the project before they have given it enough ‘thinking’ time. So, get into the habit of
considering the whole project and planning your model accordingly, so that you don’t fall into this
trap. At the start of the exam, identify the key building blocks for the project and to decide on a
logical sequence for linking these components together.
Try also to make your model flexible, so that you can easily adapt it to allow for a different data
set, different parameter inputs or to generate extra results. This habit will be useful in the office
as well as in the CP2 exam.
Warning
Markers have told us that some candidates have tried to use templates from other projects when
working through the assignments. You should avoid doing this, and start each project from
scratch.
However, it is a good idea to settle on a preferred style you are comfortable with. For example,
how will you set out your tables and what colour scheme will you use? You should be able to
develop this as you work through the ActEd Notes and the sample projects. If you don’t have to
spend time deciding on presentational issues such as these in the exam, you will have more time
to focus on the project itself.
1.3 Scenarios
The CP2 exam projects often involve carrying out calculations for different ‘scenarios’,
ie variations on the original model. The variation could relate to the data, the parameters, or the
mathematical method used.
The output of the model will then consist of a set of parallel results with one for each scenario.
Question
Give examples of scenarios that would involve varying each of the following aspects of a model:
(a) the data
(b) the parameters
(c) the mathematical method used.

Solution
(a) In a mortality investigation we would normally carry out separate calculations for the
males and females under study.
(b) In a financial projection exercise we may wish to compare the effects of different future
interest rates that might apply.
(c) In a statistical analysis we may wish to compare different methods, eg an exact calculation
versus one based on a normal approximation.
If the model we are using is a stochastic model, eg a simulation exercise, this will also generate a
set of scenarios, with one scenario for each simulation run.

Chapter 3 Summary
Key points regarding the model
 Be clear what the purpose of the investigation is.

 Identify the input and output variables.
 Familiarise yourself with the data.
 Identify the parameters for the model.
 Remember to state any additional assumptions you make.
 Be clear about the distinction between ‘parameters’ and ‘assumptions’.
 Make sure you understand the mathematical specification underlying the model.
 Be prepared for projects that require calculations for several different scenarios.
 Plan your spreadsheet before ‘diving in’.
 Practise creating new spreadsheets from scratch.



3.1 You have been asked to produce a pie chart similar to the one below showing the projected
composition of an investment fund in the year 2030.
Projected breakdown by asset class in 2030

(£m)
2
4 Equities (UK)
1
1 Equities (International)
Fixed Interest
2 Commodities
Derivatives
2 Cash
8 Other asset classes
You have been provided with a breakdown of the current asset classes in the fund and told that a
simple projection is all that is needed.
(i) Identify the following components of this model:
(a) inputs
(b) parameters
(c) mathematical equations
(d) outputs
(ii) List six assumptions you might make in your model.



Chapter 3 Solutions
3.1 (i) Components of the model
(a) The inputs (data) for this model are the amounts currently held in each asset class.
(b) The parameters for this model are the rates of investment return we expect to achieve for
each asset class.
(c) The mathematical equation for calculating the projected amounts is:
Projected Amount  Current Amount  (1  i )n
where ‘Current Amount’ is the current value of the investments in a particular asset class,
i is the rate of investment return we expect to achieve for this asset class and n is the
time in years from now until 2030.
(d) The outputs for this model will be the projected amounts for each investment class and
the pie chart.
(ii) Assumptions
In order to keep the model simple, we might make the following assumptions:
 All holdings within a particular asset class will achieve the same investment return.
 The investment return for each asset class is constant from year to year.
 Our estimates of the future investment returns are sufficiently accurate.
 Random variations in the investment returns (between assets and from year to year) can
be ignored.
 The date for the projection is the start of the year, ie 1 January 2030.
 No changes (eg purchases, sales, switches) will be made to the investments before 2030.
 No money will be added or withdrawn from the fund before 2030.
 Any dividends or interest payments received will be immediately reinvested in the fund.
 The amounts given in the breakdown of the current fund are correct.
 The current assets have all been allocated to the correct asset classes in the breakdown.
 Changes in currency exchange rates that could affect the value of the international
investments can be ignored.
 There will be no ‘black swan’ events, eg economic crashes, ‘credit crunches’ or wars, that
would invalidate the model.
We only asked for six assumptions, so award yourself ‘full marks’ if you had any six of the 12 we’ve
listed.





using the course.

CP2‐04: Creating an audit trail Page 1
Creating an audit trail

Syllabus objectives
2 Development of a model with clear documentation
2.2 Document the results of the model including justification of key assumptions,
detailing the methodology adopted, an appropriate level of reasonableness
checks, sensitivities, and limitations.
2.3 Produce an audit trail enabling detailed checking and high‐level scrutiny of
the model by a fellow student and a senior actuary.

Page 2 CP2‐04: Creating an audit trail
0 Introduction
 what is an audit trail and why do we need one?
 what am I expected to do in the exam?
 content of the audit trail
 narrative versus descriptive styles
 guidelines for audit trails
 examples of good and bad audit trails.
0.1 What is an audit trail and why do we need one?

The audit trail is one of the most important parts of the CP2 exam.
The audit trail accounts for over half of the available marks on Paper 1.
Preparing an audit trail is often referred to as ‘documenting your work’. It involves:

 describing how the spreadsheet model has been set
 explaining any important decisions and assumptions you have made
 describing how you handled any tricky issues.
A good audit trail is one that allows the model to be followed by a senior actuary and to be
corrected and worked on by a fellow student.
The idea is that, if you have to come back to the project at a later date, or if you are ill and a
colleague has to finish off what you started or use your spreadsheet for a similar project, you/they
will be able to work out very easily what was done previously, and can amend it or continue it.
The audit trail also needs to be suitable for a senior actuary to be able to sign off the project
without having to take the trouble to look at each formula in the spreadsheet to check what has
been done.
This process is particularly important in computer‐based projects or programming exercises

because it can be difficult to deconstruct a computer program placed in front of you if the
program includes no explanation of what the various sections of the program actually do and
what each variable represents.

Question
Give some other, very important, practical reasons for having an audit trail for a project.
Solution
An audit trail could be an important part of your defence if there is ever a legal challenge to a
piece of work done by your project team. The audit trail provides a written record of how the
work was done and the issues you considered.
The financial regulators also expect companies to have effective systems and controls throughout
their work. These should include detailed (and correct) documentation of any software.
In fact, you have used audit trails previously in other actuarial exam subjects. When you are asked
to ‘show your working’ or to ‘define the notation you use’ or to ‘state any assumptions you make’,
these provide an audit trail for your calculations. Usually, there are ‘method marks’ available for
these parts of your solutions, and you will be awarded these marks even if you have made a mistake
in your calculations. Similarly in CP2 there are marks for an audit trail that clearly explains what you
have done and why, even if the modelling steps are not correct. In fact there are far more marks
available for the audit trail than for the modelling steps in your spreadsheet.
0.2 What are students expected to do in the exam?
Most students prepare their audit trail for the CP2 exam as a self‐contained Word document, as
we’ve done in the examples here. However, it is also possible to present your audit trail as a
column of cells on a separate worksheet in your Excel spreadsheet.
The audit trails for CP2 projects typically run to 3 or 4 pages and the Excel approach can be quite
restrictive, especially if you want to include special formatting in your work. However, the exam
rules allow you to use either approach, so you can use whichever method you feel most
comfortable with.
A format that works well is to write the audit trail in short paragraphs with blank lines in between.
We strongly suggest that you write your audit trail ‘as you go’, rather than trying to remember
what you did at the end. A great advantage in CP2 that you don’t have in the other exams is that
you can edit your work later – and even spell‐check it!
In work projects it is sometimes helpful to explain the use of some individual cells or formulae
using the Excel ‘comment’ feature or by typing an annotation in a nearby cell. You can do this in
the CP2 exams if you wish, but these points should be mentioned explicitly in your audit trail as
well.
In real life, audit trails are also used for purposes such as recording the precise locations of the
computer files and which versions of the data and software were used. For the CP2 exam, you don’t
need to worry about these issues.

1 Content of the audit trail
1.1 What should I include in the audit trail?
The diagram below outlines the items you should include in your audit trail.
BACKGROUND
– a brief introduction, covering the purpose of the project, the data
provided, the model used and the outputs produced
– an explanation of any special conventions used in the
spreadsheet

DATA
– a description of the data provided
– a detailed description of the data preparation process
– a description of the checks / adjustments applied to the data

PARAMETERS
– a brief description of the parameters used in the model

ASSUMPTIONS
– a list of the assumptions on which the model is based

CALCULATION WORKSHEETS
– a detailed description of each calculation step in the model

RESULTS WORKSHEETS
– a description of how the results of the model were obtained

GRAPHS WORKSHEETS
– a description of any charts requested and how they were
produced

1.2 Content of the audit trail

The presentation of the audit trail will largely follow the sequence of the worksheets (‘tabs’) in
your spreadsheet model.
For each worksheet, you need to explain what you did (including any checks you applied) and
highlight any aspects that might not be obvious to another user.
You should also describe all the reasonableness checks you applied to the data, parameter values,
intermediate calculations or final results. Include these in your audit trail at the points where you
applied these checks.
Another student will be using your audit trail in conjunction with your spreadsheet and a senior
actuary will be using it to get an overview of the model and the approach used. So your audit trail
does not need to reproduce every equation you’ve used, but it does need to explain how each
step in the calculations was done, so that the reader can be confident that it is technically correct.
Exam tip
A good way to describe in the audit trail what the model does is to write out and explain the key
equations in words rather than in symbols. Imagine what you would say if you were explaining
how your spreadsheet works to a colleague who was sitting next to you.
In general, you should not include in the audit trail any detailed items that are specific to this
particular project, eg the particular numerical values used for the parameters or copies of
summary statistics or actual results, as the model needs to be flexible for future use.
Similarly, specific observations and conclusions should not be included in your audit trail. (These
would go in a separate summary report.)
However, there are two exceptions to this rule:

 if you need to highlight any issues relating to the data, eg data errors and how you dealt
with them, you should describe these in your audit trail
 it you need to refer to particular numbers as part of a reasonableness check of some
aspect of your spreadsheet.

1.3 ‘Narrative’ versus ‘descriptive’ styles
One possible style for an audit trail is the traditional ‘school science experiment’ approach,
illustrated in the box below. This gives a chronological ‘diary’ for the project and could be
described as a narrative style.
Audit trail (narrative style)

Step 1: I checked the data for errors.
Step 2: I calculated some summary statistics and the annual returns.
Step 3: I fitted a normal distribution.
Step 4: I carried out a chi‐square goodness‐of‐fit test.
Step 5: I produced a graph comparing the fitted distribution with the original
data values.
Note that this is just a very short example for illustration only. A real CP2 audit trail would be
much longer and would include a lot more detail.
An alternative approach that is considered to be more useful nowadays is a descriptive style.

Here the audit trail takes the form of a ‘user guide’ containing explanatory notes on how the
spreadsheet has been used to carry out the project. Instruction manuals and official documents
such as tax returns, passport application forms and insurance proposal forms, are often designed
in this way.
The descriptive version of the audit trail for this example (again missing out the details) might look
like this:
Audit trail (descriptive style)

Sheet 1: The historical values of the FTSE 100 index are shown in column A.
These are used to calculate the annual returns in column B.
Sheet 2: The summary statistics shown on this worksheet have been

calculated using standard Excel functions.
These can be used to check for any anomalies in the data.
Sheet 3: The sample mean and variance have been used to fit the normal
distribution plotted in the graph.
Sheet 4: This worksheet shows a comparison of actual and expected returns

(derived from the normal distribution), together with the results of a
chi‐square goodness‐of‐fit test.
The narrative style tells you everything that was done to develop the model, whereas the
descriptive style focuses on the final product and how to use it.
We recommend that you use the descriptive approach for your CP2 audit trails (as we have in the
worked example projects in Chapters 10 and 11). However, either style is acceptable.

The examiners have said that either the narrative or descriptive approach is acceptable in CP2.
However, as you start to produce larger models in your daily work you will find the descriptive
approach more suitable. The narrative style has the weakness that it can be difficult to allow for
updates to the model without a significant amount of rewriting (even during the CP2 exam itself).
The descriptive style makes it easier to allow for such changes and also facilitates the inclusion of
instructions to other users.
The specimen solutions for the sample projects on the IFoA website illustrate different styles that
would all be acceptable in the exam.
1.4 Guidelines for audit trails
When writing your audit trail (whichever style you adopt), you should aim to:
 start with an overview, stating the purpose and signposting the way through the project
 state the assumptions you have made and, if appropriate, why
 explain all key steps and decisions
 write one sentence, short paragraph or annotation for each item (brevity is good, but you
should make certain that you get your message across)
 give a sufficiently detailed description of your spreadsheet to prevent someone who is
using your audit trail (eg the examiner!) from having to ‘hunt around’ or ‘reinvent the
wheel’.
You should avoid:

 being too brief or being too detailed (eg quoting Excel formulae verbatim)
 simply repeating instructions or information from the question
 quoting ‘hard‐coded’ question‐specific details, eg parameter values or results
 including irrelevant details or ‘meta‐comments’ (eg comments about software issues or
the assessment arrangements).
You need to judge carefully the level of detail to give. Remember that the audience of the audit
trail is a fellow student (who may be checking, correcting or repeating your work) or a senior
actuary (who may be reviewing your work).
You should assume that a fellow student will have the same level of knowledge as yourself, and
will be primarily interested in the formulae and the numbers. The senior actuary, on the other
hand, will primarily be interested in the actuarial aspects, not the Excel details.
We recommend that you keep your audit trail all in one place (ie in a single Word file or Excel
tab), if only because that gives the examiner a greater chance of finding all your work. Remember
that an Excel spreadsheet is not like a traditional exam answer booklet where the examiner can
‘just’ read all the way through it page by page. Larger projects at work, in particular, can suffer
from a lack of central documentation and it is considered good practice to have a single audit trail.

Exam tips
Your audit trail should act as a bridge between the project specification, the user and your
spreadsheet. You should include adequate signposting and labelling in your audit trail so that the
work on each worksheet is clear and is clearly referenced.
The audit trail should explain:

 what you have done
 why you have done it
 where you have done it and
 how you have done it.
Imagine that you will have to repeat the project next year using different data or revised
parameter values. Your audit trail should enable you to carry out the project efficiently next year,
without having to work out what goes where, or struggling to remember how you did something,
or having to look up the same formulae again. It should also allow you to check that all the
decisions you made last year are still appropriate now.

2 Examples of good/bad audit trails
Question
Criticise the audit trail below, which a student has submitted (in narrative style). How could it be
improved?
Note that, if an audit trail is good, you shouldn’t need to refer to the original instructions for the
project – the audit trail should be self‐explanatory.
Audit trail
1. I checked the data.
2. Then I did the graphs. I didn’t like the original colours on the graph, so I changed them a
few times.
3. My computer crashed while I was working out the geometric returns and I had to reboot it
twice.
4. I calculated the summary statistics using the Excel functions from the Notes.
5. The answer was 0.669.
6. I started writing a macro to count the claims, but couldn’t get it to work. So I decided to
write the numbers down on paper instead.
7. I assumed that a ‘histogram’ was the same as a bar chart. I couldn’t work out how to get
the normal distribution on the same graph, so I’ve done two seperate ones.
8. I worked out the simulated values.
9. I looked up the percentiles on page 162 of the actuarial tables.
10. I finished by typing up what I had done.
Solution
The question doesn’t tell us the sex of the student. We have written this solution as if the student
was male, but they could of course have been female.
This student does not appear to have understood the purpose of an audit trail. This audit trail
reads like a ‘How was your day?’ narrative, rather than providing a step‐by‐step outline of the
investigations carried out. It would have been better if a descriptive style had been used.
As a result, the audit trail is far too vague. For example:

 point (1) doesn’t say what data was provided or what checks were applied
 point (3) doesn’t say how the geometric returns were calculated
 point (5) doesn’t make it clear what the ‘answer’ of 0.669 relates to

 point (6) doesn’t say where the paper calculations are.
The student has also ‘documented’ a number of irrelevant details, such as personal colour
preferences in point (2) or the computer problems experienced in point (3).
Point (4) simply repeats a general instruction from the question, without adding any extra
information. This wouldn’t help you next time if you couldn’t remember the Excel functions for
calculating the mean or the standard deviation.
Point (5) quotes a specific result (which was not used as a reasonableness check). This shouldn’t
be included in the audit trail.
In point (6) an unnecessarily complicated method has been attempted. (Macros should not be
used in the CP2 exam.) However, the student has at least stated what was actually done.
In point (7) the word ‘separate’ is misspelt. There are some marks on the marking schedule for
accurate presentation, so if there is consistent misspelling (ie mistakes that would not be
acceptable in the office), this could lead to lost marks.
Point (8) doesn’t say how the simulated values were calculated.
Point 10 is a general ‘meta‐comment’ that doesn’t add anything useful.
This audit trail does not include an explanation of the methodology used. Other important details
have also been omitted, such as an overview of what the spreadsheet does or a description of any
reasonableness checks applied to the results.
This student’s attempt at an audit trail may well have scored zero on the marking schedule!
We will see examples of good audit trails in the Worked Example projects in Chapters 10 and 11.
Exam tip
After you’ve completed a project, read through your audit trail and ask yourself:
‘Suppose I had to repeat this project next year with different data. Based on what I’ve written in
my audit trail, would I be able to redo it efficiently, without struggling to remember what I did,
and avoiding any pitfalls? And will my boss be able to understand what I’ve done?’

Chapter 4 Summary
Key points regarding the audit trail
We recommend that you use a ‘descriptive’, rather than a ‘narrative’, style.
A good audit trail should:

 enable you or a colleague to work efficiently on the project again at a later time and
enable your boss to have confidence that your model is correct
 include one point for each key step
 be written clearly in good English
 describe how you dealt with any issues that required judgement or a decision to be
made
 describe the reasonableness tests you applied and highlight any important issues
that came to light
 be easy to find and all in one place.
It should not:
 include irrelevant details or simply repeat instructions that were given to you
 include question‐specific details, such as actual parameter values or numerical
results.
Note, however, that it is acceptable to refer to specific items when describing the
preparation of the data and to quote specific results within the audit trail as part of a
reasonableness check.
Remember: In Paper 1, a simple spreadsheet will give you more time to work on your audit
trail, which carries more marks in the exam.



4.1 List the components you would expect to see in a CP2 audit trail.
4.2 A project involves calculating new term assurance premiums for a range of ages and terms for
men and women. Suggest some reasonableness checks you could apply.



Chapter 4 Solutions
4.1 A CP2 audit trail should contain:
 a brief overview of the spreadsheet model

 a description of the data and the data preparation process
 a list of assumptions made in the model
 a detailed description of each of the worksheets in the spreadsheet model
 a description of the reasonableness checks that have been applied.
4.2 Assuming that these are annual premium contracts, you could base reasonableness checks on the
following observations:
 If local legislation permits different premiums to be charged for men and women, you
would expect the premium rates for the same age and term to be higher for men than for
women. If not, the two sets of rates should be the same.
 You would expect the rates for a given term to increase with age.
 You would expect the rates for a given initial age to increase with the term.
 You would expect the rates to be similar to approximations calculated assuming that any
deaths during the term occur halfway through the term. (This is a much simpler
calculation, as it involves just one age and no summations.)
 You would expect the new rates to be broadly similar to the old rates they are replacing.
If mortality has improved over time, the new rates would be expected to be slightly lower,
although other effects such as higher expenses, lower interest rate assumptions, stricter capital
requirements or changes to underwriting procedures could offset this.
 The rates calculated on your spreadsheet should match any illustrated values you have
been given.





using the course.

CP2‐05: Creating a project summary Page 1
Creating a project summary

Syllabus objectives
3 Analysis of methods used and model outputs
3.1 Perform checks on the results of a model, including applying sensitivity

and/or scenario tests.
3.2 Comment on the reasonableness of the results under different scenarios.
4 Application and interpretation of results
4.1 Apply the results to the problem set, suggesting solutions.

4.2 Summarise the results using appropriate charts and tables.
4.3 Consider possible next steps.
5 Communication of results and conclusions
5.1 Plan and draft a summary document to cover the data, approach,
assumptions, results, conclusions and suggested next steps to a senior
actuary.

Page 2 CP2‐05: Creating a project summary
0 Introduction
 what should I include in the summary?
 guidelines for summaries
 style of English
 examples of good and bad summaries
 generating ideas for conclusions and next steps.
0.1 What is a ‘project summary’ and why do we need one?

As part of the Paper 2 exam you will be required to produce a Word document (typically 4 or 5
pages long) summarising the project.
The project summary serves as a briefing document for the actuary managing the project.
It should include the information that they would need when discussing any aspect of the project
with the client or organisation that has requested the work. It should also give the manager
confidence that the approach we’ve taken to the calculations is appropriate and that we’ve
applied sufficient checks to the data and the calculations that the results of the model can be
relied upon.
The project summary should include:

 a description of the data and the data preparation process
 a description of the approach used to derive the results
 a list of assumptions on which the results are based
 a presentation of the results of the project
 your conclusions, observations and comments based on the results
 a suggested list of next steps for further work on the project.
Ideally the actuary should be able to read the project summary as an independent document and
be fully informed about all the issues involved.
Exam tips
The examiners have said that the project summary should ‘give a reasonable overview of the
model and the results’. They have emphasised in particular the importance of giving a clear
description of the model itself, ie the mathematical framework used for the calculations.
Don’t underestimate the importance of the summary report, which accounts for most of the
marks on Paper 2, and should be given sufficient attention. It also provides an opportunity for
you to ‘add value’ in the exam by showing the examiner that you have understood what the
project is about.

1 Content of the project summary
1.1 What should I include in the summary?
The diagram below outlines the items you should include in your summary.
INTRODUCTION
– a statement of the purpose of the project

DATA
– an outline of the data provided
– an outline of the data preparation process
– the checks / adjustments applied to the data

APPROACH / ASSUMPTIONS
– the approach used
– a description of the model
– the steps applied to derive the results
– the assumptions underlying the model

RESULTS / CONCLUSIONS
– the calculations / tables / graphs / comparisons requested
– your observations and comments on the results
– the conclusions you have derived from the results

NEXT STEPS
– any additional data / clarification you would like to obtain
– any assumptions you would like to investigate
– any alternative models you would like to consider
– any other investigations you would like to pursue

1.2 Guidelines for summaries
A good project summary should:

 provide a summary of the entire project
 start with a clear statement of the purpose of the project
 describe the data analysis, the model, the assumptions you made and the analyses you
carried out
 state your observations, conclusions and recommended next steps
 mention the types of checks you applied, including reasonableness checks
 include a clear visual presentation of your results
 present the relevant information in a clear and structured way
 include any extra items that were specifically asked for
 be kept as simple as possible and not include irrelevant details
 be written in good English, using appropriate language.
1.3 Style of English
To save time, you may be tempted to write your summary in an abbreviated style. However, as
CP2 is an exam in communication, we recommend that you write in clear, properly constructed
sentences. The examiners are not looking for extensive essay‐type answers, but there are marks
available for using ‘appropriate language and a professional tone’ and for correct English. Bullet
points are fine, provided that they read as coherent sentences when read in conjunction with the
surrounding text.
The audience is usually a senior actuary who will then present the results to a client. So the style
should be fairly formal and professional, and the results and conclusions in particular should be
tailored towards the ultimate client’s needs.

2 Examples of good/bad summaries

The following exercises illustrate some of the pitfalls to avoid in your summary.
Question
Have a look at the page below, which is an extract taken from a student’s summary for a project
that involved comparing the past performance of an investment index with one of the component
assets in the index. Identify at least 6 ways in which it could be improved.
Page 2
Index + Component – Stats for the Geo. Returns
Mean 0.0301 0.05

Standard deviation 1.14% 2.61%
Variance 0.000130 0.000683
Skew. –0.24417926 –0.26499358
Kurt. 4 4
Both means were close to zero since daily returns over a long period and both finish close to
start point. Average return higher for component.
I found that the standard deviation or variance was much higher for component, as indicated
on the graph below:
Index vs Component Dai ly Returns
20 .0 0%
15 .0 0%
Ind ex Daily Ret ur n
10 .0 0%
5 .0 0%
0 .0 0%
-10.00 %-5 .0 0%
0.0 0% 10.00 %
-10 .0 0%
-15 .0 0%
-20 .0 0%
-25 .0 0%
Co mp on ent Da ily Retu rn
The skewness was negative for both.

Solution
The heading ‘Page 2’ is not very informative.
In the table:
 The two columns of numerical information should be labelled clearly.
 Abbreviations that aren’t obvious should be avoided (eg ‘geo’ and ‘kurt’).
 The values for the standard deviations should be aligned with the other columns.
 The units for the mean should be stated. (Is the first figure 3.01% or 0.0301%?)
 Consistent numbers of decimals should be given for the two means.
 Fewer significant figures should be shown for the skewness. (This is spurious accuracy.)
 More significant figures should be shown for the kurtosis. (Which was bigger?)
In the text:
 The paragraphs of text contain a lot of information that is not presented in a structured
way. Bullet points would be better here.
 The text is not written in clear English. There are some words missing, which makes it
difficult to understand.
 The student has made several observations in the text whose significance has not been
explained. Why was the variance higher for the component? Would you expect the
skewness to be negative?
 The kurtosis is shown in the table, but no comment has been made about it in the text.
What does it measure? Is a value close to 4 reasonable?
In the graph:
 The graph is far too small to be of any use.

For comparison, we’ve given a ‘correct’ version below.
Summary Statistics
Statistics for the Geometric Returns of the Index and Component
Index Component
Mean 0.03% 0.05%
Standard deviation 1.14% 2.61%
Variance 1.30%% 6.83%%
Skewness –0.244 –0.265
Kurtosis 4.104 4.314
Comments:
 Both means are close to zero since we are considering daily returns over a long period and
both indices finish close to their starting point.
 The average return is higher for the component.
 The standard deviation (or variance) is much higher for the component, as indicated on
the earlier graph.
 The negative skewness indicates a disproportionate number of large falls.
 The kurtosis is high (cf 0 for a normal distribution), indicating thick tails and a peaked
centre for the geometric returns.
Some sections of your summary will involve ‘writing around’ a graph or a table of results, as in this
example. In these cases you should make the graph or table the ‘centrepiece’, introducing it with
a brief explanation (eg ‘The following bar chart shows the number of …’ or ‘The table below shows
a comparison of …’) and following it with your conclusions (‘The graph shows that the distribution
is …’).
While ‘a picture can paint a thousand words’, you should not rely on your chart telling the
examiner your thoughts on the results. You need to put these into words as well.
When you include a chart in your summary you should comment on what it is showing and
explain whether this is consistent with your other results and what you would have expected. In
particular, if the chart shows a strange or unexpected result you should try to explain why this has
happened. This will give the client confidence in your results and help the client to understand
them.
When you are preparing your summary, try to remember the purpose of the project. Don’t allow
yourself to become so engrossed in the calculations and other details that you miss the
‘big picture’ of what it’s all about.

3 Commenting on the results (tables and graphs)
3.1 Exam tips

Importance of commenting on the results in Paper 2
The CP2 examiners have mentioned a number of times that students who have fallen short of the
pass mark for CP2 have often scored poorly in the area of analytical comments for Paper 2.
In many cases this is due to students not making enough comments on their results and
conclusions, or making comments that do not add much value for the audience. Candidates who
have passed, on the other hand, have tended to offer explanations for their results and also to
provide some overall conclusions.
Having produced the results for the additional modelling and the charts required for Paper 2,
candidates are expected to provide analytical commentary on their results. Robust analysis and
interpretation of the results is a very important part of what the assessors for CP2 are looking for.
This additional commentary indicates the extent to which the candidate has understood the
purpose of the model and the results produced. Around 20% of the marks available for Paper 2
are for good commentary.
The examiners want students to provide comments that explain why the results shown are as
they are, highlighting any unusual features and drawing comparisons between different sets of
results.
Examiners’ solutions
Students are recommended to study previous past papers to see the types of comments on the
results and conclusions the examiners have made in their model solutions. In particular, note that
the types of comments and conclusions the examiners want are normally quite short and to the
point. It is important not to dwell too long on a single point or go into excessive detail.
As can be seen from the examiners’ reports for the recent CP2 exams, there is often one mark
available for noting a particular result and a further mark for providing some explanation.
Timing
Given the large number of marks available for commentary and drawing conclusions, it is vital
that students leave sufficient time to think about the scenarios and the information given.

3.2 Generating comments

Here is a list of areas to focus on and questions to ask yourself to help generate comments.
(We’ve given each type an abbreviation so that we can refer to them in the examples below.)
Observations (OBS)
Make relevant observations about each set of results or chart.
 What do I think of these answers?
 What patterns can I see, eg trends or high / low values?
 Can I see any anomalies or inconsistencies or anything that looks silly?
Expectations (EXP)
Make relevant comments about whether the observations make sense relative to the information
provided.
 Do they make sense overall?
 Are they what I would have expected?
Explanation (WHY)
Ensure there is a clear explanation of why each set of results is as it is and, where appropriate,
how it relates to the other results.
 Do these patterns make sense? Can I explain them?
Differences (DIF)
If you have been asked to produce different scenarios, look for opportunities to explain the
differences in the results (in terms of both direction and approximate magnitude).
 How do the results for the different scenarios compare (if applicable)?
Checks (CHK)
Think of ways to checks the results.
 Can I do any reasonableness checks, eg rough calculations to check whether the answers
are believable?
 Can I compare these results with anything else to check them, eg background information
given in the question?
 Do these results accurately reflect all the key features in the real‐life situation we are
modelling?
Inferences & implications (INF)

Think of conclusions that can we infer from our observations.
 What conclusions can I draw form these results?
 Do the results make me question anything else, eg the model, the data or the
assumptions?

Question
Read the description below, then make a list of comments you could make on these results or
points for discussion with your boss.
You can use the headings Observations (OBS), Expectations (EXP), Explanation (WHY), Differences
(DIF), Checks (CHK) and Inferences (INF) to help you.
Background
You work for an actuarial consultancy. Your boss has asked you to review the results of some
work done yesterday by another student in your team who is attending a CP2 tutorial today. Your
boss’s original instructions (sent in a text message) and your colleague’s results are shown below.
Wednesday 1:45
Here are the numbers of deaths and the exposed to risk figures for the males
aged 25 to 50.
Can you calculate the crude mortality rates and use our spline program to
graduate these? Can you also do a graphical graduation for comparison?
Can you also work out the chi‐square values, check the third differences and plot
graphs of each graduation against the crude rates with a brief description of
both methods?
Thanks!
Student’s report
Crude rates
The crude mortality rates have been calculated by dividing the number of deaths observed at
each age by the corresponding exposed‐to‐risk figure.
Spline graduation
The spline graduation method aims to reduce the random noise present in the crude rates by
fitting a curve consisting of several cubic polynomial pieces joined together to form a smooth
curve. I’ve used the default settings on our software, which determines the spline with
6 parameters that follows the pattern of the crude rates most closely. The crude rates and the
fitted spline curve are plotted below.

Spline graduation (males aged 25 to 50)

0.005
0.004
Force of mortality μx
0.003
Crude
0.002
Spline
0.001
0.000
25 30 35 40 45 50
Age x
Graphical graduation
Graphical graduation is an alternative method of improving the accuracy of the crude estimates. It
is a subjective method that just involves manually sketching a curve that follows the pattern of
the crude rates. My graphical graduation is shown below for comparison.
Graphical graduation (males aged 25 to 50)

0.005
0.004
Force of mortality μx
0.003
Crude
0.002
Graphical
0.001
0.000
25 30 35 40 45 50
Age x

Chi‐square values and third differences

I have calculated chi‐square values for the two graduations to assess the goodness of fit. This
50 ( Ax  E x )2
uses the formula  2   E , where Ax is the actual number of deaths observed at age
x 25 x
x and E x is the expected number calculated by multiplying the graduated mortality rate at age x
by the corresponding exposed‐to‐risk figure. A rough rule of thumb is that graduating 10 data
points graphically requires 2 implicit parameters for a linear graph or 3 for a curved graph.
I have also calculated the maximum absolute value of the third differences of each set of rates to
assess the smoothness. A smaller figure indicates a smoother curve.
The results of these tests are shown in the table below.
Graduation Degrees of Critical value Third

2
method freedom (5%) differences
Crude – – – 0.00037
Spline 23.00 20 31.41 0.00001
Graphical 14.00 21 32.67 0.00013
Solution
Crude rates
 The crude rates show a steady progression with some points slightly above and some
slightly below the trend of the curve (OBS). The trend reflects the underlying mortality
rates, which we would expect to progress smoothly with age (WHY) and the small
deviations reflect random variations in the numbers of deaths and the ages at which
people die (WHY).
 The deviations of the crude rates from the trend are quite small (DIF). This indicates that
there are no obvious errors or outliers present in the data (CHK) and that it is probably
quite a large population (INF). The third differences figure of 0.00037 provides a baseline
figure for assessing the graduated rates (OBS).
 The crude rates show a flat pattern up to around age 30, then they start to increase (OBS).
This is consistent with the typical pattern of male mortality rates over this age range in
the UK where mortality rates are at their lowest in the mid‐20’s before starting to
increase gradually into ‘old age’ (EXP).
 The crude rates vary from just below 0.001 per annum for the younger ages to around
0.004 for the higher ages (OBS). These values are broadly consistent with 25  0.00087
and 50  0.00440 from the ELT15 (Males) tables (CHK).

Spline graduation
 The spline curve appears to follow the crude rates very closely (DIF). This suggests that
this model accurately reflects the underlying rates (INF).
 We can see, from the graph itself and from the very low third differences figure of
0.00001, that the spline curve is also smooth (OBS). This is because it is generated by a
formula with just a few parameters (WHY).
 The number of degrees of freedom should equal the number of ages (26) less the number
of parameters in the formula, so this looks to be correct (CHK). I was suspicious that the
chi‐square value worked out to be 23.00 (which looks like a whole number), but I have
checked the calculation and it is correct (CHK). The critical value agrees with the figure in
the Tables (CHK). The chi‐square value for the spline graduation is much lower than the
critical value (DIF). Again, this indicates that the model gives a good fit (INF).
Graphical graduation
 The graphical graduation appears to follow the crude rates very closely (DIF). This
suggests that this model also accurately reflects the underlying rates (INF).
 However, we can see from the graph that the graphical graduation is not very smooth
(OBS). This is confirmed by the third differences figure of 0.00013, which is much higher
than for the spline graduation (DIF). The graph appears to consist of three straight lines
joined together, with kinks around ages 33 and 45 (OBS). This is not what we would
expect, as there is nothing special about these two ages that would cause the pattern of
mortality to change (EXP). This feature has probably arisen because the method is quite
subjective and the student has ‘seen’ a feature that might not actually be there (WHY).
 The rule of thumb suggests that we should deduct around 5 or 6 degrees of freedom to
allow for fitting the curve by eye, so this looks to be correct (CHK). Again, I was suspicious
that the chi‐square value worked out to be 14.00 (which looks like a whole number), but I
have checked the calculation and it is correct (CHK). The critical value agrees with the
figure in the Tables (CHK). The chi‐square value for the graphical graduation is much
lower than the critical value (DIF). Again, this indicates that the model gives a good fit
(INF). However, the straight lines are unlikely to be a genuine feature and could be
distorting the rates (INF).

3.3 Generating ideas for comments and next steps
As mentioned above, your summary should cover each of the following areas:
 the data analysis you carried out
 a description of the model
 the assumptions made
 the analyses you carried out
 your results and conclusions
 recommended next steps.
Students often find it difficult to interpret their results and come up with ideas to include in their
comments and next steps (and lose a lot of marks as a result). The diagram below shows some
questions you can ask yourself to help generate ideas. There is a more detailed list of questions
relating to each aspect of the modelling process in the text below. When applying these, make
sure you tailor your suggestions to the specific situation, rather than just making generic
statements. Try also to come up with a range of different ideas.
Would I have used this model?

Does it capture the real-life situation?
Any anomalies or outliers?
Does it respond appropriately?
Any corrections?
Will it solve the problem?
Is it reliable /
What are its shortcomings?
believable / credible?
DATA Can I think of a better model?
Independent sources?
Are any important aspects ignored?
Extra info?
Could it go horribly wrong?
How could I improve it?
PARAMETERS MODEL ASSUMPTIONS
Reliable / reasonable values? Criticisms? Realistic?

Method of estimation? Verification? Oversimplified?
Missing variables? Tacit assumptions?
Sensitivity / stress testing? OUTPUT Caveats / disclaimers?
Interactions?
Conclusions? As expected?
Original suspicions? Comparisons?
Any refinements to the ... Reasonableness checks?
data / model / Independent verification?
parameters / Explanations? Correctly calculated?
NEXT STEPS
assumptions / output? Doubts?
What else would I try?

Data
 Are there any anomalies in the data?
 Are there any outliers, ie values that appear to be inconsistent with the model?
 Did I have to make any corrections?
 Does the data appear reliable?
 Do I believe the information I’ve been given?
 Have I got enough data for it to be ‘credible’, ie to form the basis for a model?
 Is there an independent data source I could use?
 Is there any additional information that might help me clarify things?
Model
 Is this the model I would have used in this situation?
 Does the model capture the key features of the real‐life situation?
 Does the model ‘respond’ in the same way as the real‐life situation?
 Has this model solved the problem/answered the original question?
 Does the model have any obvious shortcomings?
 Can I think of a better model?
 Does the model ignore any aspects that might be important?
 Are there any circumstances when the model would go horribly wrong?
 Could I make the model more accurate/more versatile/more informative?
Parameters
 Are the parameter values I am using reliable?
 Do their values seem reasonable?
 Is there a better way of estimating the parameter values?
 Are there any missing variables that we have ignored?
 What would happen if I changed each of the parameter values a little (sensitivity testing)?
 What would happen if I changed each of the parameter values a lot (stress testing)?
 How do the parameter values interact with each other?

Assumptions
 What criticisms would I make of the assumptions?
 Are the assumptions realistic?
 Can I test / verify any of the assumptions?
 In what ways have we oversimplified the real‐life situation?
 Does the model make any tacit (unstated) assumptions?
 Are there any important caveats / disclaimers I should mention?
Output
 What conclusions can I draw?
 Is that what I would have expected?
 Do the results support the original suspicion/observation?
 How do the different answers in the output compare?
 Are there any reasonableness checks I can apply and comment on?
 Can I verify the results independently?
 Can I explain all the results?
 Am I sure my calculations are correct?
 Do I have any doubts about the results?
Next steps
Most of the ideas for next steps can be deduced by considering the individual components.
 What refinements to the DATA might be worth investigating?

 What refinements to the MODEL might be worth investigating?
 What refinements to the PARAMETERS might be worth investigating?
 What refinements to the ASSUMPTIONS might be worth investigating?
 What refinements to the OUTPUT might be worth investigating?
 What else would I try if I was doing this in the office and I had more time?
Some of the reasonableness checks you apply may also give you ideas for conclusions and next
steps.

Chapter 5 Summary
Key points regarding the project summary
A good project summary should:

 provide a summary of the entire project
 start with a clear statement of the purpose of the project
 describe the data analysis, the model, the assumptions you made and the analyses
you carried out
 state your observations, conclusions and recommended next steps
 mention the types of checks you applied, including reasonableness checks
 include a clear visual presentation of your results
 present the relevant information in a clear and structured way
 include any extra items that were specifically asked for
 be kept as simple as possible and not include irrelevant details
 be written in good English, using appropriate language
 be set out neatly.



5.1 Which of these statements best describes the purpose of a CP2 project summary?
A The project summary consolidates all the descriptions in the audit trail, as well as the
results, into a longer document so that everything is one place.
B The project summary is there to remind another actuarial student in the future what the
project was about if nobody can remember.
C The project summary provides a self‐contained document that informs the project
manager about all the key areas of the project.
D The project summary is a document containing the results of the project, which will be
sent to the client after the senior actuary has checked it.
5.2 Here is an extract from a student’s project summary:
The client provided data for a sample of 100 people, these had not been checked for erors.
One date of birth was corrected, the year said 1896 instead of 1986. The salary’s were checked for
outliars and the were no other errors that need correcting.
Marks are awarded in the CP2 exam for ‘drafting’ and ‘good English’. Identify 6 places where this
student might lose marks in this area.
5.3 State 4 differences between a CP2 audit trail and a CP2 project summary.



Chapter 5 Solutions
5.1 C
5.2 The student might lose marks because of the following issues:
 In two places the student has run two separate sentences together using a comma, instead
of writing them as separate sentences with a full stop in between.
 There are two spelling mistakes (‘errors’ and ‘outliers’).
 The student has misused an apostrophe (‘salaries’).
 There is one typo where the student has written something that sounds similar the
correct word (‘there were’). (It is also possible that the student intended to write
‘needed’ rather than ‘need’.)
Watch out in particular for the issue in the first bullet point. This has become very common in text
messages and on the internet, but it would not be considered correct English in a formal document.
Here is a ‘correct’ version:
The client provided data for a sample of 100 people. These had not been checked for errors.
One date of birth was corrected. The year said 1896 instead of 1986. The salaries were checked
for outliers and there were no other errors that need correcting.
5.3 Here are some of the differences between the audit trail and the project summary:
 The target audience is different.
 The audit trail is intended to be read in conjunction with spreadsheet, whereas the
project summary is an independent document.
 The audit trail will include more technical details (eg descriptions of Excel functions),
whereas the project summary is written at a higher level.
 The project summary will include specific results for the project, and comments on these
results, whereas the audit trail will only refer to these as part of a reasonableness check.
 The project summary includes a list of suggested next steps.





using the course.

CP2‐06: Presenting results Page 1
Presenting results
Syllabus objectives
5 Communication of results and conclusions
5.2 Create appropriate data visualisations to communicate the key conclusions of

an analysis.

Page 2 CP2‐06: Presenting results
0 Introduction
You may be asked to create an Excel chart in either Paper 1 or Paper 2 of the CP2 exam.
In this chapter we will look at issues relating to designing effective graphs and other visual aids.
We will cover the following topics:

 guidelines for visual aids
 examples of good and bad graphs
 common methods of graphical presentation
 tables.

1 Guidelines for visual aids

A good visual aid should:
 present the key information clearly
 use an appropriate presentational device
 emphasise the important features
 be clearly labelled
 show the units of measurement used
 use appropriate scales (not too spread out or too cramped)
 not contain irrelevant distractions.
1.1 Examples of good/bad graphs
Question
Have a look at the graph below. Identify at least 6 ways in which it could be improved.

Solution
 The graph is not at all clear. It is far too cluttered.

 The graph area (ie the grey part) is too small. It needs to be ‘stretched’ horizontally.
 The percentage labels should be reduced in size so that they don’t dominate the graph
and so that you can see exactly where 10% is on the horizontal axis.
 The percentage labels should be shown with fewer decimal places (eg 10% instead of
10.00%).
 The vertical axis should be repositioned so that the data points don’t overwrite the values
on the axis.
 A smaller marker should be used for the individual points so that they don’t blur together.
A different shape (eg a dot instead of a diamond) might be better.
In fact, the axes on this graph are labelled the wrong way round too!
Here is a ‘correct’ version, with accompanying comments.
Comments:
 The correlation coefficient between the daily geometric returns for the index and the
component is 0.669, so the returns are strongly positively correlated.
 The plot of the returns confirms that these are strongly positively correlated.
 This means that the component tends to move with the index.

2 Common methods of graphical presentation

In Excel, graphs are called ‘charts’ and each set of values shown is called a ‘series’.
If you are working in Excel and select the Insert menu tab in Excel, you will see most of the
commonly used methods of graphical presentation. The ones that are likely to be the most useful
in a Subject CP2 assessment are described below.
2.1 Pie charts

Pie charts can be effective when used to present small amounts of very basic data. For this
reason they are commonly used in newspaper articles, television reports and on the internet.
In a CP2 project, you should consider whether there is a better chart type to use, rather than just
using a pie chart because it’s the easiest type to do.
Projected breakdown by asset class in 2030

(£m)
2
4 Equities (UK)
1
1 Equities (International)
Fixed Interest
2 Commodities
Derivatives
2 Cash
8 Other asset classes
To produce a pie chart, you just need the numbers or percentages for each slice of the ‘pie’.
To set up a pie chart in Excel, you need to have:
 one column containing the names to attach to each slice

 another column containing the numbers or percentages for each slice.
You then simply highlight the information in these two columns and select the ‘Pie’ option from
the Insert menu.
To include the numbers on the pie chart, right‐click on it and select ‘Add labels’.
To ‘explode’ your pie chart (ie to separate the slices with gaps, as in the example above),
right‐click on one of the slices of the pie, select Format Data Series and move the Pie Explosion
slider to a suitable position.

2.2 Bar charts

These are commonly used to show the statistical distribution of the values of a single variable.
The height of each bar shows the ‘count’ for each value.
To produce a bar chart for a discrete variable, you just need the observed frequency of each
value. For a continuous distribution (as in the example shown here), you first need to choose a
set of bands (eg between 0% and 1%, between 1% and 2% etc) and then count the number of
values falling in each band.
To set up a bar chart in Excel, you need to have:

 one column containing the x‐values (eg 0%) – the ‘Category (X) axis labels’
 another column containing the y‐values (eg 893) – the ‘Values’.
You then need to select the ‘Column’ option for your chart type.
A histogram is a bar chart where the frequencies are represented by the areas of the bars.
Excel also offers more advanced forms of bar charts, such as ‘clustered bar charts’, which allow
you to display two or more data sets together using bars arranged side‐by‐side with different
colours for each data set. These can be useful for presenting ‘new‐versus‐old’ results or for
comparing different scenarios.

2.3 Line charts

These are commonly used to show the relationship between the values of one or more variables
whose values depend on a single independent variable. The independent variable is often time.
To set up a line chart in Excel, you need to have:

 one column containing the x‐values (eg 05‐Sep‐00) – the ‘X Values’.
You then need to set up each line as a separate ‘Series’. For each series you need to have:
 a column containing the y‐values (eg 2050.89) – the ‘Y Values’.
You then need to select the ‘Line’ option for your chart type.

2.4 Scatter diagrams

These are commonly used to show the relationship between the values of two variables.
The points show the (x , y) coordinates for each pair of values.
To set up a scatter diagram in Excel, you need to have:

 one column containing the x‐values (eg 6.99%) – the ‘X Values’
 another column containing the y‐values (eg 11.98%) – the ‘Y Values’.
You then need to select the ‘Scatter’ option for your chart type.
In fact, scatter diagrams are a very flexible type of chart. If you create a scatter diagram, then
right‐click on one of the points and select ‘Format Data Series’, then ‘Automatic’ for the ‘Line
color’ option, Excel will join the points together, so that it looks like a line chart.
2.5 Tables
Often the most effective method of presenting results is to use a table, instead of a graph.
These are particularly useful for:

 comparing different scenarios (as an alternative to the clustered bar charts mentioned
above)
 presenting results involving non‐numerical variables
 presenting the values of a third variable whose value depends on two (or more)
independent variables.
In a table involving very large quantities (eg monetary amounts such as £5,000,000) or very small
quantities (eg mortality rates such as 0.00035), you should present your values in terms of the
most appropriate unit size (eg £m or ‘per 100,000’).

Question
Which form of presentation would you use if you wanted to show:
(a) the value of an investment portfolio that was valued at an irregular set of dates over the
last 10 years
(b) mortgage payments for a repayment mortgage and an endowment mortgage based on
interest rates of 4%, 5%, 6%, 7% and 8%
(c) the inflation rate in four different countries for each of the last 10 years?
Solution
(a) We can’t use a line chart here because line charts treat the values on the x‐axis (the
irregular set of dates) just as labels and display the points equally spaced. However, we
can achieve the effect we want by using a scatter plot, with time as the x‐value and
portfolio value as the y‐value, and selecting ‘Automatic’ for the line option, which will join
the points together. This will display the dates with the gaps between them in the correct
proportions.
(b) The numbers here are likely to be quite close together and we are probably most
interested in the differences between the two types. So a simple table with columns
headed ‘interest rate’, ‘payment for a repayment mortgage’ and ‘payment for an
endowment mortgage’ would probably be the clearest. Alternatively, you could use a
clustered bar chart.
(c) We could use a line chart with one line for each country plotted against the year.

The chapter summary starts on the next page so that you can

Chapter 6 Summary
Key points regarding the presenting results
For your summary report:

 Present the relevant information in a clear and structured way.
 Don’t include any irrelevant details.
 Make graphs / tables the ‘centrepiece’ with a brief introduction first and comments
afterwards.
 Explain the features brought out by each graph or table.
For graphs:
 Choose the most appropriate presentational device.
 Emphasise the important features.
 Label your graph clearly (including the units of measurement used).
 Use appropriate scales in your graphs.
For tables:
 Label the rows and columns clearly.
 Use the most appropriate units (eg £m).



6.1 List 6 types of visual display that are likely to be useful for the CP2 exam.
6.2 Which of these statements best describes the purpose of a chart in a CP2 project summary?
A A chart allows you to include a large amount of information in a single place.
B Charts make the project summary look more attractive.
C If you include a graph, you don’t have to write anything about it in the text.
D A chart allows you to communicate the key results in a clear and effective way.
6.3 You may be asked to produce a chart in either Paper 1 or Paper 2 of the CP2 exam. List 6 reasons
why you might lose marks for this task.



Chapter 6 Solutions
6.1 Types of visual display that are often useful in CP2 include:
 pie charts
 simple bar / column charts
 clustered or stacked bar / column charts
 line charts
 scatterplot diagrams
 tables.
6.2 D
6.3 You could lose marks if:
 you didn’t produce the chart (eg because you ran out of time)
 you didn’t produce the chart that was asked for (eg you’ve plotted something else by
mistake)
 your chart is not an appropriate type to use (or not the type that was asked for)
 some of your numbers are wrong
 your chart isn’t clearly labelled (eg no title or no units shown on the axes)
 the ranges for the scales on your chart are not appropriate (eg the values are
‘squashed up’ or ‘go off the end’)
 the number of decimals shown is not appropriate (eg showing 2 decimal places on the
vertical axis for very large numbers)
 it is not easy to distinguish the different series in your chart (eg they have all been plotted
in the same style and colour)
 your graph does not clearly show the underlying patterns in the results (eg too many lines
plotted).

End of the CP2 ‘theory’

You have now finished Chapters 2 to 6, which cover the ‘theory’ required for the CP2 exam.
What should I do now?

1. If you are still unclear about what you will need to do in the exam, you can refer
back to Chapter 1 (‘Introduction to CP2’).
2. If you are still unsure of what you are expected to do in any of the areas of preparing
the data, developing a spreadsheet model, creating an audit trail, writing a project
summary or creating a visual presentation, you can review the relevant chapter from
Chapters 2 to 6.
What comes next?

In Chapters 7 and 8 we will cover the technical details of using Excel and Word in the exam.
Time to consider …
Assignments and Mock Exams – You may wish to consider purchasing ActEd’s assignments
and/or Mock Exams, so that you will have these available to attempt when you have reached
the end of the course. Students have said:
“The Assignments made me feel more confident that I understood what the exam
was about.”
“The Mock Exams helped me identify the things I was doing wrong.”
Preparation Day – You may wish to reserve a place on one of the CP2 Preparation Day
tutorials, which you can do either face‐to‐face or via a live online webinar. This will provide
further practice and give you an opportunity to ask your tutor any questions you may have.
Students have said:
“I think a lot of people don’t know about the CP2 Preparation Days.
A friend at work recommended me to go on one, and I found it very useful.”
You can find lots more information, including demos, on our website at www.ActEd.co.uk.

CP2‐07: Using Excel Page 1
Using Excel
Page 2 CP2‐07: Using Excel
0 Introduction to Excel
 basic Excel operations and tasks
 Excel functions
 Excel charts
 other useful Excel features
 guidelines for Excel
 pitfalls with Excel.
0.1 Introduction
In both papers of the CP2 exam you will be required to carry out tasks using Excel, Microsoft’s
spreadsheet software.
Excel is a computerised version of the original paper spreadsheets that were used for many years
by accountants, actuaries, businesses, academics and government departments to record
information and to carry out calculations and analyses. These consisted of a header record at the
top showing the column headings for the items being recorded with the data shown below in
records consisting of one row for each individual.
In this example the headings in row 1 and the data entries below them in columns A to G have
been entered manually, while the entries for qx in column H and the numbers shown in cells
K5 to K8 have been calculated using a ‘formula’. For example, cell K7 contains an Excel formula
that automatically calculates the total benefit by summing the entries in column G. The ability to
carry out calculations on the data automatically is one of Excel’s great strengths and what has
made electronic spreadsheets so popular. Excel also provides a convenient way of creating
databases of information and producing summary reports and graphs.
The illustration shows a single worksheet (or ‘sheet’), but an Excel spreadsheet (or ‘workbook’)
will typically consist of several worksheets handling different parts of the project. The worksheets
are often called ‘tabs’ as they can be selected by clicking on the tabbed markers at the bottom of
the screen.
1 Basic Excel operations and tasks
1.1 Basic Excel operations

In this section we describe how to carry out basic operations when using Excel spreadsheets.
In the guide below:

 Menu1 > Menu2 > … represents a sequence of Excel menu selections
 [Key] represents a keyboard selection.
There may be slight variations depending on which operating system and which version of Excel
you are using. For example, the Office button in Excel 2007 corresponds to the File menu in later
versions of Excel. Also, some of these tasks can be achieved in more than one way.
Note on software versions

Excel continues to evolve over time, with new versions being released periodically. The examples
shown in these Course Notes are based on the Excel 2007/2010 format but more recent versions
are now available that include new features.
It is important that you are familiar with the version you will be using in the exam, so that you
don’t waste time in the exam working out how to use the software. This is particularly true when
working with charts, which vary considerably between versions.
Create, open or close an Excel workbook
Task How to do it
Open an existing workbook In Windows Explorer: double‐click on the name of the Excel file
In Excel: Office button > Open and double‐click on the file name
Create a new workbook In Excel: Office button > New or [Ctrl]‐N
Close a workbook Click on the close icon (×)
(If you haven’t saved the file yet or you’ve made some changes since
you last saved it, you will be prompted as to whether you wish to save
it)
Save a workbook (under the same name or a new one)
Save (under the same name) Office button > Save or [Ctrl]‐S
Save (under a different name) Office button > Save as ..
Get into the habit of saving your spreadsheet periodically to ensure that you don’t lose your work
if your computer crashes.
Create, access, (re)name, move or copy an individual worksheet
Create a new worksheet Click on the new worksheet icon (displayed after the last tab name at
within a workbook the bottom of the screen)
Access an individual Click on the worksheet tab or [Ctrl]‐[Page Up] / [Ctrl]‐[Page Down] to
worksheet within a workbook move to the next / previous worksheet
Rename a worksheet Double‐click on the worksheet tab, type a new name and press [Enter]
Move or copy a worksheet Right‐click on the tab name and select Move or copy sheet and click to
select the new position (or you can just drag it with the mouse)
(To create a copy, rather than just moving it, tick the Create a copy box)
Navigate within a worksheet
Navigating within a To go to the top left (cell A1): [Ctrl]‐[Home]

worksheet To move left or right: Use the arrow keys
To move up or down: Use the arrow keys or [Page Up] / [Page Down]
Select (highlight) a cell, an array of cells or a row or column
Select a cell Click on the cell

Select an array of cells Click on the first cell and hold down the mouse button while you drag
over the other cells (or hold down [Shift] and use the arrow keys)
Select a row or column Click on the row number or the column letter (round the edges)
To find where a column of data ends, you can use the key combination [Ctrl]‐[↓], which jumps to
the last row. You can also use [Shift]‐[Ctrl]‐[↓] to highlight down to the end of that column.
(This feature actually stops at the first blank cell. So be careful if your column contains blanks –
you may not have captured all the data.) You can use [Ctrl]‐[→] and [Shift]‐[Ctrl]‐[→] in a similar
way to find where a row of entries ends.
Edit the contents of a cell
Edit the contents of a cell Select the cell and then type a value or a formula in the formula bar at
the top of the screen or double‐click the cell and type directly into the
cell itself
Move, copy or delete a cell or an array of cells
Move a cell (or array of cells) Select the cell(s), [Ctrl]‐X (or right‐click and select Cut), click to the new
position, [Ctrl]‐V (or right‐click and select Paste)
Copy a cell (or array of cells) Select the cell(s), [Ctrl]‐C (or right‐click and select Copy) click to the
new position, [Ctrl]‐V (or right‐click and select Paste)
Delete a cell (or array of cells) Select the cell(s), [Delete]
Delete or insert a row or column
Delete a row or column Select the row or column, then press [Delete] to blank it out or right‐
click and select Delete to remove it completely
If you highlight more than one row or column, you can use the same
method to delete them
Insert a new row or column Select the number of the row below where you want the new row or
the letter of the following column, then right‐click and select Insert
If you highlight five rows (say) and select Insert, it will insert five new
rows above the first highlighted row
Create a formula involving values from other cells
Create a formula Select the cell and type the formula, starting with =
(You can select cells the formula refers to directly with the mouse,
rather than typing their cell references)
If you forget to include the = sign at the start of a formula, Excel will just display the text you’ve
entered.
Use basic arithmetic operators (+, –, *, /, ^)
Use basic arithmetic Type the symbol for the operators directly from the keyboard
operators
Use standard mathematical functions such as SQRT, EXP, LN, SUM and
special functions such as COUNTIF(S), VLOOKUP, LARGE
Use mathematical functions Type the function name from the keyboard followed by “(“, then enter
the arguments as prompted, followed by “)”, or select the function
using the fx icon on the toolbar if you can’t remember the exact name
Excel functions are described in more detail in Section 2 below.

Use logical operators (IF, AND, OR, NOT)
Use basic arithmetic Type AND etc from the keyboard followed by “(“, then enter the
operators arguments followed by “)”
In Excel these operators are entered as functions. So, for example, you would write AND(… , …)
rather than … AND … . See Section 2.4 below.
Change the appearance or format of a cell
Change the appearance of a Select the cell(s), then select the required options (eg font colour or
cell number of decimals) from the Font, Alignment or Number sections on
the Home menu, or right‐click the cell and select one of the icons from
from the toolbar
You can use [Ctrl]‐B and [Ctrl]‐I as shortcuts to select or unselect bold and italic text.
Create a chart (graph)
Create a chart (graph) Insert, then click on the icon for the required chart type
Excel charts are described in more detail in Section 3 below.
Select, edit (change features of) a graph
Select a graph Click anywhere on the graph

Edit a graph Right‐click on the graph and select the feature you want to change (You
will get different choices depending where you click)
Move, copy or delete a chart (graph)
Move a chart (graph) Select the chart, [Ctrl]‐X, click to the new position, [Ctrl]‐V
Copy a chart (graph) Select the chart, [Ctrl]‐C, click to the new position, [Ctrl]‐V
Delete a chart (graph) Select the chart, [Delete]
If you copy a chart, you can change the data values and the settings for the new chart without
affecting the original. This is useful if you want to create a set of similar charts.
Export a graph to Word
Export a graph to Word First select the graph in Excel, press [Ctrl]‐C, then change to Word, click
(retaining the link to Excel) at the correct position and press [Ctrl]‐V
Double‐clicking on the graph in Word will open up Excel and allow you
to make changes to it
Exporting an image of a graph First select the graph in Excel, click on the Copy drop‐down menu in the
to Word Home menu and select Copy as Picture … and press OK, then change to
Word, click at the correct position, click on the Paste drop‐down menu
in the Home menu and select Paste Special … and press OK
This will insert a fixed image of the chart with no link to Excel, so it
cannot be changed
(As a shortcut, you can use Ctrl‐C in Excel, then from the Paste menu in
Word, select the icon to paste as a picture)
The second method of exporting a graph creates a much smaller Word file and prevents
accidental changes being made. This is usually the best method for copying a chart into the
summary report.
Use the Help facility
Get help on a feature Click on the ? icon (in the top‐right corner) or press [F1]
2 Excel functions
One of the key features of Excel is that the value shown in a cell can be calculated using
information in other cells. This is done using an Excel ‘formula’, which starts with an = sign.
As well as the basic arithmetic operators (+, –, *, / and ^ for addition, subtraction, multiplication,
division and powers), Excel includes a wide range of built‐in functions that you can use in your
calculations. These include:
 mathematical functions (like those on calculators) such as SQRT, EXP and LN
 functions that apply to ranges of cells, eg MAX and SUM
 special functions such as COUNTIF and VLOOKUP
 operators such as IF and AND, which are treated as functions
 other features such as RAND, PI, which are treated as functions with no arguments.
Excel functions, eg SUM, often need to be applied to a range of cells, ie a rectangular array of
cells. Ranges are specified using the notation First cell:Last cell. If First cell and Last cell are in the
same row or column, the range will be a ‘thin’ rectangle of cells in a single row or column.
You can type the colon either as ‘:’ or as ‘.’ (which will then be converted and displayed as ‘:’).
Here are some examples of Excel formulae you might see used in actuarial modelling.
Question
What do you think the following Excel functions would calculate?
(a) = LN (1+A1)
(b) = AVERAGE (A2:A51)
(c) = MAX (Data!B2:K1001)
(d) = COUNTIF(B2:B51,”Male”)
(e) = IF (OR(X5<0, X5>1), ”Error!”, ”OK”)
(f) = IF (RAND( )>0.5,1,0)
Solution
(a) This will apply the function ln(1  x ) to the value stored in cell A1. So, if A1 contains a
value for the effective annual interest rate (eg i  0.05 ), this would calculated the
corresponding force of interest  .
(b) This will calculate the average (arithmetic mean) of the values stored in the 50 cells in
rows 2 to 51 of column A.
(c) This will calculate the highest value in the array (rectangle) of 10,000 cells in rows 2 to
1001 of columns B to K in the worksheet called Data. If the formula was on the same Data
worksheet there would be no need to include the worksheet name. It would be simpler
to just use = MAX(B2:K1001).
(d) This will count how many entries in rows 2 to 51 of column B say Male.
(e) This will display the message Error! if the value stored in cell X5 is outside the range (0,1),
or OK otherwise. This type of function is often used to check for mistakes by identifying
probability values that are impossible etc.
(f) The function RAND generates a random number between 0 and 1. So this will produce a
random value that is equally likely to equal 1 or 0.
In fact, RAND( ) returns a value in the range [0,1) , ie 0 is included but 1 is not. This means
that very occasionally an Excel formula such as = LN( RAND( ) ) will result in an error if
Excel tries to evaluate LN(0). You can avoid this issue by using 1–RAND( ) instead, which
gives a uniform random number in the range (0,1] , ie 1 is included but 0 is not.
Excel formulae can be combined eg by adding several together or they can be ‘nested’ (by using
one function ‘inside’ another).
2.1 Functions for summarising data

The following functions are particularly useful for summarising data.
Function Description
COUNT Counts the number of cells that contain numbers

COUNTA Counts the number of cells that are not empty (ie the number of cells that
are populated)
MIN Gives the minimum (the lowest value)
MAX Gives the maximum (the highest value)
SUM Calculates the total
AVERAGE Calculates the average (the arithmetic mean)
To insert any of these functions in your spreadsheet, it is usually easiest just to type them directly.
All formulae start with an ‘equals’ sign (=).
To use a value from a different worksheet in a formula, enter the cell number in the form
Sheet2!X5, or alternatively, as you’re typing, just navigate to the cell you require and click on it to
enter it in the formula.
Question
The spreadsheet we saw earlier is for a small company where the employees qualify for a death in
service benefit equal to 4 times their annual salary once they reach age 20.
(i) What formulae do you think were used for calculating cells K5, K6 and K7?
(ii) What answer would = COUNT (A2:A8) give?
Solution
(i) The formulae in these cells could be:

K5: = COUNT (G2:G8)
K6: = AVERAGE (E2:E8)
This formula would include all the employees in the calculation of average. If we wanted
to calculate the average just for the pension scheme members (ie excluding C J Saint who
has not reached age 20 yet), we could use the more advanced function AVERAGEIF
(see Section 2.3):
K6: = AVERAGEIF (E2:E8,“>=20”)
This would increase the average age to 33.7.
K7: = SUM (G2:G8)
(ii) This would give the answer 0, as the employees’ names are not numbers. To get the
answer 8, you would need to use = COUNTA (A2:A8).
We’ve limited our example to 6 people so that you can see the full spreadsheet. However, the
latest version of Excel allows up to 1,048,576 rows (  220 )! The columns are not limited to 26
letters either. After column Z the double letters AA, AB, … are used and after ZZ the triple letters
AAA, AAB, … are used. The final column XFD is the 16,384th column (  214 ).
Two other related functions are LARGE and SMALL, which calculate the k th largest and the k th
smallest values in a range of cells.
Question
What answer would the formula = LARGE (E2:E8,2) give?
Solution
This would give 40, the age of the next‐to‐oldest employee.
2.2 Absolute and relative cell references ($)

One feature that makes spreadsheets a very powerful tool is the way they allow you to copy
formulae. However, you need to be careful.
Suppose, for example, that you have a column of data values in cells B2 to B11 and that you have
typed the formula =SUM(B2:B11) below this in cell B12 to calculate the total. Suppose that you
also have another column of data values in cells C2 to C12, which you want to add up as well.
If you copy the formula from cell B12 to cell C12, Excel will correctly assume that you have
another ten numbers in column C that you want to add up in the same way. So it will
automatically adjust your formula to read =SUM(C2:C11). This is called ‘relative referencing’.
In fact, Excel treats your formula =SUM(B2:B11) in cell B12 as saying ‘add together the numbers
starting 10 rows above here and finishing one row above here’.
However, in many cases we might want to copy a formula without adjusting all the references in
this way. For example, if cell G4 contains the formula = F4*(1+F1), copying it down to cell G5
would give = F5*(1+F2), which would no longer be applying the 20% VAT rate, which is still stored
in cell F1.
To ‘anchor’ the row numbers and/or column letters so that they don’t change when we copy the
formula, we can include $ signs in front of the row numbers and/or column letters in the original
formula. The $ sign tells Excel to use absolute referencing instead of relative referencing. If you
anchor the row numbers, these will not change if you copy the formula up or down. If you anchor
the column letters, these will not change if you copy the formula sideways. You can anchor any or
all of the two letters and two numbers defining a range of cells. The dollar sign looks like an
anchor. So you can think of it as ‘anchoring’ the number or the letter immediately following.
So here, it would be best for the original formula in cell G4 to say = F4*(1+$F$1). When it is
copied down to cell G5 it will then say = F5*(1+$F$1).
Question
What would happen if (on a different worksheet) you were to copy each of the following formulae
from cell C12 to cell E13?
(a) =SUM(C1:C10) (b) =SUM($C1:$C10)

(c) =SUM(C$1:C10) (d) =SUM($C1:C10)
How many cells would be summed by the new formula in each case?
Solution
(a) The row numbers and the column letters would both be adjusted to give:
=SUM(E2:E11)
The new formula would calculate the sum of 10 cells in column E.
(b) Now the row numbers would be adjusted, but not the column letters, to give:
=SUM($C2:$C11)
The new formula would calculate the sum of 10 cells in column C.
(c) In this case everything would be adjusted apart from the row number 1 defining the start
of range. So this would give:
=SUM(E$1:E11)
The new formula would calculate the sum of 11 cells in column E.
(d) In this case everything would be adjusted apart from the column letter C defining the
start of the range. So this would give:
=SUM($C2:E11)
The new formula would calculate the sum of 30 cells (  10  3 ) in columns C, D and E.
Whenever you type a formula that involves a range, decide whether any of the elements need to
be anchored. Include $ signs in your formula if you know that you would not want that row
number or column letter to change if you copied it later. While you’re typing a formula in the
formula bar, you can save time by pressing the [F4] key to cycle through all the $ options.
It is not good practice to copy a cell then to go back and edit the formula manually when the row
number or column letter should have been anchored in the first place, as this is time‐consuming
and can lead to mistakes.
Note that if you move a formula (rather than copying it) the new formula will still apply to the
original range of cells. Excel does not adjust the rows and columns in this case.
2.3 Special functions

There are a number of special functions that are particularly useful in actuarial work where we
need to analyse data.
The functions COUNTIF and SUMIF work in the same way as COUNT and SUM, except that they
only include cells whose values satisfy a specified condition. The condition can either be an exact
value (such as 0.05) or an inequality (such as <0).
Question
Here is the worksheet we saw earlier.
Give formulae that would:
(a) count the number of employees earning less that £20,000
(b) calculate the average salary for the female employees
(c) count the number of employees younger than the minimum age.
Solution
You could use the following formulae:
(a) = COUNTIF (D2:D8, “< 20000”)
(b) = SUMIF (F2:F8, “F”, F2:F8) / COUNTIF (F2:F8, “F”)

In fact, there is also an AVERAGEIF function that works in the same way. So, for (b), a simpler
formula would be:
= AVERAGEIF (F2:F8, “F”, D2:D8)
(c) = COUNTIF (E2:E8, “<”&K3)
The & operator that we’ve used here concatenates (joins together) two or more components.
So the condition “<”&K3 is equivalent “<20” but is more flexible, as it allows us to use a variable
value in the condition.
The function SUMPRODUCT calculates expressions of the form  x i yi . This can be useful for
calculating weighted sums and weighted averages – the weights are specified in one column and
the values in another.
Question
Cell K8 shows the expected annual payout in death benefits. Give a formula for calculating this
using the SUMPRODUCT function.
Solution
This is calculated by multiplying each person’s benefit amount by their mortality rate ( qx ) and
then finding the total. So we could use the following formula:
= SUMPRODUCT (G2:G8, H2:H8)
There are also the extended functions COUNTIFS and SUMIFS, which allow you to apply multiple
criteria (ie several ‘ifs’ at once).
Note carefully the order of the arguments for SUMIFS, which differs from the order used in
SUMIF. With SUMIF you put the column you want to sum last, but with SUMIFS you put it first.
The functions VLOOKUP (vertical look up) and HLOOKUP (horizontal look up) are useful for
looking up numbers in a table of values. The function OFFSET (and the more advanced INDEX
function) can also be useful when you need to use the value in a cell that is a specified number of
rows and/or columns away from another cell.
Question
The mortality rates qx are tabulated on another worksheet, as shown below. (To save space
we’ve hidden rows 8 to 49 by ‘grouping’ them. This is done using the Group button on the Data
menu. Clicking on the  icon then allows you to reveal or hide these rows as required.)
The following formula has been used to look up the mortality rate for a male whose age is stored
in cell X1.
= VLOOKUP (X1, $A$2:$B$52, 2, FALSE)
(i) Explain the arguments 2 and FALSE used in this formula.
(ii) How would you modify this formula to find the mortality rate for a female?
Solution
(i) The 2 specifies that the answer we want is to be found in the second column of the
specified array ie in column B.
The last argument is optional. Including the value FALSE (which is the safest choice) tells
Excel that you need an exact match for the age. If you changed this argument to TRUE,
Excel would look for the closest match to that age. (For this to work, the values in
Column A have to be in ascending order.)
(ii) We would need to look up the value in the third column and extend the lookup table to
include column C. So the formula would be:
= VLOOKUP (X1, $A$2:$C$52, 3, FALSE)
In fact, if we knew that we were going to be using both sexes, it would be neater to have included
column C in the original formula as well, ie = VLOOKUP (X1, $A$2:$C$52, 2, FALSE), so that the
formulae only differ in one place.
The HLOOKUP function works in a similar way, but searches horizontally.

2.4 Logical functions and operators

There are also some ‘logical’ functions such as IF. This can be used where different formulae are
required in different circumstances.
The use of the IF function, the logical operators AND, OR and NOT, and the logical values TRUE
and FALSE are best understood by looking at some examples.
Question
Suppose that cell D1 (on a different worksheet) contains the formula MOD(TODAY( ),7), which
gives the remainder when the serial number for today’s date is divided by 7. (Note that the Excel
‘calendar’ starts with Sunday 1 January 1900 = Day 1.)
Explain the logic behind the following formulae:
(a) = IF (D1 = 3, “It’s Tuesday”, “It’s not Tuesday”)
(b) = IF ( OR (D1 = 0, D1 = 1), “It’s the weekend”, “It’s a weekday”)
(c) = AND (D1 = 0, D1 = 1)
(d) = OR (D1 = D1, D1 = D1)
(e) = NOT (2 + 2 <> 4)
Solution
(a) This uses the fact that a remainder of 3 always corresponds to a Tuesday.
(b) This works because a remainder of 0 corresponds to Saturday and 1 to Sunday.
(c) This will give the answer FALSE, since the conditions cannot both be true.
(d) Since one or more of the statements is true, this will give the answer TRUE.
(e) The <> operator (greater than or smaller than) is equivalent to ‘not equal to’.
So 2 + 2 <> 4 evaluates to FALSE. The NOT then ‘reverses’ this to give the answer TRUE.
2.5 Statistical functions
Calculating sample moments

The function VAR gives the sample variance, ie it estimates the underlying variance using a
denominator of n  1 . There is a corresponding function VARP (the P stands for ‘population’),
which gives the actual variance of a population of equally likely values, ie it is calculated using a
denominator of n . When working with large data sets, it’s not vital which of the two you use.
The function STDEV gives the sample standard deviation, calculated as the square root of VAR.
There are also functions such as SKEW and KURT for calculating higher sample moments for a
data set. The function CORREL calculates the correlation between two sets of values.
Other less commonly used functions you might like to investigate include the QUARTILE, MEDIAN
and MODE functions.
A number of statistical functions have been given new names in Excel 2010 that contain a dot.
For example, VARP is now officially called VAR.P. However, we recommend you use the Excel
2007 names, without the dots, as these can be used in both versions.
Functions for simulations

For stochastic modelling you may need to create a set of simulated data values based on a
particular statistical distribution. Excel has a number of functions you can use for this purpose.
For example, the function RAND (and also RANDBETWEEN) is useful for generating
pseudo‐random numbers for simulations and the NORMSDIST function can be used to find
probabilities based on the standard normal distribution.
Uniform distribution
To create U (0,1) random numbers, ie pseudo‐random values from the continuous uniform
distribution on the range (0,1), use the Excel function RAND( ).
Note that, if U ~ U (0,1) , then X  a  (b  a)U ~ U(a, b) . So you can easily generate U (a , b) random
numbers as well.
Bernoulli (binary) distribution

Suppose that you need to create a random value from a binary distribution such as:
5 with probability 0.2

X
10 with probability 0.8
To do this in Excel you would use the following formula, which uses the IF function:
=IF (RAND( ) > 0.2, 10, –5)
This formula will first generate a value of RAND. It will then decide whether the condition RAND( )
>0.2 is TRUE or FALSE. If it is true, it will select the value 10; if it is false, it will select the value –5.
If the two values of the distribution are 0 and 1, this is a Bernoulli distribution.
Exponential distribution
To simulate values from an exponential distribution, you can use the following fact:
1
If U ~ U (0,1) , then X   log U ~ Exp( ) .

All the logs here are ‘base e’. So the Excel function required is LN.
This formula is based on the ‘inverse transform’ method, where pseudo‐random values from a
particular distribution can be generated by calculating F 1 (u) , where F ( x ) is the (cumulative)
distribution function and u is a pseudo‐random value from the continuous U (0,1) distribution.
The distribution function for the exponential distribution is F ( x )   e   x . The inverse function is
found by solving the equation F ( x )  u to express x in terms of u . So here we have  e   x  u ,
1 1
which is equivalent to x   log u . So F 1 (u)   log u .
 
If you need to do anything like this in the exam, the formulae you need will be given in the question.
Normal distribution
To simulate values from a normal distribution, the easiest method is to first simulate a value Z
from the standard normal distribution using the inverse transform method. This can be done using
the Excel function NORMSINV and the formula:
= NORMSINV ( RAND( ) )
The value produced by this calculation can then be rescaled to give a value X from a N( , 2 )
distribution, using the relationship:
X
 Z ~ N(0,1)  X     Z ~ N(  , 2 )

An alternative approach (which produces much quicker calculations in Excel) is to use the
Box‐Muller method.
Question
You wish to generate a large number of normally distributed random numbers for a simulation
using the Box‐Muller algorithm. The formula is:
2loge u1 cos(2 u2 )
where u1 and u2 are independent random numbers from a U (0,1) distribution.
How would you enter this in Excel? (Consult the Help files in Excel if you need to.)
Solution
The formula for calculating 2loge u1 cos(2 u2 ) would be:
= SQRT (–2*LN(RAND( ))) * COS(2*PI( )*RAND( ))
Excel treats PI like a function. So you need to include the brackets, even though it is a constant
and has no arguments. You could of course simply type 3.142 instead.
2.6 Financial functions

The following financial functions might prove useful. For further explanation of the arguments of
the functions, see the Help pages in Excel.
NPV(rate, values) gives the net present value of a series of cashflows, discounted at a specified
interest rate. (The interest rate is an effective rate ‘ i ‘.)
IRR(values) gives the internal rate of return for a series of cashflows. If necessary, you can specify
an initial guess to use (eg 5%) by including this value as a second argument.
PMT(rate, nper, pv) calculates the repayments required to pay off a loan, where rate is the
interest rate, nper is the number or repayments and pv is the initial loan amount.
2.7 Other useful functions

Other functions you might need to use are ABS (absolute value), INT (integer part) and ROUND,
ROUNDDOWN, ROUNDUP, which can be used to round answers to a specified number of digits or
to restrict the number of significant figures shown.
Question
What answers do you think ROUND(12345.6789, 2) and ROUND(12345.6789, –2) would give?
Solution
This will round the number 12345.6789 to 2 decimal places (ie to the nearest 0.01), which will give
12345.68.
This will round the number 12345.6789 to the nearest 100, which will give 12300.
Note, however, that you should not normally force Excel to round answers in this way. It is
usually better just to set the display settings for the cell to display the number of decimals you
want to show. Excel will then retain the accurate value ‘behind the scenes’ and use the accurate
value in any further calculations involving the value in that cell.
To insert one of the more advanced functions in your spreadsheet, it is usually best to use the
function icon ( fx ) on the formula bar. This has the following advantages:
 It presents you with a list of all the available functions (which is useful if you can’t
remember the exact name).
 When you select a function, it describes the arguments of the functions and the order in
which they appear.
 It allows you to pick out the input values directly from your spreadsheet (click on the icon
on the right and then select the cell(s) you want using the mouse).
 It shows you the value based on the arguments you have selected (so that you can see if
you’ve used the right cells).
If any less commonly used functions are required in the assessment, eg the factorial function
FACT, these will be explained in the exam paper.
2.8 Data types

Most of the examples we have seen involved numbers. This includes percentages, which are
stored as 0.05 (say) but displayed as 5%. However, Excel can also work with text (eg the names
and job titles in column A) and dates.
Dates are stored as the number of days since 1 January 1900 but can be displayed in various
formats such as 25‐Dec‐2018.
Question
Give an example of a calculation we might want to do involving dates.
Solution
If a person’s date of birth is stored in cell B1, we can calculate their age last birthday today using
the function = INT ((TODAY( ) – B1)/365.25) and display the answer as a whole number.
2.9 Dealing with errors

If one of your formulae generates an error, Excel will indicate this by showing a special code
beginning with the # symbol for the result of the calculation. The most common ones are:
Message Type of error Examples
#DIV/0! Divide by zero = 1/0

#NUM! Invalid argument = LN(‐1)
= SQRT(‐1)
#VALUE! Meaningless calculation = “January” + 2020
#N/A Not applicable / Unknown / Can’t be found = VLOOKUP (“Febuary”, …)
A very useful function is IFERROR, which takes the form IFERROR (usual calculation, alternative
answer). This allows you to carry out a calculation but to override the answer with an alternative
answer if the calculation produces an error.
Question
The following formula has been used to calculate the value of an annuity certain, where the
interest rate is stored in cell I1 and the term stored is in cell N1:
= ( (1–(1+I1)^(–N1))/I1
(i) Identify a problem that could arise with this formula.
(ii) Describe an easy way to solve this problem.
Solution
(i) If the interest rate is 0%, this formula will result in a ‘dividing by zero’ (which Excel
displays as #DIV/0!). This will then mess up any subsequent calculations that use this
value.
(ii) If the interest rate is 0%, the correct answer for the annuity value is N1 (ie it is just equal
to the term). We can get Excel to give the correct answer in all cases by overriding the
error message using the following formula:
=IFERROR ( (1–(1+I1)^(–N1))/I1,N1)
The IFERROR function is often used in conjunction with the VLOOKUP function.
Question
Explain what the following formula will do:
= IFERROR ( VLOOKUP (X1,$B1:$C1000,2,FALSE), “Not found”)
Solution
This formula will look for the value X1 in rows 1 to 1000 of column B. If it finds this value, it will
return the corresponding value in column C. If, however, the value X1 is not there, it will give the
result Not found. (Without the IFERROR function it would give the result #N/A.)
You can check for these types of errors in your calculations by using the functions ISERROR and
ISNA in combination with an IF.
There is also the NA( ) function, which automatically generates a #N/A error. Although this might
sound pointless, it can actually be quite useful when you want Excel to ignore particular cells.
For example, points on a graph will be ignored if they have an NA value. So you can deliberately
assign this value (probably in conjunction with an IF function) to any points that you don’t want to
show on your graph.
3 Excel charts
3.1 Creating charts (graphs)

To create a chart (graph), highlight the range of cells containing the information to be displayed in
the chart, then select an appropriate chart type from the Insert menu tab.
Once you’ve created a chart, you can right‐click on the graph to modify various features and fine‐
tune it. Note that the options offered when you right‐click vary depending on where you click on
the graph.
Here is a summary of the things you are most likely to want to do with your charts and how to do
them.
Task How to do it
Add a title for your chart or Left‐click on the graph and a special Chart Tools menu will
label the axes appear. Then select Layout > Chart Title or Axis Titles.
Change the scales (eg range, Right‐click somewhere on the x‐axis or the y‐axis and select
number of decimals or to Format Axis. In Axis Options you can set the range (using
display in millions) Minimum and Maximum), the spacing for the gridlines
(Major unit) and the Display units (eg 000s or millions).
In Number you can set the number of decimals.
Change how the points, Right‐click on the points, lines, bars or slices you want to
connecting lines or bars are change. You can then select a colour directly or use Format
displayed (eg the colour) Data Series to change other features. To change an
individual point, click on it twice.
Change the range of cells to Right‐click anywhere on the chart and choose Select Data.
plot or the series names Then edit the name or range as required.
shown in the legend
Change the overall appearance Right‐click just inside the edge of the chart and select Format
of the graph, eg the Chart Area.
background colour or the
outside border
Change the size of your chart Left‐click on the chart, then drag the ‘handles’ to the size you
require. Note that you can reposition the axis labels, the
legend and the title manually if required.
Move a chart to a different You can just cut & paste it. Highlight it, then press Ctrl‐X,
position click on the position where you want it and press Ctrl‐P.
Copy a chart to a Word You can copy your chart to Word either by copying & pasting
document or using Home > Copy > Copy as Picture … . The first option
will embed the chart and all the Excel calculations behind it
into the Word document (often creating a bloated Word file).
The second option will just copy the final picture itself.
The charts in the more recent versions of Excel allow much more flexibility than earlier versions,
but this makes them a bit more complicated to use. It is important that you try out the different
features to make sure you can use them without effort. The best way to learn about all the
features is to experiment for yourself.
3.2 Common chart types

Excel allows you to create a wide range of different chart types.
Choose a chart type that shows the important information clearly in a way that is not swamped by
unnecessary detail.
Make sure also that your chart is correctly labelled and the units on the axes are clearly shown
with an appropriate number of decimals.
Pie charts
To set up a pie chart, you need one column with the names of the slices and another with the
value for that slice. You can choose to show the actual numbers or the percentages. You can also
‘explode’ the graph (using Format data series), which can make it easier to see the thinner slices.
In the examples below the pie chart on the right has been ‘exploded’ by 10%.
Sales of fruit Sales of fruit
Other
Other
Apples 22% Apples
300
437 31%
Bananas Bananas
200 14%
Oranges
464 Oranges
33%
To add the words and the numbers (eg Oranges, 464), right‐click on the pie, then select Add Data
Labels.
Column (bar) charts

To create a column chart (bar chart) for one variable, you just need one column with the values
you want for the y axis and another with the labels you want to give the ‘categories’ shown along
the x axis.
Here are two examples.
Sales of apples
100
80
60
Boxes
40
20
0
J F M A M J J A S O N D
Month
If the y ‐values on your graph are large, it may be clearer to show the values in units of thousands
or millions. To do this, just right‐click on one of the numbers on the y axis, select Format axis and
set Display units to the units you want to show.
Poisson distribution (mean 1.5)

0.4
0.3
Probability
0.2
0.1
0.0
0 1 2 3 4 5+
Value
If you don’t specify any labels for the categories, Excel will assume you want 1, 2, 3, … You will
usually need to change this. You can include empty cells for the labels if you don’t want to label
them all.
If your chart has just one series you don’t normally need a legend, so you can select the legend
with the mouse and press [Delete] to remove it.
If you want to show the actual values, like the 437 etc shown below, you can click on one of the
bars and select Add Data Labels.
Sales of fruit
500
400 464
437
300
Boxes
300
200
200
100
0
Apples Oranges Bananas Other
Fruit
Excel’s default settings sometimes let the title and legend dominate the chart. So make sure you
select a suitable title size and place the legend in a suitable place on the chart. Point size 14 is
usually a good size for the text in the title.
Usually the title at the top of a chart will be a phrase consisting of half a dozen words,
eg ’Comparison of results for Scenarios 1 and 2’ and the axes will have short labels,
eg ‘Age (years)’ or ‘Profit (£000)’.
There are several different types of column chart you can use to show more than one series
together. To create one of these, put the input values in parallel columns with the series name as
the column heading, highlight all of these, then select Insert > Column and select the chart type
you want. This one is a clustered column chart.
Sales of fruit
100
80
60
Boxes
40 Apples
20 Oranges
0
Month
Clustered column charts show clearly both the trends in the individual values and the comparison
between the different items.
Alternatively, the same information can be displayed as a stacked column chart, either showing
the actual values or the relative percentages.
Sales of fruit
160
140
120
100
Boxes
80
60 Apples
40 Oranges
20
0
Month
Sales of fruit
100%
80%
60%
Boxes
40% Apples
20% Oranges
0%
Month
A stacked column chart is good where you want to emphasise the total numbers. A stacked
column chart with percentages is good where you are only interested in the relative numbers.
Line charts
Line charts are useful for showing or comparing the progression of values, eg as a function of
time. Markers can be added (the dots in the second chart) if you want to make the actual values
easy to see.
Sales of fruit
100
80
60
Boxes
40 Apples
20 Oranges
0
Month
Sales of fruit
100
80
60
Boxes
40 Apples
20 Oranges
0
Month
If you are working in black‐and‐white, you can use different shapes for the markers to distinguish
your series, eg circle, square, triangle or cross, or you can use dotted or dashed lines. If you are
working in colour, it’s usually best to use circles throughout and use a different colour for each
series.
If the markers on your line chart look a bit odd or fuzzy, you’ve probably forgotten to change the
marker line colour. This defines the colour of the outside of the marker (circle etc) separately
from the inside (fill). This feature allows you to use hollow circles, which are sometimes useful.
The bars in column charts offer a similar feature if you want to show ‘hollow’ bars.
If you want to exclude a point from your chart (eg because the value is not known), enter =NA()
for either the x or y value and Excel will leave a gap in the right place.
Scatter plots
Scatter plots are useful for visualising the relationship (if any) between two variables. To set up a
scatter plot, you need two columns with the corresponding x and y values. You can then plot
these as a scatter plot.
Sales of fruit
100
80
Oranges
60
40
20
0
0 20 40 60 80 100
Apples
Scatter plots are one of the most flexible types of chart in Excel. For example, you can easily add
lines joining the dots to convert it to a line chart or redefine the x values as a separate series or
add another series. So these are often a good starting point to use if you are still deciding the
best way to present your results.
Graphs of functions
To plot the graph of a mathematical function in Excel, you need to set up two columns with a
range of x values in the first column and the corresponding y values in the second column.
You can then plot these values as a line graph (or scatter plot). You can smooth your graph by
left‐clicking on the graph itself, then selecting Format Data Series > Line style and ticking the
Smoothed box.
Standard normal distribution

0.5
0.4
0.3
f(x)
0.2
0.1
0.0
‐3 ‐2 ‐1 0 1 2 3
x
In the graph above, we have used x values going up in steps of 0.2. We have included both
horizontal and vertical gridlines to make it easier to see the numerical values. For example, the
value for x  2 is around 0.05.
4 Other useful Excel features
4.1 Sorting
Excel provides an efficient and flexible feature for sorting data via the Data > Sort option. In most
situations it is best to avoid using this feature unless you want to change the dataset
permanently.
An alternative to sorting is to use the LARGE and SMALL functions, which we described earlier.
If you are sorting data, make sure that you have captured the entire range of entries and that you
have included all other rows or columns that belong together. For example, if you sorted the
names on your contact list – without including the phone numbers – you’d end up with a lot of
wrong number calls!
4.2 Paste by value

Formulae in Excel are dynamic, ie if you change one of the inputs, the output values will be
recalculated automatically, based on the new input value. This is one of Excel’s great strengths –
but sometimes it’s not what you want. For example, if you’re doing a simulation using random
numbers, you might want to preserve a particular set of results.
To achieve this, you can use the ‘paste by value’ feature. Select and copy the cells in the normal
way, but then use Home > Paste > Paste Values > 123. Excel will then copy the actual numerical
answers, rather than the formulae. These answers will then be ‘frozen’ – they won’t change if
you change any of the input values they were originally based on or if you use the recalculate
feature (ie press the [F9] key) to run another simulation.
Avoid using the ‘paste by value’ feature in other circumstances, as it requires manual intervention
if changes are made subsequently.
4.3 Filtering
Excel allows you to filter the records in your data so that it only displays a subset, eg only female
employees based in the UK or the Republic of Ireland. To access this feature, highlight a range of
cells or the letter(s) at the top of the column(s) you want to filter, then select Data > Filter. You
can now click on the drop‐down filter menus to select the subset you require.
You can also use this feature to identify any rogue entries in your data. These will be listed in the
drop‐down menus.
Note that, when a filter is applied, the summary calculations shown at the bottom of the screen
and any copying you do will now only include the filtered records. So don’t forget to turn the
filtering off when you’ve finished with it.
4.4 Named cells and ranges

If you expect to be referring to the same cell or block of cells repeatedly, eg a cell containing a key
parameter value or a block of cells containing your original data values, you can give these cells a
memorable name, such as ‘Interest’ or ‘Data’. This allows you to write formulae such as
=1/(1+Interest) or =SUM(Data) without having to write out the cell ‘coordinates’ in full, which also
makes them easier to check. This can be particularly useful when you need to refer to these
values from another worksheet, which would otherwise entail including the name of the original
worksheet in your formula.
To define a cell name or a range name (or to look at the existing ones), select Formulas > Name
Manager > New. Then type an appropriate name in the Name: box and enter the coordinates of
the cell or range in the Refers to: box. Then select Add and OK. (Alternatively, you can highlight
the relevant cell or range of cells and select Formulas > Define Name or simply overwrite the cell
reference shown in the box at the top left. This will set up this cell or range as a named range.)
If you are intending to use a name, it is best to define the name before you start to refer to the
cell because Excel will not automatically update existing cell references to the name you have just
defined. (If you forget to do this, it is still possible to update the references retrospectively using
Formulas > Define Name > Apply Names.) If the cell immediately to the left of the current cell
contains suitable text, Excel will automatically suggest this as the name to give the range.
Note also that named cells and ranges are always absolute references, ie they are assumed to
contain $ signs that anchor their position (both the row and column). So, if you copy a formula
containing a named range, Excel will not automatically adjust the cell references for the range.
4.5 Goal seek

Suppose that you wish to find the interest rate for which the annuity factor calculated as
1  (1  i )10
is equal to 7. You can use Excel’s ‘goal seek’ feature to solve equations such as this
i
that cannot be solved directly. To access this feature, select Data > What‐If Analysis > Goal Seek.
Goal Seek is a powerful and useful tool but you should use it with care. Always try to find a closed
form solution (ie a direct formula) first, as this means that other users will not need to rerun the
goal seek when the data values or parameter values are changed.
The best way to set up a goal seek is to first express the equation in the form of a formula whose
value should equal zero. So here we could type the formula =(1–(1+A1)^–N1)/A1–7 in cell F1
(say), where the term (10) is stored in cell N1. So we want to set the value of cell F1 (which
contains the formula) equal to 0 by changing the value of cell A1 (which contains the interest rate
parameter). If you specify these entries in the dialogue box and select OK, Excel will then try to
home in on the solution.
Question
Why is it best to rearrange the equation so that you are seeking the value zero?
Solution
There are two reasons for this:

 With the recommended approach, the 7 is included in the formula and will be preserved
for other users to see. This is not the case if the 7 is typed in the dialogue box as the
target value for the goal seek.
 The target value for the goal seek feature must be a fixed (constant) value. You cannot
type a formula or a cell reference. Including the 7 in the formula itself overcomes this
restriction, since the same approach will work if we replace the 7 by a formula or a cell
reference (which would be better, since this avoids hard‐coding the 7).
When using goal seek, you should include a check cell that warns another user if the goal seek
needs to be rerun. In the above example, you could put the following formula in cell F2:
= IF (ABS(F1) >0.05, ‘Rerun Goal Seek’, ‘Goal Seek OK’ )
If the absolute value of the result in cell F1 is greater than 0.05, cell F2 will then show ‘Rerun Goal
Seek’. Otherwise it will show ‘Goal Seek OK’.
4.6 Array functions

There are some functions in Excel that operate on a range of cells, rather than a single input
value. For example, the matrix inverse function MINVERSE needs to operate on all the values in a
square matrix together. These functions are available as ‘array functions’, which are entered and
displayed in a special way. These can be very useful but you will probably not need them for the
CP2 exam.
To enter an array function, select the range of cells where you want the results to go, type the
formula you require (some of the arguments will involve arrays of cells), then press [Ctrl]‐[Shift]‐
[Enter], rather than just [Enter]. The result will then be displayed in the highlighted array. The
same formula will be shown in each of these cells in curly brackets to indicate an array function.
If you want to change your formula, you will need to highlight all the result cells before editing
your formula. Then make the changes you require and press [Ctrl]‐[Shift]‐[Enter] again.
The array functions you are most likely to use are:

 MINVERSE (finds the inverse of a square matrix)
 MMULT (multiplies two matrices together)
 TRANSPOSE (swaps the rows and columns of a matrix)
 FREQUENCY (counts the number of values in a dataset falling in different ranges)
You can consult the Excel Help file for instructions on how to use these, which also include
examples you can follow.
4.7 Data tables

Excel has a feature called data tables, which is available via Data > What‐if Analysis > Data table.
These allow you to create a table showing the results of a calculation based on a range of
different input values without having to actually set up any extra parallel calculations. This is a
very powerful feature because the input parameter can just be a scenario number. If you set up
your calculations so that they are all driven by the scenario number, you can easily produce
results for a suite of different scenarios without having to set up any parallel calculations.
If you are familiar with these, you could us them in the CP2 exam, but it is usually better to stick
to more basic techniques.
4.8 Pivot tables

Another feature that you might find useful in office work is pivot tables. These allow you to create
tables of totals and averages for different subsets (‘cuts’) of your data, subdivided in the way you
choose.
However, pivot tables would be considered to be an advanced feature and we would not
recommend you to use them in the CP2 exam.
4.9 Useful tricks

[Ctrl]‐Z
As always, you can use this key combination to undo a mistake, eg if you have accidentally
deleted a formula or done something that has messed up the appearance of a graph.
Quick sums
If you highlight a block of cells or a set of individual cells (by holding down the [Ctrl] key as you
click on each), you will see the average value, the number of entries and the total displayed
temporarily at the bottom of the screen. This is equivalent to using the AVERAGE, COUNT and
SUM functions and can be useful for quickly checking your calculations and for reasonableness
checks. (If you right‐click where it shows the answer, you can change this feature to display the
minimum and/or maximum values instead.)
Using cells from other worksheets
You can use cell values from a different worksheet in a formula. The easiest way to incorporate
these is just to click on the cell you want to use at the appropriate point while you’re typing the
formula. It will then appear in your formula as something like ... + ‘Sheet2’!C12.
Dates
To enter a date, you can just type 9Sep19 (say). Excel will recognise this as a date and
automatically select one of the date formats to display it.
Display formats
To change the format used for displaying a date or a numerical value, right‐click the cell, then
select Format Cells … > Number and select the format you require.
Automatic/manual recalculation
One of the strengths of Excel is that, whenever you make a change to a worksheet, it
automatically recalculates all the values. However, if you are dealing with very large data files or
you have a lot of very complicated formulae, Excel can sometimes take several seconds (or
longer) to recalculate all the values. If this is slowing you down, you can temporarily turn off the
automatic recalculation feature by selecting Formulas > Calculation Options and ticking the
Manual box. You can use the [F9] key to ‘force’ it to update the values when you need to.
But don’t forget to turn it back to automatic again when you’ve finished setting things up!
The data files in the CP2 exam are unlikely to be big enough for you to need to do this.
4.10 Pitfalls to watch out for

Excel sometimes has one or two surprises.
Question
(a) If you enter the value 0.5 in cell A1 and the formula = EXP(–A1^2/2) in cell A2, what
numerical value will appear in cell A2?
(b) What answer do you the think the formula =IF(1.1+0.1–1.2=0,TRUE,FALSE) will give?
(c) Read the description of the PMT function in the Excel help files. What values would you
enter for the parameters rate, nper and pv to find the correct monthly repayments for a
5‐year loan of £10,000 with an APR of 12%?
Solution
(a) 1.133148
You might have expected the answer to be:

2
e 0.5 /2  e 0.125  0.882497
However, in expressions like this, Excel treats the –0.5 as a single number, and calculates
2
e(0.5) /2  e 0.125  1.133148 , which is probably not what you intended.
To make sure the minus sign is incorporated as you intended, you need to force Excel to apply the
minus sign after the squaring, eg by using:
= EXP(–(A1^2)/2) or = EXP(–(A1^2/2)) or = EXP(–1*A1^2/2)

(b) FALSE
The problem here is that Excel does not store numbers such as 1.1 exactly, but rather as ‘floating
point’ numbers, which are binary approximations to real numbers. So, unless you are working
exclusively with whole numbers, you can’t be sure that comparisons like this one will give the
correct mathematical answer.
The usual way to get round this is to use the ABS function to check whether the difference is close
enough to zero (ie within a given tolerance). So here, you could use the following formula, which
would give the expected answer TRUE:
= IF( ABS(1.1+0.1–1.2) < 0.000001,TRUE,FALSE)
(c) rate = 0.94888%, nper = 60, pv = 1000
The instructions in the Excel help file say that, for a quarterly loan with 6% APR, you should enter
6%/4 for rate. So this suggests that you should enter the rate here as 1%. However, this gives the
wrong answer (£222.44).
In fact, this function returns the value of pv a nper , where the annuity is calculated at an
effective rate of rate. So, for this calculation, rate must be set equal to the monthly effective rate
of 1.121 12  1  0.0094888 . This then gives the correct answer of £219.35.
5 Guidelines for Excel
5.1 General guidelines

The following guidelines apply to Excel in general, whether you are using it in the exams, at work
or for other purposes:
 Where possible, create each worksheet like a book to be read from left to right and top to
bottom using each column / row for a single purpose.
 When analysing data, set up your spreadsheet with one column for each type of data,
starting with a column heading and followed by entries (‘records’) for each individual in
the rows below, rather than having the individuals going across.
 Use short names for the worksheet tabs. If you call one of your worksheets ‘Profit
projection for ABC Limited for the calendar year 2025’ this will make it difficult to move
between the different tabs and it will make any formulae referring to this worksheet
unmanageable. Something like Profits25 or ABC_25 or Prof25 (ABC) would be much
easier to work with. You can explain in your audit trail what it is.
 Label your columns/rows clearly, again keeping the column headings short.
 Although you can change the column widths as required, it is best to avoid widening the
columns more than is necessary, as this makes large spreadsheets difficult to navigate.
You can use sensible abbreviations for the column headings to achieve this.
 Use blank columns to separate sections and to stop your spreadsheet looking cluttered.
 Make good use of the row‐column structure of Excel. For example, suppose you have
several columns you wish to sum. If you put the formula for the first column total at the
bottom of the first column, it will copy across naturally to the other ‘parallel’ columns to
calculate their totals correctly as well. If, on the other hand, you tried to arrange the
column totals in another column at the side, this would not work.
 Choose appropriate numbers of decimal places to display. Don’t show too many (or too
few) in your answers, as this can make the amounts harder to read and mistakes are more
likely to arise.
 Avoid hard‐coding ‘pure numbers’ in your formulae. Use variables and formulae instead,
referring to parameters as appropriate.
 Try to set up your spreadsheet so that it is flexible (ie additional calculations can be
incorporated easily) and scalable (ie additional data can be incorporated easily).
 Try to avoid features and functions that will require manual intervention to update the
calculations if changes are made subsequently to the data values or parameters (although
sometimes it might be difficult to avoid using a goal seek).
 Use a different background colour to distinguish cells containing input parameters that
can be varied by the user from those containing formulae. Ideally, keep the model
parameters together in the same part of the spreadsheet.
 Use a different background colour to highlight any data values that have been amended
manually.
 Highlight any other ‘dangerous’ cells, eg ones dependent on a goal seek result or that
can’t be directly copied down columns or across rows.
 Break up complicated calculations to avoid mistakes and repetition.
 Incorporate checks in your calculations.
Question
You are doing some calculations based on an interest rate of 5%.

 Why is it not a good idea to ‘hard‐code’ the 5% in your spreadsheet formulae?
 What is the best way to incorporate the 5% in your calculations?
Solution
If someone needs to change it to 6% later, they will need to search for and change all occurrences
of the 5%.
The best approach is to treat the 5% as a parameter (whose value can be changed later) and type
its value in a cell that you can refer to in any formulae that use it. Your calculations will then be
updated automatically if the value in that cell is changed.
5.2 Guidelines for the exams

Here is a list of guidelines that are more specific to the CP2 exam:
 Don’t spend ages ‘beautifying’ your spreadsheet. You need to make sure that your work
is clearly labelled and easy to follow (the examiners have described this as ‘clear and
functional’), but don’t waste time in the exam creating elaborate colour schemes,
differing font sizes etc.
 Use the simplest calculation method that is reasonable, keeping your formulae as short as
possible and avoiding repetition. This can be done by using intermediate formulae.
As well as making the calculations more efficient in terms of calculation time, this also
makes your work easier to understand and easier to explain in the audit trail for Paper 1,
and it makes it easier to identify any mistakes in your formulae.
 Stick to simple functions, rather than trying to be ‘clever’. Remember that the exams are
not a test of your Excel skills and on the examiners’ marking schedule there will be
relatively few marks for the formulae and the calculations. In fact, you may be penalised
in the exam for using unnecessarily complex formulae.
 Avoid features that require manual intervention. This includes sorting and ‘paste by
value’. Similarly, you should use formulae to refer to data values in cells on another
worksheet, rather than relying on cutting‐and‐pasting.
 Include labels at the top of columns and alongside summary statistics and calculation
results. Make them concise but meaningful. If necessary, you can explain them in more
detail in the accompanying documentation.
 Excel allows you to hide selected rows or columns in your spreadsheet using the ‘group’
feature, which can be useful in office work where the intermediate calculations are not
important or where you just want to copy a subset of results. However, it is best to avoid
doing this in the CP2 exam to ensure that the examiners don’t miss any of your
calculations while they’re marking your work.
Question
The Black‐Scholes formula for calculating the price of a call option on a share in cell D3 can be
expressed as a single formula:
D3: = S1*EXP(–Q1*T1)*NORMSDIST((LN(S1/K1)+(R1–Q1+V1^2/2)*T1)/(V1*SQRT(T1)))–
S1*EXP(–R1*T1)*NORMSDIST((LN(S1/K1)+(R1–Q1–V1^2/2)*T1)/(V1*SQRT(T1)))
where cells S1, Q1, T1, K1, R1 and V1 contain the six input values required for this calculation.
How could you break up this calculation to make it easier to check?
Solution
This could be done by calculating the values of d1 and d2 separately in cells B1 and B2 first. For
example, we could have:
D1: = (LN(S1/K1)+(R1–Q1+V1^2/2)*T1)/(V1*SQRT(T1))
D2 : = D1–V1*SQRT(T1)
D3: = S1*EXP(–Q1*T1)*NORMSDIST(D1)–S1*EXP(–R1*T1)*NORMSDIST(D2)
The function NORMSDIST used here is for the standard normal distribution, ie N (0,1) .
5.3 Checking your calculations
Automatic checks
It is good practice to incorporate some cells in your spreadsheet that will carry out automatic
checks on your calculations (also called ‘self‐checks’). These are immediate pass/fail checks built
into your spreadsheet to ensure that input values and calculations are consistent and not
obviously wrong.
Question
You are carrying out a chi‐square test based on actual and expected numbers and you know that
the totals for these should be equal.
If the chi‐square totals are in cells D18 and E18, suggest a formula you could use to check your
work.
Solution
You could use the following formula in cell F18 (ie the cell immediately to the right of E18):
= IF( D18 = E18, “OK!”, “<< Recheck”)
However, this assumes that the answers will be exactly the same. So it would probably be better
to make a small allowance for rounding errors and use a formula such as:
= IF( ABS(D18‐E18) < 0.000001, “OK!”, “<< Recheck”)
Other examples of automated checks might include:

 checking that the total of the cells in one range matches the total in another
 checking that a particular range of cells does not contain any negative numbers
 checking that a particular range contains exactly 100 numerical entries
 checking that an estimated probability lies between 0 and 1
 checking that a set of percentages sums to 100%
 checking that a calculated result lies within 5% of an independent estimate.
Question
Illustrate the formulae you would use to incorporate each of these as automated checks.
Solution
To check that the total of the cells in the range A1:A1000 matches the total in the range
B1:B1000, you could use the SUM function:
=IF(SUM(A1:A1000)=SUM(B1:B1000), “OK!”, “<< Recheck”)
To check that the range A1:A1000 does not contain any negative numbers, you could use the MIN
function:
=IF(MIN(A1:A1000)>=0, “OK!”, “<< Recheck”)
To check that the range A1:A1000 contains exactly 100 numerical entries, you could use the
COUNT function:
=IF(COUNT(A1:A1000)=100, “OK!”, “<< Recheck”)
To check that an estimated probability in cell P1 lies between 0 and 1, you could use the AND
function:
=IF(AND(P1>=0,P1<=1), “OK!”, “<< Recheck”)
To check that a set of percentages contained in the range A1:A10 sums to 100%, you could use
the formula:
=IF(SUM(A1:A10)=100%, “OK!”, “<< Recheck”)
(In a formula the % sign just divides by 100. So typing 100% is equivalent to typing 1.)
To check that a calculated result in cell X1 lies within 5% of an independent estimate in cell C1,
you could use the AND function:
=IF(AND(X1>=0.95*C1,X1<=1.05*C1), “OK!”, “<< Recheck”)
or the ABS function:
=IF(ABS(X1‐C1) <=0.05*C1), “OK!”, “<< Recheck”)
Reasonableness checks
Reasonableness checks are higher level checks on whether answers are ‘believable’ and make
sense. As well as automated checks, it is important to apply reasonableness checks to the figures
you’ve calculated.
Just because a spreadsheet shows a particular answer doesn’t mean that it’s right!
Chapter 7 Summary
Key points regarding Excel
Make sure you know how to carry out basic operations using the version of Excel you will be
using in the exam.
Practise using the Excel functions that you are likely to need in the exam so that you can use
these without effort on the day.
Familiarise yourself with the various Excel chart types available and their strengths and
limitations.
Practise setting up and amending Excel charts so that you can carry out these tasks without
effort on the day.
Practise applying the Excel guidelines described in Section 5. The key things to aim for are:
 good use of the rows and columns
 clear labelling
 appropriate numbers of decimal places
 no hard coding or manual intervention
 colours to highlight input parameters, data corrections and dangerous cells
 simple functions
 simple presentation.

7.1 The screenshot below shows how an actuary wants to present an Excel table of the price of a
share on the last trading day of the last 12 months, together with some summary statistics.
A student who is new to Excel has set up a version that currently looks like this:
(i) Write down the correct formulae that you would use for cells E2, E4 and E5.
(ii) The student has obtained a different answer in cell E5 from the actuary. Identify the
mistake the student has probably made and describe how to resolve it.
(iii) Identify the problem with the formulae in cells E7 and E8, and describe how to resolve it.
(iv) Identify the other changes to the appearance of this worksheet that the student will need
to make to match the actuary’s version, and describe how to do these.
Hint: There are 5 of them.
7.2 Set up a simple spreadsheet to simulate the total score when two dice are tossed.
7.3 State four methods you can use to check an answer that you have calculated using a spreadsheet.
7.4 Suggest at least four ways to improve the effectiveness of each of the following graphs, which
relate to an insurer’s portfolio of motor insurance policyholders.
New policeholders
200.00
150.00
Number
100.00 Series1
Series2
50.00
0.00
1 2 3 4 5 6 7 8 9 10 11 12
100
This chart shows how the numbers of males and
80 females amongst our motor insurance
Females
policyholders compared for this year and last

60
year
40
20
0
‐2 3 8 13 18
Males
Chapter 7 Solutions
7.1 (i) Formulae
The formulae would be:
Cell E2: =COUNT(B$2:B$13)
Cell E4: =MAX(B$2:B$13)
Cell E5: =MIN(B$2:B$13)
These would also work without the $ signs or with extra $ signs in front of the B’s.
(ii) Mistake
The student probably typed the formula in cell E2 as =COUNT(B2:B13), without $ signs, then
copied it down to cells E4 and E5, and then edited the function name.
Cell E5 would then contain the formula =COUNT(B5:B16), which refers to the wrong range (and
excludes the share price of £42.87 in cell B3).
If they did this, cell E4 would contain the formula =COUNT(B4:B15). This also refers to the wrong
range, but would still give the correct answer because the highest value (£47.04 in cell B13) does
fall within this range.
(iii) Problem
The student has probably typed the function names as MEAN and SD, or something similar. Excel
does not recognise these functions and so displays this error message.
The correct functions for the mean and standard deviation are AVERAGE and STDEV (or STDEVP).
(iv) Other changes

The other cosmetic changes required to match the actuary’s version are:
 The heading for column A has been right‐aligned so that it lines up with the numbers
shown in the column. This is done by selecting the cell, then clicking on the right‐align
icon in the Alignment section on the Home menu.
 Column B has been made wider to accommodate the heading and column C has been
made narrower. To adjust the width of column B, click the mouse on the vertical line
between the B and C at the top of the columns and drag the column boundary to the
required width.
 Similarly, column C has been made narrower.
 To change cells E4 and E5 to currency format you can use the format painter to copy the
format from one of the cells in column B or you can highlight the cells and select
‘Currency’ from the drop‐down menu in the Number section of the Home menu.
 To apply shading to the answers in cells E2, E4, E5, E7 and E8, select each cell and select a
suitable fill colour using the fill colour (‘paint can’) icon on the Font section of the Home
menu.
7.2 Here is one method you could use:
Cells B3 and B4 each contain the formula =1+INT(6*RAND())
Cell B5 contains the formula =B3+B4
7.3 You could simply repeat the calculation on your calculator. This can be useful for satisfying
yourself that an Excel function works the way you think it does, but it doesn’t leave a ‘written
record’ for other users to refer to.
You can include a cell that generates an automatic warning message if a calculated value is
unreasonable (eg a negative probability) or inconsistent with another value (eg totals don’t
match).
You can repeat the calculation using a different Excel function or a different method.
You can use independent information for corroboration, eg background information given in the
question.
7.4 First graph
 The incorrect spelling of ‘policyholders’ in the title should be corrected.
 The series names need to be changed from the default settings of Series1 and Series2.
 Different styles (eg solid and dotted lines) should be used to distinguish the two graphs.
 The x axis should be labelled. (The values shown probably need to be changed too.)
 The number of decimals in the y scale should be set to zero (or, if the number of decimals
shown in the graph is linked to the data values, the number of decimals displayed in the
data should be changed).
 The maximum value for the y scale should be set to a smaller value, eg 100.
Second graph
 A more appropriate chart type should be used, as it is not at all clear what this chart is
supposed to be showing.
 A legend should be included to explain what the triangles and squares represent.
 Smaller symbols that are easier to distinguish should be used.
 The title should me moved so that it doesn’t obscure the main part of the chart.
 The title should be changed to something shorter. (The introductory words ‘This chart
shows’ can also be removed. If more explanation is required, this can be provided in a
separate note below the graph.)
 The labels on the axis should be changed to a smaller font than the title.
 Units should be included in the axis titles if these are not the actual numbers.
(The numbers look wrong anyway if there are supposed to be roughly equal numbers of
males and females.)
 The minimum value on the x axis should be set to 0 to remove the negative values.
(The values displayed on the axis will then show a more sensible progression.)
 The minor gridlines should be turned off, as these are just obscuring the y values.




using the course.

CP2‐08: Using Word Page 1
Using Word
Page 2 CP2‐08: Using Word
0 Introduction to Word
 basic Word operations and tasks
 creating your project summary
 formatting text
 typing mathematical formulae and Greek letters.
0.1 Introduction
You will need to write your project summary for Paper 2 using Word, Microsoft’s word processing
software. You may also choose to write your audit trail for Paper 1 in Word, although you have
the option to use Excel for this instead.
So you will need to have a (very) basic knowledge of word processing. In particular, you will be
expected to know how to:
 create, open and close a Word document
 save a document (under the same name or a new one)
 navigate within a document
 select (highlight) a character, word or selection of text
 move, copy or delete text
 add page breaks
 change the appearance or format of text
 align text
 use bullet points
 create a table
 import and edit a graph from Excel
 use the Help facility.
The table on the next page (which is not intended to be comprehensive) gives a summary of these
basic Word features in Word 2007/10.
1 Basic Word operations and tasks
1.1 Basic Word operations

In this section we describe how to carry out basic operations when using Word documents.
We will focus on the Word features that are most likely to be required in the Subject CP2 exams.
In the guide below:

 Menu1 > Menu2 > … represents a sequence of Word menu selections
 [Key] represents a keyboard selection.
There may be slight variations depending on which operating system and which version of Word
you are using. For example, the Office button in Word 2007 corresponds to the File menu in later
versions. Also, some of these tasks can be achieved in more than one way.
If you aren’t confident with these operations, you can either explore the Help files in Word itself
or you can buy a book with a title such as ‘Word for Beginners’ or ‘Word for Dummies’.
See Chapter 12 for a list of recommended books.
Note on software versions

Word continues to evolve over time, with new versions being released periodically. The examples
shown in these Course Notes are based on the Word 2007/2010 format but more recent versions
are now available that include new features.
It is important that you are familiar with the version you will be using in the exam, so that you
don’t waste time in the exam working out how to use the software.
Create, open or close a Word document
Task How to do it
Open an existing document In Windows Explorer: double‐click on the name of the Word file
In Word: Office button > Open and double‐click on the file name
Create a new document In Excel: Office button > New or [Ctrl]‐N
Close a document Click on the close icon (×)
(If you haven’t saved the file yet or you’ve made some changes since
you last saved it, you will be prompted as to whether you wish to save
it)
Save a document (under the same name or a new one)
Save (under the same name) Office button > Save or [Ctrl]‐S
Save (under a different name) Office button > Save as ..
Get into the habit of saving your document periodically to ensure that you don’t lose your work if
your computer crashes.
Navigate within a document
Navigating within a document To go to the start/end of the document: [Ctrl]‐[Home] / [Ctrl]‐[End]

To go to the start or end of a line: Home / End
To move left or right one character: Use the arrow keys
To move left or right one word: Use [Ctrl] + the arrow keys
To move up or down: Use the arrow keys or [Page Up] / [Page Down]
Select (highlight) text
Select a part of the text Highlight with the mouse or hold down Shift and use the arrow keys
Edit the text
Edit a part of the text Highlight the part of the text you want to change and just type over it
Move, copy or delete text
Move a part of the text Select the text, [Ctrl]‐X, click to the new position, [Ctrl]‐V
Copy a part of the text Select the text, [Ctrl]‐C, click to the new position, [Ctrl]‐V
Delete a part of the text Select the text, [Delete]
Changing the layout
Add a page break Place the cursor where you want a new page, then [Ctrl]‐[Enter]
Change the tab positions See below
Use bullet points See below
Add a page footer Insert > Footer, type your text, then click Close Header and Footer
Edit a page footer Double click on the footer text, edit it, then click Close Header and
Footer
Create a table
Create a table Insert > Table
Change the appearance of text
Change the appearance of a Select the text, then select the required options on the Home menu
part of the text You can use the B, I and U icons or [Ctrl]‐B, [Ctrl]‐I and [Ctrl]‐U for bold,
italic or underlined text
Click on the arrow in the font selector in the toolbar or the point size
selector to change the font or the size of the writing
Graphs
Import a graph to Word First select the graph in Excel, press [Ctrl]‐C, then change to Word, click
at the correct position and press [Ctrl]‐V
Editing a graph Right‐click on the graph, then select the required options
Use the Help facility
Get help on a feature Office button > Help > Microsoft Office Help or F1
1.2 Creating your project summary

The simplest way to set up your project summary is to type it directly in Word.
Any graphs that you’ve prepared in Excel can just be copied from your spreadsheet and pasted in.
It is a good idea to have the spellchecker turned on to pick up any mistakes. Select Review > Set
language (Excel 2007) or Review > Language > Set proofing language (Excel 2010) and check that
‘Do not check spelling or grammar’ is not ticked.
2 Formatting text
Tabs
You can often improve the presentation of your summary by using tabs to line up columns of text
or numbers. The following screenshot illustrates the four types of tab alignment:
alignment tools
bullet points ruler
right tab centred tab decimal‐aligned tab left tab
The easiest way to set the tab positions for a particular line of text is to place tab markers on the
ruler bar. (If the ruler isn’t shown, tick the Ruler box on the View menu.) Select the tab type you
want using the icon to the far left of the ruler by clicking to cycle through the different types.
Then just click at the position on the ruler where you want it, dragging it to adjust its position if
necessary. (If you want to remove it, drag it below the line.) You can use the format painter (the
paintbrush icon) to copy the tab settings to other lines.
Then, when you’re typing, just press the [Tab] key to line up the next section of text at the next
tab position.
Tables
Alternatively, you can use a table and select the appropriate alignment for each column.
Aligning a whole line of text

If you want to align a whole line of text, eg to ‘centre’ a title, you can use the left / centre / right
alignment tools. (See the screenshot above.)
Headings
To separate the sections of your summary (and your audit trail, if you’re using Word), it is
sufficient just to use headings with bold typeface and/or underlining. To add these effects, just
highlight the heading, then click the B or the U symbols on the menu bar, or alternatively, use the
key combinations [Ctrl]‐B and [Ctrl]‐U. If you need to remove one of these features, just repeat
the same process.
Bullet points
Bullet points or numbered points are a good way to present information that has a list structure.
Use the bullet points icon on the toolbar (which is shown with three squares) to select bullet
points or the icon with 1/2/3 for numbered points.
Exam tip
While a bullet point style is appropriate, you should make sure you use whole sentences
(subject/verb/object) to make your points, rather than very brief bullets as are often used in
PowerPoint presentations. CP2 is an exam in communication, so you need to make your points in
full, not as a ‘slide show’.
Page breaks
To start a section of your summary on a new page, insert the cursor immediately before the
position where you want the new page to start, then press [Ctrl]‐[Enter] or select Insert > Page
Break from the menu.
3 Typing mathematical formulae (‘equations’) and Greek letters

It’s unlikely that you will need to reproduce any complicated mathematical formulae in your audit
trail or summary report. (It’s usually better to explain the methods you’ve used in words.)
However, in some situations, you might need to type some mathematical symbols or simple
formulae.
If you are familiar with the Word Equation Editor, you can use this facility to type any Greek
letters or mathematical formulae that you may need to refer to. If not, you can use the methods
described below.
Greek letters
Greek letters are now included in the commonly used fonts. So, if you need to use Greek letters
in your spreadsheet or in your audit trail, you can find them using Insert > Symbol > More
Symbols ... and then selecting the Basic Greek subset. Another option is just to write the names
of the letters out in full, eg mu, sigma. This assumes of course that you know the names of the
letters!
Mathematical formulae
Word allows you to type characters as subscripts or superscripts, eg the 2’s in x2 and x2.
To do this, select the characters you want to change to a superscript or a subscript, and then use
x 2 or x 2 on the Home menu.
This should enable you – with a bit of imagination – to type any mathematical formulae or
equations you might need, eg:
λe–λx, X ~ N(μ,σ 2), x = {–b ± (b2 – 4ac)½ } / 2a
For minus signs, a dash is clearer than a hyphen. Use [Ctrl]‐[‐], using the minus sign on the
numeric keypad (on the far right of the keyboard), to type a dash.
Some other symbols, eg ± and ½, can also be obtained using Insert > Symbol > More Symbols ….
4 Guidelines for Word
4.1 Guidelines for the exams

 You should type your summary in Word.
 Use bold or underlined headings to separate the sections.
 Use tabs (or tables) to improve the presentation of columns of text or numbers.
 Use bullet points for lists.
 Use Copy as Picture and Paste Special to copy Excel charts into your Word file.
 Don’t spend ages ‘beautifying’ your Word documents. You need to make sure that your
presentation is clear and easy to follow, but don’t waste time in the exam creating
elaborate colour schemes, differing font sizes etc.
Chapter 8 Summary
Key points regarding Word
Make sure you know how to carry out basic operations using the version of Word you will be
using in the exam.
Follow the Excel guidelines described in Section 4. The key things to aim for are a clear and
simple presentation.
Use Copy as Picture and Paste Special to copy Excel charts into your Word file.
Don’t spend ages ‘beautifying’ your Word documents.

8.1 Which of these statements most accurately describes the purpose of the CP2 exam?
A To demonstrate your knowledge of the features and functions available in Excel and
Word.
B To demonstrate that you can set up an Excel spreadsheet and prepare a Word document
in a limited amount of time.
C To demonstrate that you can model a project, analyse the results and document your
work clearly.
D To demonstrate that you can write a report containing clear descriptions and graphs.

Chapter 8 Solutions
8.1 C




using the course.

CP2‐09: Exam technique Page 1
Exam technique
Page 2 CP2‐09: Exam technique
0 Introduction
0.1 General points of exam technique

Most of the usual exam technique advice also applies in CP2. In particular:
 read the project specification and instructions carefully
 make sure you understand the information you have been given and what you are
required to do
 plan your time to make sure that you have enough time to complete everything.
For Paper 1 we recommend that you start the exam by drawing up a plan for the project, in
the form of a sketch or a to‐do list of the tasks required. (There is an example of a project plan
in the Worked Example in Chapter 10.)
For Paper 2 make sure at the start that you understand what the project involves and what has
been done already.
We’ve mentioned a number of specific exam tips throughout the course. The most important
are:
 keep it simple
 present your work clearly
 focus on the audit trail and the summary.
0.2 Why do people fail?

The most likely reasons for failing this exam are:
 providing a weak or unclear audit trail in Paper 1 – in particular, not including enough
checks (both automated and reasonableness checks)
 providing a weak summary for the project in Paper 2 – in particular, not including
enough comments or next steps
 devoting too much time to the spreadsheet, rather than the audit trail / summary
 getting too ‘techie’ (ie focusing too much on technical details)
 making things unnecessarily complicated
 not reading the instructions carefully and/or not doing what was asked.
1 ‘Top 10’ recommendations from ActEd markers

The markers who have been marking the ActEd Assignments and Mock Exams have indicated
the most common areas where students have lost marks in the projects they have submitted.
Here are the key recommendations on their list:
 Try to plan your time at the outset so that you leave enough time for the audit trail
and the summary. Don’t spend too long working on the spreadsheet.
 Read the instructions carefully and do everything that was asked. Don’t forget to
include the items you’ve prepared (graphs etc) in your summary.
 Include some automated checks in your spreadsheet (including the main calculations,
as well as the data)
 Apply some reasonableness checks to check that your answers make sense, just as
you would if you were doing the calculations on paper.
 When listing the assumptions remember the distinction between assumptions and
parameter values. ‘The model assumes that the interest rate remains constant’ is an
example of an assumption, whereas ‘The model assumes that the interest rate is 3%’ is
just a statement of one of the parameter values.
 Where possible, avoid methods that require manual intervention, such as
cutting‐and‐pasting values or using goalseek. These are ‘accidents waiting to happen’
for other users. Instead, make use of the wide range of functions and features
available in Excel to automate your calculations as much as possible.
 Understand the difference between the audit trail and the summary report when
writing these. The purpose of the audit trail is to explain the details of how your
spreadsheet works. The purpose of the summary report is to provide a high‐level
overview of the whole project.
 After you present a table or chart in your summary report, make plenty of comments
and observations about it. You can highlight the key features or anything unexpected,
and compare the different scenarios. You can also reconcile the results with your
other results or any background information given.
 On both papers, try to focus on the ‘big picture’. Don’t get so engrossed in the
technicalities of the calculations that you lose sight of what the project is about.
 Try to come up with a wide range of ideas for next steps. There is no ‘right answer’
for these, so just use your common sense and a bit of imagination to think of things
you think might be constructive. Remember also to mention why you think your
suggestions for next steps would be helpful.
 Read your audit trail and summary through at the end to check for typos.
See also the ‘Why do candidates fail CP2?’ section in the IFoA Guide to CP2 Modelling Practice.
2 Marking the exam

The typical breakdown of the marks available for the two papers is shown below (although the
numbers of marks may vary from paper to paper depending on what is required for each
particular project).
Paper 1 Spreadsheet and checks

Accurate completion of modelling steps and data checks [30]
Demonstration of good modelling technique and practice [7] 45%
Checks (both automatic and reasonableness) [8]
Audit trail
Audit approach
Fellow student can review and check methods used in the model [8]
Senior actuary can scrutinise and understand what has been done [8]
Written in clear English [4]
Written in a logical order [3]
Audit content 55%
All steps clearly explained [7]
Clear signposting included throughout [5]
Statement of assumptions made [5]
All model steps accurately covered [15]
Paper 2 Spreadsheet
Implementation of spreadsheet tasks [15] 15%
Summary
Methodology (including purpose, data, method and assumptions) [20]
Results, including charts [10]
Commentary on results and conclusions [20] 85%
Next steps [25]
Drafting [10]
As with the other actuarial exams, the pass mark for CA2 / CP2 is usually around 60%.
In order to pass the exam, your average mark for the two papers has to be at least 60%.
This means that it is still possible to pass if your score on one of the papers is below 60%,
provided you can make up for the shortfall on the other paper.
Chapter 9 Summary
Key points regarding exam technique
 Read each paper carefully to make sure you understand what is required.
 Start Paper 1 by planning how you are going to set up your model.
 Make sure you leave enough time to complete the audit trail in Paper 1 and the
summary report in Paper 2.
 In Paper 1, remember to include enough automated checks in your spreadsheet and
reasonable checks in your audit trail.
 In Paper 2, remember to include enough comments on the results and next steps.
 Avoid overcomplicating things.
 Your average mark for the two papers has to reach the pass mark, which is usually
around 60%.
This page has been included so that you can

CP2‐10: Worked example – Paper 1 Page 1
Worked example – Paper 1

Page 2 CP2‐10: Worked example – Paper 1
0 Introduction
This chapter contains an example project for CP2 Paper 1. It consists of the project specification
and instructions, followed by a detailed solution.
The solutions are presented as a running commentary of the thought process that a well‐prepared
student might go through when working through this project. Extracts from the student’s work
are interspersed.
The complete audit trail is shown in Section 3.
The student’s plan for the project is on page 9.

1 Example project – Paper 1
Exam requirements
1. Read the background document, which describes the scenarios that need to be modelled
and documented for this project.
2. Construct a spreadsheet model that produces the following calculations and charts. You
should ensure that your spreadsheet contains appropriate self‐checks and that you have
performed and documented robust reasonableness checks at each stage of your
calculations.
(i) Carry out appropriate checks on the annuity factors provided. [4]
(ii) Carry out the pension projections for the individuals shown in the table under
each of the three scenarios. [8]
(iii) Use your spreadsheet to extend the table given to show the following
information:
 age now
 fund now
 salary
 the pension in the first year, expressed as a percentage of final salary,
under each arrangement (annuity / drawdown) for each scenario. [8]
(iv) Produce a graph showing a comparison of the pension percentages for the
individuals in the table under each arrangement based on Scenario 2. [5]
Note: All scenarios outlined above should be modelled separately within your
spreadsheet. The user should not need to change the parameters to see the results.
Marks available for spreadsheet model and checks:
Accurate completion of above modelling steps [25]

Demonstration of good modelling technique and practice [7]
Checks (both automatic and reasonableness) [8]
[Sub‐total 40]

3. Produce an audit trail for your spreadsheet model that includes the following aspects:
 purpose of the model
 data and assumptions used
 methodology, ie a description of how each calculation stage in the model has
been produced
 explanation of the checks performed.
You should ensure that your audit trail is suitable for both a senior actuary, who has been
asked to approve your work, and a fellow student, who has been asked to peer review
and correct your model, or to continue work on it, or to use it again for a similar purpose
in the future.
Marks available for audit trail:
Audit approach
Fellow student can review and check methods used in the model [8]
Senior actuary can scrutinise and understand what has been done [8]
Written in clear English [5]
Written in logical order [4]
Audit content
All steps clearly explained [10]

Clear signposting included throughout [5]
Statement of assumptions made [5]
All model steps accurately covered [15]
[Sub‐total 60]
[Total 100]

Background
You have been approached by LongerLives, a company that provides advice on retirement options
to employees who are contributing to personal pension plans.
In the past they have advised most of their clients when they reach retirement age to take out an
index‐linked annuity. Under this arrangement, the employee’s entire fund built up by retirement
is used to buy a pension for the remainder of their life, which will increase each year in line with
inflation.
They are now offering a ‘drawdown’ option where the fund remains invested after retirement and
the pensioner withdraws an amount directly from this fund at the start of each year to provide an
income.
An analysis has produced the following table showing the typical profile of their clients.
‘Fund now’ indicates the fund the employee has already built up by the age indicated.
Age Fund now (£K) Salary (£K)

20 0 20
30 10 25
40 25 30
50 50 35
60 100 40
You have been asked to assist with a series of calculations to compare the projected pensions
(expressed as a percentage of the client’s salary at retirement) under each arrangement (annuity
and drawdown) for the individuals in the table.
Under both arrangements, you should assume that retirement takes place at age 65 and the
pension payments increase each year in line with inflation.

Technical notes
You have been provided with the following table of annuity factors. These are used to calculate
the cost of buying a pension of £1 per annum under the annuity arrangement. The interest rate
to use when using this table is the rate of inflation plus 1%.
ANNUITY FACTORS ( k +1% )

AGE 2% 3% 4% 5%
55 22.4 20.5 18.7 16.9
60 20.6 19.0 17.3 15.6
65 18.9 17.4 17.3 14.3
70 17.2 15.8 14.4 13.0
75 15.5 14.2 13.0 11.7
Drawdown calculations are carried out on the assumption that everybody lives to exactly age 90.
It is assumed that all employees will contribute 15% of their salary between now and retirement.
The calculations are to be carried out on three different bases, as show in the table below. In
each case, the values of these variables are assumed to remain constant in the future.
SCENARIO
VARIABLE Scenario 1 Scenario 2 Scenario 3
Investment return ( i ) 4% 6% 8%
Salary increases ( j ) 3% 4% 5%
Inflation ( k ) 1% 2% 3%

Additional guidance sheet A – Illustration / formulae
The illustration below shows a breakdown of the calculations required to carry out the pension
projections for Scenario 1 (working in £000s).
The formulae used here are as follows:
x = Current age
R = Retirement age
M = Maximum age (for drawdown)
i = Investment returns
j = Salary increases
k = Inflation
Factor1  (1  i)Rx
Factor 2  (1  i )R x  (1  j)(1  i )R x 1    (1  j)R x 1 (1  i )
 (1  i )R x  (1  j)R x 
 (1  i )  
 ij 
 1  (1  i ) (1  k )R M 
Factor 3  (1  i )  
 i k 
 
Illustration
Client details: Age now = 40, Fund now = 25, Salary now = 30
Factor1  2.67 , Factor 2  59.49 , Factor 3  17.99
Salary at retirement (age 65)  30  1.0325  63

Projected fund at retirement  25  2.67  15%  30  59.49  334
Pension (annuity arrangement)  334 18.9  18 , ie 28%

Pension (drawdown arrangement)  334 17.99  19 , ie 30%
Additional guidance sheet B – Excel hints
You should treat the table of annuity factors as the data for this project.

2 Student’s commentary
2.1 Getting started

Right, then. I’ve downloaded and printed out the instructions for the project.
I’ll start by reading through the instructions carefully to make sure I understand what I have to do.
It’s about personal pensions. I don’t work in pensions, but I don’t expect it will require any
specialist knowledge of pensions and I can see that they’ve given a page of formulae to help with
the calculations.
They’re asking me to compare two types of pension arrangement – annuities and drawdown.
I remember reading something about that in Subject CP1. I think they changed the rules on
annuities a few years ago but I can’t remember the details.
They’ve also given three scenarios in the table. So that will be similar to the other CP2 projects I’ve
looked at.
2.2 Planning the project

OK, that gives me a good idea of what’s going to be involved. I’ll spend the next quarter of an
hour doing a handwritten plan to map out how I’m going to set up the worksheets in my
spreadsheet. I’ll also include some checks I can apply and make a note of any issues I need to
mention in my audit trail.
My tutor on the Preparation Day said that some people like to start their spreadsheet with an
Overview tab with the basic information for the project and a list of the worksheets, but that this
was an ‘optional extra’. So I’ll leave this till the end and not worry if I don’t have time to do it.
[See Project Plan on the next page]
Next comes the data. Hmm. The instructions give quite a few tables of information, but I wouldn’t
really call those data. We don’t have a list of employees with their dates of birth, or anything like
that. Maybe the data is the small table with the client profile on the first page. I’m not sure.
Ah! I see it says in the Excel hints at the end that we should treat the table of annuity factors as
the data. Part (i) also asks us to check the annuity factors. So I suppose that makes sense. They
probably came from an insurance company or a table off the internet. So I’ll make the annuity
factors my data and apply some checks to the numbers.

2.3 Project plan

Then there’s the parameters. I can treat the information in the other tables as parameters.
There’s the client profile table and the percentages in the table of scenarios. There’s also the three
numbers – the retirement age (65), the drawdown that goes up to age 90 and the 15%
contribution rate. These should be parameters because they will feed into the calculations and
they might need to be changed later.
There are three scenarios and the calculations look quite complicated. So I’ll set up 3 separate
worksheets for these. I’ll use the illustration they’ve given to help me understand the calculations
when I get to that stage. And I can use the illustration to check my answers. For the moment I’ll
just make a note that this is where I’ll calculate the 3 calculation factors they’ve used in the
illustration.
After that I’ll add a Results worksheet that brings together the key numbers they’ve asked for in
the table in part (iii). I’ll write down all the column headings for that, so that I know what exactly
I’m aiming for.
And then my final table will be for the graph. As usual, I’ll pick out the data I need for the graph
and include it on the same sheet as the graph itself.
Well, 15 minutes has gone already. It says that there are only 25+5+10=40 marks for the
spreadsheet, but 60 marks for the audit trail. So I need to make sure I allocate enough time to the
audit trail and don’t spend too long doing the spreadsheet.
2.4 Setting up the audit trail

In fact I’ll set up my audit trail now. I prefer to do my audit trails in Word, rather than trying to
squeeze things into columns in Excel. So let’s create a new Word document ... double‐click on the
Microsoft Word icon on the desktop ... and let’s give the new file a name ... File > Save ... I’ll give it
the name I’ve been told to use with my ARN number in … and I’ll make a note of which folder I’ve
put it in, so that I can find it again later.
I’ll start by typing an introduction describing the background to the project. I’m going to update
the rest of the audit trail as I go along, after I’ve done each section of my spreadsheet.
[If you want to refer to the student’s finished Audit Trail as you’re reading through, you can find it
in Section 3 on page 18.]
2.5 Setting up the spreadsheet (student’s commentary)
We haven’t been given any data on a spreadsheet to work with, so I’ll just set up a new
spreadsheet by double‐clicking the Excel icon on the desktop.
Note
In the printed book the colours used by the student show as shades of grey, but the student has
used actual colours in his spreadsheet. If you want to see the actual spreadsheet, you can
download it from the ActEd website. (Go to www.acted.co.uk and follow the links.)

Data
I’ll start with the data. So, if I double‐click on the tab name ‘Sheet1’, I can then change the name
to ‘RawData’.
Since I’ve only be given a hard copy of the data (the annuity factors), I’ll have to type these in
myself. I’ll type in a table of annuity factors exactly as they appear in the instructions. I’ll use very
simple formatting, just changing the ‘bits round the edge’ to bold to distinguish them from the
values in the middle of the table. Excel doesn’t show the 0 when you type 19.0, which makes the
numbers look inconsistent. So I’ll also set all the numbers to show 1 decimal.
Hmm … I must have made a mistake. I’ve typed the number 17.3 twice. Actually, it looks like
there’s a mistake in the table we’ve been given. One of those 17.3’s is wrong. Actually, that’s
good because I can include some automated checks on the numbers, which should earn me some
marks.
How can I check these numbers? These numbers represent the cost of a pension of £1 a year, so
x – since it says that the drawdown pensions
they must basically be values of ax – or probably a
are paid at the start of the year. I know from the other actuarial subjects that these should go
down as the person gets older and they should also go down as the interest rate increases. To
check that they go down I’ll type the formula =IF(AND(B5>B6,B6>B7,B7>B8,B8>B9),"OK","Error!")
in cell B10. I can now copy this formula across to the other columns. Good! It’s picked up the
error in the 4% column.
I can do something similar for the rows. In cell F5 I’ll type the formula
=IF(AND(B5>C5,C5>D5,D5>E5),"OK","Error!") and then copy it down the column. These are all ok
this time – no new errors.
Screenshot 1 – RawData worksheet
It doesn’t really make sense here to do the usual kinds of summary statistics. Calculating the
average etc doesn’t make much sense. So I’ll leave it at that.

I’ll now set up a new tab for the corrected data I’ll use for the later calculations. I’ll call it
‘CleanData’. I can do this quickly by right‐clicking on the RawData tab name and then selecting
‘Move or copy sheet’ and ticking the ‘Create a copy’ box. I then need to link the entries by formula
to the original data. So I click in cell B5 in the CleanData tab and then start typing = and then click
over to the RawData tab, pick out cell B5 and press Enter. Excel enters the formula =RawData!B5.
I can then copy this formula to the whole table. Now, if anyone makes any corrections to the raw
data later, these will follow through automatically.
Screenshot 2 – CleanData worksheet
I now need to amend the incorrect value. It’s the 17.3 in the middle of the 4% column. It looks as
though someone has copied this from the number above. But what value should I use? They
haven’t told us what mortality table these numbers are based on, so I can’t just look it up. And
anyway, these probably come from an insurance company and they will have adjusted the rates to
allow for expenses and profits. I wonder if the illustration uses this number. It says the illustration
is for Scenario 1 and that you look up ‘inflation rate + 1%’ in this table. So that would be 2% for
Scenario 1. Yes, they’ve use the 18.9 figure for 2% and age 65 in the illustration. So that doesn’t
help me.
The numbers seem to progress fairly steadily in the table. So I can probably just average the ones
either side for the moment and make a note in the audit trail that the correct number needs to be
established. If I average above and below I get 15.85, the same as if I average either side. So I’ll
use that number. In fact, I can say that I’ve averaged the four surrounding numbers, which sounds
a bit more scientific. I’ll use dark shading for that cell to show that it’s a correction and I’ll change
it to 2 decimal places so that I can see the exact value I’ve used. And I’ll make a note in the audit
trail to say that I’ve used manual intervention here.
Another very simple reasonableness check I could mention is to say that with a low rate of interest
such as 2%, the discounting will have very little effect, so the annuity factors should be just a little
smaller than the life expectancy at that age. So 75‐year‐olds will live to 90‐something, which
seems right.
Which reminds me … I need to type up the description of the data preparation in the audit trail
before I forget.
Right. I think I’ve written enough about the data preparation for anyone looking at my
spreadsheet to see what I’ve done. I’d better press on ...

Parameters
I’ll set up a new tab for the parameters. I’ll arrange the rates for the three scenarios in a table, as
in the instructions. I can put the other parameters separately below. I’ll add the letters used for
these in the calculations (R and M) for reference.
Screenshot 3 – Parameters worksheet
Scenario calculations
I’ll spend a minute studying the calculations in the illustration. The details are the same as for the
40‐year old in the table based on Scenario 1. So I can use this as an independent check.
OK, I think I can see now where all the numbers come from.
The formulae in the calculations look quite complicated, but basically:

 R, M and the contribution rate are constant throughout
 i, j and k, as well as the annuity factor and Factor3, are constant within each scenario
 x is different for each row.
Before I forget, I’ll make a note that some of these could be included as assumptions.
The number of years to retirement (R – x) appears in Factor1 and Factor2 and in the calculation of
the salary at retirement. So I’ll break down the calculations by adding a separate column
(called n) for this.
It’ll also make it easier to check if I show the parameters specific to each scenario at the top.
This will also stop the Excel formulae containing lots of references to the Parameters tab
(like Parameters!$B$11, which I’ll have for R) and becoming really long and unreadable. I suppose
I could set these up as named ranges but I don’t think I need to here.

Screenshot 4 – Scenario1 worksheet
The final formulae used in row 13 are as follows:
Cell Heading Formula

A13 Age =Parameters!F5 (originally typed manually)
B13 Fund now =Parameters!G5 (originally typed manually)
C13 Salary =Parameters!H5 (originally typed manually)
D13 N =Parameters!$B$11–$A13
E13 Factor 1 =(1+$C$4)^$D13
F13 Factor 2 =(1+$C$4)*((1+$C$4)^$D13–(1+$C$5)^$D13)/($C$4–$C$5)
G13 Final sal =$C13*(1+$C$5)^$D13
H13 Final fund =$B13*$E13+Parameters!$B$13*$C13*$F13
I13 Annuity =H13/$C$9
J13 % =I13/$G13
K13 Drawdown =H13/$C$10
L13 % =K13/$G13
I’ll set up the Scenario1 tab first. I can then just copy it and make the necessary changes to create
Scenario2 and Scenario3.
The three percentages at the top are easy. I just need to link these to the correct parameter values
for Scenario 1. So in cell C4 I need =Parameters!B5. It doesn’t really matter whether I put $ signs
with this. I’m not going to copy this cell anywhere. And when I create the sheets for the other
scenarios it will be a different formula anyway. So I’ll ignore the dollars to make it easier to read.

I’ll need to get the annuity factor from the table in the Data tab. I expect I can use some kind of
look‐up function for that. For the time being I’ll just type it in manually and make a note to come
back and automate it in a minute. I want to focus on getting answers for everything first. Here
the inflation rate is 1%, so I need to use the figure for age 65 and 2%, which is 18.9.
Next, I’ll type in the first three columns of the table with Age, Fund now and Salary, as in the
question. Hmm. I suppose that would be a form of hard‐coding. We’re supposed to avoid typing
in numbers directly into cells unless they’re parameters. Actually, that’s a tricky one. The ages etc
aren’t really parameters or data. We only really need them to complete the table. But they are
used for the calculations in each of the scenarios. So I think it’s best to treat them as parameters.
If I include these in the parameters worksheet, I can link the scenario calculations and the table to
them.
Screenshot 5 – Parameters worksheet (part)
[5 minutes later]
Ok, I’ve typed in all the formulae. Let’s check whether my numbers agree with the illustration. I
should get 28% and 30% for the two percentages for the middle row. Uh‐oh! The 28% is right, but
I’ve got a negative answer for the second one! That’s the one that uses Factor3. Actually, Factor3
is negative too – which I should have spotted earlier. So the mistake must be in the formula. Let’s
check it carefully against the formula they’ve given. Ah, yes. I’ve got one of the left brackets in
the wrong place. I can easily edit that. Yes, Factor3 is now 17.47 and the final answer is 30%.
Great!
The formula for Factor3 in cell C10 now reads =(1+$C$6)*(1–((1+$C$4)/(1+$C$6))^

(Parameters!$B$11–Parameters!$B$12))/($C$4–$C$6)
Ok, let’s go back and put in a proper formula for the annuity factor, which is done manually at the
moment. The annuity factor is based on the inflation rate in cell C6 plus 1%. I need to look across
row 6 in the CleanData tab (which is the 4th row, counting the interest rates as the 1st) to find the
entry corresponding to. So I think I need =HLOOKUP(C6+1%,CleanData!$B$4:$E$7,4,FALSE).
Yes, that’s giving the right answer. This formula assumes the retirement age is 65. I can’t think
how to make it look down the column as well. Can you put an HLOOKUP inside a VLOOKUP?!
I’ll leave it like this and make a note about it in the audit trail.

I really need to put in some automated checks here. Hmm. I suppose I could check that the
average of the values of n in the table is consistent with the average of the ages. The average
values should add up to the retirement age R. Also, Factor1 and Factor 2 appear to be decreasing
as you move down the table. This makes sense because you are approaching retirement.
So I’ll add an extra row with those checks in. I’ll have to use a few AND functions to check Factor1,
but I can then just copy the same formula across for Factor2.
I can set up the other two scenarios now. The only things I need to change are the formulae for
the 3 variables at the top, to make sure they link to the correct scenarios.
Time to update the audit trail.
The Parameters tab is easy to document but for the scenario calculations I need to remember to
explain all the formulae in words.
[15 minutes later]
Assumptions
I need to make a list of the assumptions made in this model. I already made a note of some of
these when I did my initial plan. I’ll put these near the beginning of my audit trail.
Results table
The results table is easy to create. I just need to set up a separate Table tab and pick out the
entries listed in the instructions.
Ah, yes! I was going to link the ages etc in the Scenario tabs to the ages here. I’ll do that now.
Screenshot 6 – Table worksheet
Graph
Finally, I need to set up a tab for the graph. I’ll include a ‘Data for graph’ section with the numbers
I need to use. It says to base the graph on Scenario 2, so I need to link to these values.
A good type of chart to use for comparisons like this is a ‘clustered column chart’. I think it will do
it automatically if I just highlight my complete table of data (cells B4 to C9, including the headings)
and then select Insert, click Column and pick the first chart type (2D clustered column). Yes, there
we go. And red and blue are sensible colours to use.

To get the ages appearing on the x axis, I right‐click on the graph, choose Select data, move to the
right hand panel, click Edit and then highlight the range of cell containing the ages (cells A5 to A9).
Then press OK.
Screenshot 7 – Graph worksheet
I just need to add a title and to label the axes. To do these I need to highlight the graph, then
select the Layout menu at the top. I can now use the Chart Titles and Axis Titles features. For the
title I usually use the ‘Above chart’ option and for the vertical axis I usually use the Rotated title
option, which makes it write ‘sideways’.
I’ve been going for 2½ hours now. Let’s finish off the audit trail now.

3 Audit trail
This audit trail relates to the spreadsheet Worked Example Project (Paper 1).xls.
It was last updated on 1 September 2018 by A. Student.
Background
We have been asked by LongerLives to carry out a comparison of two pension arrangements for
employees with person pension plans – annuities and drawdown.
The accompanying spreadsheet calculates the projected pension amounts for the annuity and
drawdown options under three different economic scenarios and a graph comparing the two
arrangements for one of the scenarios.
Detailed descriptions of each worksheet are set out below.
The following colour conventions have been used:

 Pale shading indicate input cells that can be changed by the user
 Dark shading indicates corrected data
 Checks are shown in red.
No macros or user‐defined functions have been used.
Assumptions
The spreadsheet model makes a number of assumptions:

 The annuity factors provided are correct (after any adjustments have been made).
 The retirement age and the maximum age are assumed to be fixed.
 The rates of investment return, salary increases and inflation assumed in each scenario
will remain constant in the future.
 The value assumed for the maximum age is appropriate.
 Pensions are paid annually in advance and are index‐linked to inflation.
 Employees will be able to draw down their pensions in the future without any restrictions
being introduced.
Data (annuity factors)
We have been provided with a table of annuity factors (provided by the client) for a selection of
retirement ages and interest rates.
These have been entered manually in the RawData worksheet. Checks have been included to
ensure that these factors decrease with both the age and the interest rate, as would be expected.
These revealed an error in one of the values.
Other summary statistics, such as average, max, min were not considered useful here.

The CleanData worksheet contains the annuity factors that will be used for the subsequent
calculations. These are linked by formula to the values in RawData. As the values appear to
progress smoothly, the incorrect value has been manually overwritten as a temporary measure
with the average of the four surrounding numbers. The correct value needs to be established
and entered in the RawData tab. The formula from the cell above the incorrect value in
CleanData can then be copied down.
As another reasonableness check, the annuity factors at the lowest interest rate appear to be
consistent with life expectancies for the various ages.
Note that, if more data values need to be added to the table (eg more interest rates), the
formulae on the CleanData tab will need to be copied across the worksheet and references
elsewhere to this range of cells will need to be adjusted.
Parameters
The following parameters can be set here by the user:

 the investment return (i), salary increase rate (j) and inflation rate (k) for each scenario
 the retirement age (R), maximum age (M) for drawdown and contribution rate
 the employee profiles (age, fund now and salary) to be used in the calculations.
Note, however, that the annuity factors currently assume a fixed retirement age of 65,
irrespective of the parameter value shown here.
Scenario calculations
The worksheets Scenario1, Scenario2 and Scenario3 carry out the pension projections for each of
the three scenarios.
The three economic variables at the top are linked to the corresponding parameter values. These
are the only inputs that differ between the scenarios.
The annuity factor is extracted from the annuity table in CleanData using an HLOOKUP function.
The value is based on the inflation rate plus 1%. (As stated above, this version of the spreadsheet
always uses a retirement age of 65.)
Factor3 is an actuarial factor used to calculate the amount of pension that can be taken in the first
year using drawdown under the economic assumptions of this scenario. The projected fund is
divided by this factor to calculate the pension amount. The formula used assumes that all
pensioners will live to the same maximum age M and they will drawdown their entire fund by that
age. The formula has the form of an annuity factor calculated at the real rate of interest (ie the
interest rate net of inflation).
For reference, the actual formula is (1+i)/(i–k)*[1‐{(1+i)/ (1+k)}^(R–M)].

The first three columns of the table are linked by formulae to the values in the Parameters tab.
Age is the employee’s current age. Fund Now is the amount currently in the employee’s pension
fund and Salary is the employee’s current annual salary.
Column n is the number of years to retirement, calculated as R – x, where R is the retirement age
and x is the current age. This has been added to simplify the calculations, as this is used in several
of the later formulae.
Factor1 is the compound interest factor (1+ i)^n, which is used to accumulate the existing fund up
to retirement age at the rate of investment return (i).
Factor2 is used to accumulate the future contributions up to retirement age, allowing for future
salary increases and future investment returns. It is derived as the sum of a geometric series with
terms corresponding to each future year, which leads to the formula (1+i)/(1–j)*[(1+i)^n–(1+j)^n].
The Final Sal column shows final salary, which is calculated by rolling up the current salary to
retirement age (for a period of n years) at the rate of salary increases ( j).
The Final Fund column gives the projected fund the employee will have at retirement age. It is
calculated by applying Factor1 to Fund Now by multiplying them and applying Factor2 to this
year’s pension contribution (the contribution rate times current salary) by multiplying them, and
then calculating the total of these two components.
Annuity is the projected annual pension amount for the first year under the annuity arrangement.
It is calculated by dividing the Final Fund by the annuity factor.
This is then expressed as a percentage of the employee’s salary at retirement.
Drawdown is the projected annual pension amount for the first year under the drawdown
arrangement. It is calculated by dividing the Final Fund by the Factor3.
This is then expressed as a percentage of the employee’s salary at retirement.
CHECKS
 The check below the values of n ensures that the average age in the table and the average
value of n sums to the retirement age R.
 The checks below the Factor1 and Factor 2 columns use a combination of AND functions
to ensure that the values of the factors decrease down the column, ie with increasing age.
Table
The Table worksheet summarises the results in the form of a table.
The entries in the first three columns of the table are linked to the employee profiles in the
Parameters worksheet.
The other entries are linked directly to the two corresponding columns in the Scenario tabs
(headed ‘%’).

Graph
The Graph worksheet produces a graph comparing the pension percentage amounts under the
two arrangements.
The input values for the graph are linked directly to the columns with the same names in the
worksheets for Scenario 2.
A clustered column chart has been used here, as this makes it easy to compare the results for the
different scenarios.





using the course.

Worked example – Paper 2

0 Introduction
This chapter contains an example project for CP2 Paper 2. It consists of the project specification
and instructions, followed by a detailed solution.
The solutions are presented as a running commentary of the thought process that a well‐prepared
student might go through when working through this project. Extracts from the student’s work
are interspersed. The complete summary report is shown in Section 3 on page 12.
To make it easier for you to study, the worked examples we have presented here for Paper 1 and
Paper 2 relate to the same project. Note, however, than in the CP2 exam, Paper 2 will relate to a
different project from the one in Paper 1.

1 Example project – Paper 2
Exam requirements
Note that this assignment requires:

 an Excel file containing the model (see the screenshots in Chapter 10)
 a Word file containing the audit trail (see Section 3 in Chapter 10).
1. Read the background document and technical notes, which describe the scenarios that
have been modelled and documented for this project.
2. Read the audit trail, which has been written by your colleague, another actuarial student,
for the calculations that they performed. This will assist you in following and
understanding the calculations performed in the Excel model provided.
You are not required to add to or amend the audit trail.
You should assume that your colleague’s calculations have been checked and are
correct unless otherwise indicated.
You have since spoken to your contact at LongerLives. He tells you that the annuity factor for 4%
at age 65 should have been 15.8, not 17.3. He has also requested an additional graph showing a
comparison of the annuity percentages for Scenario 2 for each of the employees in the profile
based on retirement ages 65 and 70.
3. Study the audit trail and then make the necessary changes to the spreadsheet to:
(a) make the data correction
(b) recalculate the annuity percentages for Scenario 2 based on retirement age 70
(c) produce the additional graph.
[Sub‐total 20]
4. Prepare a summary document of five to seven pages, capturing the main features and
results of the work done by you and your colleague. You can assume that the summary is
being prepared for your boss, a senior actuary, who will present the work to LongerLives.
Your summary should include the following:

 purpose of the project, data, method and assumptions used by you and your
colleague
 results, including relevant tables and charts
 commentary on the results
 key conclusions
 suggested next steps.

Comments on the results should cover, but not be limited to:

 analytical comments on each stage of the results, including explaining patterns in
the results and any unusual features
 an explanation of the differences between the results under the various scenarios
modelled.
Next steps need to be specific to the project, with some mention of why each is a valid
next step.
The summary should cover the full scope of the project, including the current approach
that was modelled in the spreadsheet provided.
Marks available for the summary:

Commentary on results and conclusions [18]
Next steps [20]
Drafting [10]
[Sub‐total 80]
[Total 100]

2 Student’s commentary
2.1 Getting started

Right, then. I’ve downloaded the spreadsheet provided and printed out the instructions for the
project, which includes the audit trail that goes with it.
I’ll start by reading through the instructions carefully to make sure I understand what I have to do.
I also need to open the spreadsheet and read through the audit trail to understand how the
calculations have been done.
[10 minutes later]
OK. I think I understand the work that’s been done so far.
2.2 Amending the spreadsheet

Part 3(a)
Part 3(a) of the instructions asks me to make the data correction. Luckily my colleague who set up
the original spreadsheet anticipated this and has explained in the audit trail how to fix it.
Just to be clear, I’ll rename the RawData tab as ‘RawData (corrected)’. Now I need to type the
correct annuity factor in cell D7, overwriting the incorrect 17.3. Good – when I pressed Enter the
Error! message disappeared.
Screenshot 1 – RawData (corrected) worksheet

In the CleanData tab, the incorrect value of 15.85 is still showing and is coloured to indicate a
manual correction has been made. So I need to copy the formula in the cell above down to cell D7.
Yes, the colour has gone back to white and it now says 15.8. And all the checks say OK.
Screenshot 2 – CleanData worksheet (updated)
Part 3(b)
Part 3(b) of the instructions asks me to redo the calculations for Scenario 2 but with retirement
age 70 instead of 65.
I still need to keep the results for age 65 so that I can do the graph comparing age 65 and age 70.
So I think the best approach is to add another worksheet to do the calculations for age 70.
If I right‐click on the tab name Scenario2, I can select Move or copy, then tick the Create a copy
box and ask for it to appear before the Scenario3 tab. I’ll double click and change the name to
Scenario2 (age 70).
Now the audit trail says that, although the retirement age of 65 is set up as a parameter, the
existing calculations assume that the annuity factors are based on age 65 anyway. Hmm.
However I do this, I’m going to need two retirement ages stored somewhere.
But where should I put the new retirement age? If I stick to the method my colleague used, it’s
probably best if I add it to the parameters and then change the formulae on the new Scenario2
(age 70) tab to link to this new parameter value. I’ll call the alternative retirement age R* and add
a note that it’s used in the new scenario.
Actually, it’s not ideal the way the retirement ages are dealt with at the moment. I’ll make a note
that one possible next step would be to tidy up the way the retirement ages are handled and make
it so that it automatically looks up the annuity factors for the retirement age specified.

Screenshot 3 – Parameters worksheet (updated)
OK. So, on the new scenario worksheet I need to edit the formula for the annuity factor. At the
moment it says =HLOOKUP(C6+1%,CleanData!$B$4:$E$7,4,FALSE). So I think all I need to do is
change the 4 to a 5 to make it look up the retirement age 5 rows down instead of 4, so that it will
pick out age 70 instead of age 65. Yaargh! I’ve got a #REF! error. I hate these lookup functions!
Screenshot 4 – Scenario2 (age 70) worksheet

Let’s try and work out what’s going wrong. So it’s looking up C6+1%, which is 3%. That’s fine. The
array it’s looking in is B4:E7, which starts with the row with the percentages … Ah! It stops at E7,
which doesn’t go down far enough to include the age 70 row. So I need to change the E7 to E8.
Actually, it would be better to change it to E9 in case someone wants to use age 75 at some point.
So I’ll make the formula in C9 say:
=HLOOKUP(C6+1%,CleanData!$B$4:$E$9,5,FALSE)
Good. It now says 15.8. I think it said 17.4 before I changed the age, which is right because, with
a higher age, the annuity factor should go down.
I see that Factor3, for the drawdown calculation, also uses the retirement age. At the moment
that’s still based on age 65. For consistency, I’ll change that to use age 70 as well, even though I
haven’t been asked to do anything with the drawdown figures. So the formula in C10 now says:
=(1+$C$6)*(1–((1+$C$6)/(1+$C$4))^(Parameters!$B$13–Parameters!$B$12))/($C$4–$C$6)
That now says 13.69. I’ll add a note next to these two cells to say that that they now use age 70.
The first value of ‘n’ still says 45. This should be 50 now. So I need to change Parameters!$B$11
to Parameters!$B$12 here and copy this formula down. Now I’m getting an Error! message from
one of my automated checks. Well, it shows that they work! The checks are still using retirement
age 65. I need to change this to =Parameters!B12 in the formula for that cell. I’ll add a another
note to show that I’ve changed this.
So I think this new worksheet is correct now.
Screenshot 5 – Scenario2 (age 70) worksheet (final version)

Part 3(c)
Part 3(c) of the instructions asks me to create a new graph.
Seeing as it’ll be showing a comparison of two different retirement ages, rather than annuity
versus drawdown, I’ll do the new graph on a separate worksheet, rather adding it to the existing
one. But I can set it up by copying the existing Graph tab and making the necessary changes.
I’ll call this new worksheet Graph (age 70).
Screenshot 6 – Graph (age 70) worksheet
I’ll change the heading at the top of the sheet to say that it’s for retirement ages 65 and 70.
Now the first column in the data is fine. I don’t need to change that. But I need to change the
second column to use the figures from the new scenario tab. I can enter the formula ='Scenario2
(age 70)'!J13 in cell C5 and copy it down the column.
I need to change the column headings and make them a bit wider.
In the graph itself, the columns have already updated automatically, but I need to change the
labels in the title, on the axes and in the legend. The title and axes are easy to change. I can just
click on the existing wording and overwrite them. I’d better change ‘Age’ on the x axis to say
‘Age now’. Otherwise, it might get confused with the retirement ages.
To change the names in the legend, I need to change the names given to the series used in the
graph. So I’ll right‐click on the graph, choose Select Data and then edit each of the series to
change the series name. I’ll call then ‘Retirement age 65’ and ‘Retirement age 70’.

2.3 Writing the summary

Now let’s do the project summary for part 4. I’ll open a new Word file called ‘Summary’.
[The student’s final Summary Report starts on page 12.]
I’ll use the headings they’ve indicated in the question: purpose, data, approach, assumptions,
results, conclusions and next steps.
Purpose
For ‘Purpose’ I need to outline who the project is for, what it involves and what results we’ve been
asked for. I can base this on the information given in the question, but I’ll try to write it in my own
words, rather than just copying verbatim.
I wonder if I need to describe the scenarios in detail here. No, I think it would be better to keep the
introduction short and just mention here that there are three. I can give the details in the
Approach section.
Data
I need to mention where the data came from, what it consisted of, what checks were done and
what data amendments are needed.
Seeing as there isn’t much data for this project, I think I’ll reproduce the table of annuity factors in
my summary. This might be useful if my boss wants to do some spot checks on the calculations.
I’d better mention the original correction we made, changing the incorrect 17.3 to 15.85, even
though we have the correct figure now – just in case there’s a mark for it.
I can also mention a reasonableness check of comparing the 2% figures with life expectancies,
since an annuity factor calculated at 0% would equal the life expectancy.
Approach
For the Approach section I need to explain clearly, but at a fairly high level, how the calculations
were done. My tutor at the tutorial said this was an important section.
I can show here that I understand what Factor1 and Factor2 are actually doing. This will
‘add value’ to my summary. I don’t think I actually need to reproduce the formulae though.
I don’t think I need to go into detail about the table or the graphs here. I can cover these in the
Results section. So I’ll just mention them.
Assumptions
I need to list the key assumptions that have been made. Most of these are the ‘usual suspects’ –
correct data etc.
I can also say that the pensions are paid annually in advance. I know this because it says in the
background information that drawdown takes place at the start of each year.

I’m guessing that the ‘inflation + 1%’ is because the annuity provider will back these with bonds
that have approximately that yield. I’ll mention that too. Again, I might get an extra point for
‘adding value’.
Results and conclusions
For the results, I’ll present my table and the two graphs. I’ll start by introducing them. Then I’ll
put a simple border round the tables in Excel and copy them directly into my summary by cutting
and pasting them.
I also need to make some comments about each to score some marks for comments and
observations. There are some fairly obvious things I can say. These all relate very closely to the
table and the graphs, so I think it’s better if I do my results and conclusions together.
I think the main thing to look at is which values are higher than which, and try to explain why.
Next steps
I know the ‘next steps’ is an important part that carries quite a few marks. So I’ll try to come up
with 10 to 15 ideas, as it suggests in the course notes. I can use the headings in the diagram in the
ActEd Course Notes to help me come up with some ideas for these – DATA, MODEL, PARAMETERS,
ASSUMPTIONS and OUTPUT. I can also consider any business issues that relate to the model.
The data relates to the annuity factors, so I’ll make a few comments about those.
How about the model and the parameters? We could change various things there – for example,
different scenarios, different retirement ages or a different contribution rate. In fact, what are the
rates in the scenarios derived from?
How about the assumptions? We’ve assumed that quite a few things are constant – for example,
the rates in the scenarios and the 15% contribution rate. We could use an actual yield curve or
older employees could pay a higher contribution rate.
Under the ‘output’ heading, we could suggest having an interactive ‘calculator’ for employees to
use, where they enter their own details.
And from a business angle, I can mention the loadings built into the annuity factors.
Good. I’ve got around a dozen next steps now. That should be enough.
Now I just need to read through to check what I’ve written.

3 Summary report
This summary report was prepared on 1 September 2018 by A. Student.
Purpose of the project
We have been asked by LongerLives, a company that provides advice on employees’ retirement
options, to carry out some comparisons under two pension arrangements:
(1) annuity: where retirees purchase a whole life annuity
(2) ‘drawdown’: where retirees withdraw payments directly from their fund.
Three different economic scenarios are being considered.
We have been asked to produce the following results for a selection of employees provided in the
form of an employee profile:
 a table showing the pension in the first year, expressed as a percentage of salary at
retirement, under each arrangement for under each scenario
 a graph showing a comparison of the pension percentages for the individuals in the table
under each arrangement based on Scenario 2
 an additional graph showing a comparison of the annuity percentages for Scenario 2 with
retirement ages 65 and 70.
The data, methods used and the results are outlined below.
Data
The client supplied a table of annuity factors for different retirement ages and interest rates as
data.
Checks were carried out to ensure that the annuity factors decreased with both the age and the
interest rate. This revealed one copying error, which has since been resolved with the client.
The correct annuity factors are as follows:
ANNUITY FACTORS
AGE 2% 3% 4% 5%
55 22.4 20.5 18.7 16.9
60 20.6 19.0 17.3 15.6
65 18.9 17.4 15.8 14.3
70 17.2 15.8 14.4 13.0
75 15.5 14.2 13.0 11.7
As a reasonableness check, the factors for 2% can be seen to be close to the life expectancies we
might find for UK lives of those ages.

Approach
The employee profile we were asked to use contained the following ages, fund amounts already
built up and current annual salaries:
Age Fund now (£K) Salary (£K)

20 0 20
30 10 25
40 25 30
50 50 35
60 100 40
The details of the three scenarios are shown in the table below:
SCENARIO
VARIABLE Scenario 1 Scenario 2 Scenario 3
Investment return ( i ) 4% 6% 8%
Salary increases ( j ) 3% 4% 5%
Inflation ( k ) 1% 2% 3%
The projected fund at retirement for each of the employees in the table was then calculated as
the total of:
 the fund now multiplied by an actuarial factor (Factor1) to accumulate this amount to
retirement age
 the next year’s pension contribution (calculated as 15% of the annual salary) multiplied by
another actuarial factor (Factor2) to accumulate the future contributions (incorporating
salary increases) to retirement age.
The projected fund was then divided by the annuity factor for the appropriate retirement age to
calculate the first year’s pension payment. The annuity factor is based on price inflation plus 1%.
This was then expressed as a percentage by dividing by the projected salary at retirement age.
The calculations for the drawdown percentage were similar, except that a special factor (Factor3)
was used in place of the annuity factor. This assumes that all employees live to exactly age 90 and
so the remaining fund should reach zero by that age.
The requested tables and graphs were then produced.
Most of the calculations were based on retirement age 65, but one of the graphs also required
age 70.

Assumptions
We have made the following assumptions:
 The annuity factors are now all correct and are appropriate to the employees under
consideration.
 The annuity factors are based on price inflation plus 1%, which is considered to reflect the
rate of return the annuity provider expects to earn on its funds whilst providing the
annuities. (These could reflect bond yields of an appropriate term.)
 The rates assumed in each scenario, and the contribution rate, will remain constant in the
future.
 The value assumed for the maximum age is appropriate.
 No separate fees or expenses or taxes need to be deducted.
 Pensions are assumed to be paid annually in advance and to increase each year in line
with price inflation.
 Employees will be able to draw down their pensions in the future without any restrictions
being introduced.
Results / Conclusions
Below is the extended table showing the first year’s pension under each arrangement (annuity
and drawdown) for the employees in the profile. These are expressed as a percentage of salary at
retirement.
SCENARIO 1 SCENARIO 2 SCENARIO 3

Age Fund now (£K) Salary (£K) Annuity Drawdown Annuity Drawdown Annuity Drawdown
20 0 20 45% 47% 62% 66% 87% 92%
30 10 25 36% 38% 48% 51% 64% 68%
40 25 30 28% 30% 36% 38% 46% 48%
50 50 35 22% 23% 26% 28% 32% 33%
60 100 40 18% 19% 20% 22% 23% 25%
Scenario 2 might be considered to be a ‘best estimate’ scenario, with ‘Scenario 1’ being

pessimistic and ‘Scenario 3’ being optimistic. These results confirm this, with the pension
percentages increasing for both arrangements as we move from Scenario 1 to 2 to 3.
For all the combinations considered, the drawdown arrangement provides a higher pension than
the annuity arrangement. This could be due to loadings for expenses and profit built into the
annuity rates.
The percentages fall sharply as the current age increases. This suggests that the older employees
have not built up enough money in their current fund to provide an adequate pension on
retirement. Even under the most optimistic scenario, Scenario 3, employees aged 40 or over
won’t receive a pension of more than half of their salary at retirement.
The graph below shows a comparison of the first year’s retirement pension expressed as a
percentage of salary at retirement under the two arrangements, based on Scenario 2.

Pension as percentage of salary (Scenario 2)

80%
70%
60%
Percentage
50%
40%
Annuity
30%
Drawdown
20%
10%
0%
20 30 40 50 60
Age
This highlights the same features as seen in the table. The pension is always slightly higher under
the drawdown arrangement and the amount decreases for older employees.
One reason for the decline with age could be the worsening of economic conditions over the past
decade and the expectation that this will continue into the future.
The graph below shows a comparison of the pension percentages under the annuity arrangement
for employees retiring at ages 65 and 70 (based on Scenario 2).
Annuity as percentage of salary

(retirement ages 65 and 70)
90%
80%
70%
60%
Percentage
50%
40% Retirement age 65
30%
Retirement age 70
20%
10%
0%
20 30 40 50 60
Age now
As expected, the pension is significantly higher for retirement at age 70. This is because:
 the existing fund will accumulate for longer
 contributions will be paid for longer, and
 the employee’s future lifetime after age 70 will be around 5 years shorter than after age
65.

Next steps
It would be helpful to determine the source of the annuity factors and the economic assumptions
they are based on, to assess whether they provide a realistic assessment of the annuity rates that
will apply when the employees reach retirement age.
This would also allow us to check that they contained no other mistakes.
It would be helpful to find out how the rates for the three scenarios were derived.
For sensitivity testing, we could explore other scenarios, with different rates, to determine which
of the three rates has the most impact on the results. We could also look at the effect of varying
the contribution rate (currently 15%).
The model assumes a constant contribution rate of 15%. We could change this to an increasing
scale, eg starting at 5% and going up to 30%. This might equalise the pensions across the different
ages.
It might be useful to break down the retirement ages into individual ages between 65 and 70, as
this is now becoming a common age range for people to retire.
We could investigate the effect of changing the maximum age for drawdown from 90 to 95, say,
to see by how much this reduces the first year’s pension percentage.
The model also assumes the investment return is always constant. We could replace this with a
yield curve reflecting the appropriate investment terms.
The current model has a restriction that the retirement age is assumed to be 65. We could
change the set‐up to make the retirement age follow through automatically and to allow
comparisons to be made between different ages.
We could also produce a version of the model that would serve as an interactive ‘calculator’,
allowing employees to enter their own details and generate a tailored projection.
We could also investigate whether the annuity factors contain an excessive loading for expenses
and profit. It might be possible to obtain more favourable factors from another provider.

Subject CP2: Assignment X1
2019 Examinations
Time allowed: 1¾ hours
Instructions to the candidate
For this assignment you only need to submit HANDWRITTEN answers for marking.
However, you should have Excel available while you are working in case you need to
check how to use any Excel features that are referred to in the questions.
This is an ‘open book’ assignment, so you may refer to other materials if you wish.
1. Please:
– attempt all of the questions, as far as possible under exam conditions
– begin your answer to each question on a new page
– leave at least 2cm margin on all borders
– write in black ink using a medium‐sized nib because we will be unable to mark
illegible scripts
– note that assignment marking is not included in the price of the course materials.
Please purchase Series Marking or a Marking Voucher before submitting your script.
– note that we only accept the current version of assignments for marking, ie you can
only submit this assignment in the sessions leading to the 2019 exams.
2. Please do not:
– use headed paper
– use highlighting in your script.
At the end of the assignment

If your script is being marked by ActEd, please follow
the instructions on the reverse of this page.
In addition to this paper, you should have available actuarial tables and an
electronic calculator.

Submission for marking
You should aim to submit this script for marking by the recommended submission date. The
recommended and deadline dates for submission of this assignment are listed on the summary page
at the back of this pack and on our website at www.ActEd.co.uk.
Scripts received after the deadline date will not be marked, unless you are using a Marking Voucher.
It is your responsibility to ensure that scripts reach ActEd in good time. If you are using Marking
Vouchers, then please make sure that your script reaches us by the Marking Voucher deadline date
to give us enough time to mark and return the script before the exam.
When submitting your script, please:
 complete the cover sheet, including the checklist

 scan your script, cover sheet (and Marking Voucher if applicable) and save as a pdf
document, then email it to: ActEdMarking@bpp.com
 do not submit a photograph of your script
 do not include the question paper in the scan.
In addition, please note the following:
 Please title the email to ensure that the subject and assignment are clear
eg ‘CP2 Assignment X1 No. 12345’, inserting your ActEd Student Number for 12345.
 The assignment should be scanned the right way up (so that it can be read normally without
rotation) and as a single document. We cannot accept individual files for each page.
 Please set the resolution so that the script is legible and the resulting PDF is less than 4 MB
in size.
 Do not protect the PDF in any way (otherwise the marker cannot return the script to ActEd,
which causes delays).
 Please include the ‘feedback from marker’ sheet when scanning.
 Before emailing to ActEd, please check that your scanned assignment includes all pages and
conforms to the above.

2019 Examinations
Please complete the following information:
Name:
Number of following pages: _______
Please put a tick in this box if you have solutions

and a cross if you do not:
Please tick here if you are allowed extra time or

ActEd Student Number (see Note below): other special conditions in the
profession’s exams (if you wish to
share this information):
Time to do assignment
(see Note below): _____ hrs _____ mins
Note: Your ActEd Student Number is printed on all
personal correspondence from ActEd. Quoting it will help Under exam conditions
us to process your scripts quickly. If you do not know (delete as applicable): yes / nearly / no
your ActEd Student Number, please email us at
Note: If you take more than 1¾ hours, you
ActEd@bpp.com.
should indicate how much you completed within
Your ActEd Student Number is not the same as your this exam time so that the marker can provide
IFoA Actuarial Reference Number or ARN. useful feedback on your progress.
Score and grade for this assignment (to be completed by marker):
Q1 Q2 Q3 Q4 Total
=_____%
15 15 10 10 50
Grade: A B C D E Marker’s initials: ________
Please tick the following checklist so that your script can be marked quickly. Have you:
[ ] Checked that you are using the latest version of the assignments, ie 2019 for the sessions leading
to the 2019 exams?
[ ] Written your full name in the box above?
[ ] Completed your ActEd Student Number in the box above?
[ ] Recorded your attempt conditions?
[ ] Numbered all pages of your script (excluding this cover sheet)?
[ ] Written the total number of pages (excluding the cover sheet) in the space above?
[ ] Included your Marking Voucher or ordered Series X Marking?
Please follow the instructions on the previous page when submitting your script for marking.

Feedback from marker
Notes on marker’s section
The main objective of marking is to provide specific advice on how to improve your chances of
success in the exam. The most useful aspect of the marking is the comments the marker makes
throughout the script, however you will also be given a percentage score and the band into which
that score falls. Each assignment tests only part of the course and hence does not give a complete
indication of your likely overall success in the exam. However it provides a good indicator of your
understanding of the material tested and the progress you are making with your studies:
A = Excellent progress B = Good progress C = Average progress

D = Below average progress E = Well below average progress
Please note that you can provide feedback on the marking of this assignment at:
www.ActEd.co.uk/marking

CP2: Assignment X1 Questions Page 1
X1.1 A genetic researcher has set up a prototype spreadsheet (see below) to summarise the
information from genetic samples and to extract information for a specified sample number.
In this worksheet:
 ‘cM’ is an abbreviation for centiMorgan, which is a unit used for measuring the length of a
sequence of genetic material
 the ‘type’ is the combination of Copy1 and Copy2, which can be XX, XY, YX, or YY
 ‘X?’ means either XX or XY.
A B C D (formula used)
1 Sample Copy1 Copy2 cM
2 1 X Y 5.2
3 2 X Y 10.3
4 3 X X 1.9
5 4 X Y 7.0
6 5 X X 8.8
7 6 X X 3.6
8 7 X X 4.7
9 8 X Y 10.0
10 9 X Y 6.4
11 10 X X 2.9
12
13 Mean length in sample (cM) = #NAME? =MEAN(D2:D11)
14 Total length for type X? = 0 =SUMIF(B2:B11,X,D2:D11)
15 Total length for type XY = =SUMIFS(B2:B11,"X",C2:C11,"Y",D2:D11)
16
17 Enter sample number ... 5
18
19 Type = #VALUE! =INDEX(B2:B11,D17)+INDEX(C2:C11,D17)
20 Length of gene sequence = #REF! =VLOOKUP(D17,A2:A11,4,0)
The researcher has found that the formulae entered in cells D13, D14, D15, D19 and D20, which
are shown in the ‘(formula used)’ column, are not working properly.
(i) Identify the problem with each of these five formulae and give a correct version that
would work as intended. [10]
Once this prototype worksheet is working correctly, it will be used with much larger samples.
(ii) Suggest, with reasons, improvements that could be made to the formulae used that
would make this worksheet more robust. [5]
[Total 15]

Page 2 CP2: Assignment X1 Questions
X1.2 A colleague has mentioned that marks are awarded in Paper 1 of the CP2 exam for ‘auto‐checks’,
ie formulae in the spreadsheet that check the values in particular cells. One purpose of an auto‐
check is to check whether a value that has been entered by the user is an acceptable value for
that cell, eg whether it is a valid date that falls within a permitted time period.
(i) State two other purposes that auto‐checks can be used for and give an example of each.
[2]
(ii) List four other types of check (other than auto‐checks) that can be used to identify
possible errors in the data in a spreadsheet. [2]
(iii) (a) Explain what is meant by a reasonableness check (also known as a ‘sense check’).
(b) Give an example of a reasonableness check that might be used in an actuarial

context. [3]
A historian is using a spreadsheet to prepare an appendix to accompany her book entitled

Little‐known Characters from the Victorian Period. The book describes 250 individuals who were
influential in the British Isles during the period from 1837 to 1901 who deserve more recognition
for the contribution they made to their field.
She has entered the details for the first ten individuals, as shown below. Question marks (?)
indicate that the historical information is uncertain or unknown.
A B C D E F G
1 Name Field Country Born Married Died Children
2 Sir Digby Dogby Industrialist England 1850 1883 1915 4
3 Lady Effingham Scientist England 1868 1889 1956 ?
4 Rev Isaac Huxley Campainer England 1822 1841 1871 8
5 Princess Louise Writer England 1873 1901
6 Patrick Ryan Politician Ireland 1854 1867 1936 1
7 Ronald Macdonald Businessman Scotland 1804 1832 1971 2
8 Wilberforce Smith Architect Englnd 1839 1917
9 John J Jones Designer Wales 1892 1817 1855 0
10 Fabio Sottovoce Artist Ireland 1835? ? 1884 ?
11 Robert Oscar Young Explorer Scotland 1860? 1899 ?
12
13
(iv) Identify five possible errors in the data shown above and suggest suitable corrections for
each. [5]
(v) State two checks of each of the following types (which need not involve Excel formulae)
that the historian could apply to eliminate any errors, once the data for all the individuals
has been entered:
(a) accuracy
(b) consistency
(c) reasonableness. [3]
[Total 15]

X1.3 (i) (a) Explain the difference between a parameter of a model and an assumption of a
model as these terms are used in Subject CP2.
(b) Give an example in an actuarial context of a parameter and an assumption that

both relate to the same feature of a particular model. [4]
A work project has been specified as follows:
We require a simple spreadsheet to allow our traders to calculate the price of a new call option
product that we will soon be launching. The option matures on 31 December 2025 and the
theoretical option price ( c ) is calculated using a variation of the standard Black‐Sholes formula:
c  S exp(qT ) * (d1 )  K exp(rT ) * (d2 )
ln S K  (r  q  1  2 )T ln S K  (r  q  1  2 )T
where d1  2 and d2  2
 T  T
In this formula:
 S is the price of the underlying asset at the calculation date, which can be determined
directly from market information.
 T is the time from the calculation date until the maturity date.
 q is the average dividend rate assumed for the underlying asset over the period between
the calculation date and the maturity date.
 K is the strike price selected by the customer.
 r is the risk‐free interest rate applicable to the period between the calculation date and
the maturity date, which can be determined directly from the bond markets.
  is an estimate of the annualised volatility applicable to the period between the
calculation date and the maturity date, which will be based on volatility estimates derived
from other sources.
 * (x) is the distribution function for an adjusted form of the standard normal
distribution, which is believed to provide an accurate description of the underlying price
movements.
It is hoped that the spreadsheet will be automated as much as possible, so that the only input
required from the user will be the strike price K .
A bid/offer spread will be applied to the theoretical price when determining the prices that will be
quoted to customers.
(ii) State six assumptions underlying this model. [6]

[Total 10]

X1.4 (i) Explain the reasons for producing an audit trail to accompany a spreadsheet model. [5]
Hint: You may wish to consider the items that you would expect to appear in an audit
trail for Paper 1 of the Subject CP2 exam.
(ii) (a) Explain what is meant by ‘hard coding’.
(b) State the reasons why hard coding should be avoided in actuarial projects. [5]
[Total 10]
END OF PAPER

2019 Examinations
Time allowed: 1¾ hours
For this assignment you only need to submit HANDWRITTEN answers for marking.
However, you should have Excel available while you are working in case you need to
check how to use any Excel features that are referred to in the questions.
This is an ‘open book’ assignment, so you may refer to other materials if you wish.
1. Please:
– attempt all of the questions, as far as possible under exam conditions
– begin your answer to each question on a new page
– leave at least 2cm margin on all borders
– write in black ink using a medium‐sized nib because we will be unable to mark
illegible scripts
2. Please do not:
– use headed paper
– use highlighting in your script.


You should aim to submit this script for marking by the recommended submission date. The
recommended and deadline dates for submission of this assignment are listed on the summary page
at the back of this pack and on our website at www.ActEd.co.uk.
When submitting your script, please:
 complete the cover sheet, including the checklist

 scan your script, cover sheet (and Marking Voucher if applicable) and save as a pdf
document, then email it to: ActEdMarking@bpp.com
 do not submit a photograph of your script
 do not include the question paper in the scan.
In addition, please note the following:
 Please title the email to ensure that the subject and assignment are clear
eg ‘CP2 Assignment X2 No. 12345’, inserting your ActEd Student Number for 12345.
 The assignment should be scanned the right way up (so that it can be read normally without
rotation) and as a single document. We cannot accept individual files for each page.
 Please set the resolution so that the script is legible and the resulting PDF is less than 4 MB
in size.
 Do not protect the PDF in any way (otherwise the marker cannot return the script to ActEd,
which causes delays).
 Please include the ‘feedback from marker’ sheet when scanning.
 Before emailing to ActEd, please check that your scanned assignment includes all pages and
conforms to the above.

2019 Examinations
Please complete the following information:
Name:
Number of following pages: _______
Please put a tick in this box if you have solutions

and a cross if you do not:
Please tick here if you are allowed extra time or

ActEd Student Number (see Note below): other special conditions in the
profession’s exams (if you wish to
share this information):
Time to do assignment
(see Note below): _____ hrs _____ mins
Note: Your ActEd Student Number is printed on all
personal correspondence from ActEd. Quoting it will help Under exam conditions
us to process your scripts quickly. If you do not know (delete as applicable): yes / nearly / no
your ActEd Student Number, please email us at
Note: If you take more than 1¾ hours, you
ActEd@bpp.com.
should indicate how much you completed within
Your ActEd Student Number is not the same as your this exam time so that the marker can provide
IFoA Actuarial Reference Number or ARN. useful feedback on your progress.
Score and grade for this assignment (to be completed by marker):
Q1 Q2 Q3 Total
=_____%
14 20 16 50
Grade: A B C D E Marker’s initials: ________
Please tick the following checklist so that your script can be marked quickly. Have you:
[ ] Checked that you are using the latest version of the assignments, ie 2019 for the sessions leading
to the 2019 exams?
[ ] Written your full name in the box above?
[ ] Completed your ActEd Student Number in the box above?
[ ] Recorded your attempt conditions?
[ ] Numbered all pages of your script (excluding this cover sheet)?
[ ] Written the total number of pages (excluding the cover sheet) in the space above?
[ ] Included your Marking Voucher or ordered Series X Marking?
[ ] Rated your X1 marker at www.ActEd.co.uk/marking?
Please follow the instructions on the previous page when submitting your script for marking.

Feedback from marker
Notes on marker’s section
The main objective of marking is to provide specific advice on how to improve your chances of
success in the exam. The most useful aspect of the marking is the comments the marker makes
throughout the script, however you will also be given a percentage score and the band into which
that score falls. Each assignment tests only part of the course and hence does not give a complete
indication of your likely overall success in the exam. However it provides a good indicator of your
understanding of the material tested and the progress you are making with your studies:
A = Excellent progress B = Good progress C = Average progress

D = Below average progress E = Well below average progress
Please note that you can provide feedback on the marking of this assignment at:
www.ActEd.co.uk/marking

Question X2.1 and X2.2 both relate to the project described below.
PROJECT DESCRIPTION
As part of a review of its reinsurance arrangements, a non‐life insurer is analysing the claims it
paid out during 2017 that exceeded £100,000. The analysis involves fitting three different
statistical distributions to the claims distribution using Excel. An extract from one of the key
calculation worksheets and technical details for the three distributions are shown below.
Distribution Parameter ranges Distribution function Mean Variance
1 1
Exponential  0 1  exp( x)
 2
     , x
Normal    2
 0   
  2
   
Pareto   2,   0 1 
x  1 (  1)2 (  2)
The company wishes to ensure that it has suitable documentation for all its models and projects.
The manager of this project is responsible for preparing an audit trail for the spreadsheet and for
preparing a summary report for the project.
X2.1 Carry out the following tasks, which relate to the audit trail for the project described above.
(i) Identify the parameters and the scenarios for this model. [2]
(ii) State three assumptions that would be appropriate to mention in the audit trail. [3]
(iii) (a) State the most likely purpose of the Warnings in cells E9:G9.
(b) Suggest two aspects that might be included in the formulae for these cells. [3]
(iv) Describe columns E, F and G, in approximately 200 words, in a form that would be suitable
for the audit trail. [6]
[Total 14]

X2.2 Carry out the following tasks, which relate to the summary report for the project described above.
(i) State the purpose of preparing a summary report for an actuarial project. [2]
(ii) Below is an extract from a student’s summary report for this project, which was intended
to provide a sufficient description of the data, the method used and the results for the
actuary responsible for this project.
DATA
The IT department extracted data for ‘large’ claims (those exceeding £100,000). There
were 92 of these.
METHOD
Summary statistics were then calculated from the data. These were used to fit three
different statistical distributions to the data.
A suitable method of estimation was selected for each distribution using the drop‐down
menus.
Note that the estimated value of the parameter α for the Pareto distribution was calculate
using the formula =2*B12^2/(B12^2‐B11^2).
RESULTS
The Pareto distribution gave the best fit.
There were no warning messages and the results in cells E9:G11 on the ‘Calculation’ tab
all look sensible.
State, with reasons, four ways in which this part of the student’s project summary could
be improved. [4]
(iii) Apply suitable reasonableness checks to the results shown in cells E11 and F12. [4]
(iv) Give four comments on the results shown in columns E, F and G. [4]
(v) Give six ‘next steps’, with reasons for your suggestions, for this project. You may assume
that any tasks not indicated in the spreadsheet extract above have not yet been carried
out. [6]
[Total 20]

X2.3 The charts below show the percentages of voters supporting the various political parties in a
particular country over the last ten years. The first chart shows Years 1 to 5, while the second
chart shows Years 6 to 10. The country faced a political crisis at the start of Year 6.
100%
90%
80%
Don't know
70%
None of the above
60%
Draconian Party
50%
Presidential Party
40%
Federal Liberators
30%
Unionisers
20%
Preservatives
10%
0%
1 2 3 4 5
45%
40%
35% Preservatives
30% Unionisers
25% Federal Liberators
20% Presidential Party
15% Draconian Party

None of the above
10%
Don't know
5%
0%
1 2 3 4 5
These charts have been created using Excel’s default settings on the user’s computer.
(i) State the Excel names for these two chart types. [1]
(ii) (a) State, with reasons, three improvements that could be made to these charts.
(b) Give instructions to a less experienced Excel user explaining how to make the
changes you have suggested. [9]
(iii) (a) A colleague has said that a good way to think of comments to make on a graph is
to look for any anomalies or unusual features. Suggest four other ways of
generating comments based on a graph.
(b) State four comments on the graphs shown above. [6]

[Total 16]
END OF PAPER





using the course.

2019 Examinations
Time allowed: 3¼ hours
Note that this assignment requires an Excel file containing the spreadsheet model.
This can be downloaded from the ActEd website at www.ActEd.co.uk
1. This project requires you to update the Excel spreadsheet provided.
2. You are also required to produce a Word document containing a summary report for the
project.
3. If you are submitting your work for marking, please use Office 2007, 2010 or 2013 format.
4. Please:
– attempt this assignment as far as possible under exam conditions
– remember that all materials provided in relation to this assignment are provided for
your own exclusive use and should not be shared in any way with other students.


You should aim to submit this script for marking by the recommended submission date.
The recommended and deadline dates for submission of this assignment are listed on the summary
page at the back of this pack and on our website at www.ActEd.co.uk.
When submitting your assignment, please:
 Email your assignment to ActEdMarking@bpp.com.

 In the subject header of your email type ‘CP2 Assignment X3’ followed by your Name, ActEd
Student Number and Time Taken in the following format:
CP2 Assignment X3 JOHN SMITH (12345) 3.5 HOURS
Please note that your ActEd Student Number is not the same as your Institute and Faculty
Actuarial Reference Number or ARN.
 Attach your Excel spreadsheet and Word files to your email. Your email may be rejected if
your attachments include excessively large files.
 Leave the body of your email blank unless you need to notify the marker of important
information relating specifically to this assignment, eg if you are resubmitting your
assignment after experiencing a problem with your email system.
 When your assignment has been marked, you will receive an email with instructions on how
to access your marking feedback and the marking schedule.

CP2 Assignment X3 – Instructions

1. Read the background document, which describes the scenarios that need to be modelled
and documented for this project.
2. Read the audit trail, which has been written by your colleague, another actuarial student,
for the calculations that they performed. This will assist you in following and
understanding the calculations performed in the Excel model provided.
You should assume that your colleague’s calculations have been checked and are
correct.
The Government of Taxland now wish to explore an additional scenario where all workers
pay a flat rate of income tax of 18%, irrespective of their level of income. (Under this
system there is no 0% band for low earners.)
3. (a) Expand the spreadsheet model CP2 Assignment X3 spreadsheet.xlsx to produce

the required additional calculations for the additional scenario. You should
ensure that the additional work you undertake on the spreadsheet contains
appropriate self‐checks and you should not overwrite the existing calculations.
(b) Incorporate the proposed flat‐rate system in the calculations and in the two
existing charts. [10]
4. Produce the following two new charts suitable for publication in a newspaper:
(a) a chart in a suitable format showing clearly how the amount of income tax
payable by individual workers on each of the six income levels compares under
the proposed flat‐rate system and the current system
(b) a pie chart showing clearly how the total amount of tax collected by the
government under the current system breaks down according to the pay level of
the workers. [10]
Marks available for spreadsheet [Sub‐total 20]

4. Prepare a summary document of five to seven pages, capturing the main features and
results of the work done by you and your colleague. You can assume that the summary is
being prepared for your boss, a senior actuary, who will present the work to a
government representative.
Your summary should include the following:
 purpose of the project, data, method and assumptions used by you and your
colleague
 results, including relevant tables and charts
 commentary on the results
 key conclusions
 suggested next steps.
Comments on the results should cover, but not be limited to:

 analytical comments on each stage of the results, including explaining patterns in
the results and any unusual features
 an explanation of the differences between the results under the various scenarios
modelled.
Next steps need to be specific to the project, with some mention of why each is a valid
next step.
The summary should cover the full scope of the project, including the current approach
that was modelled in the spreadsheet provided.
Marks available for the summary:

Commentary on results and conclusions [20]
Next steps [20]
Drafting [10]
[Sub‐total 80]
[Total 100]

Background
Your company has been asked by the government of Taxland to help them review the amounts of
income tax and the average tax rates paid by workers.
The current system operates by dividing an individual’s annual income into four bands, which
attract different tax rates, as shown in the table below.
Band Income Tax rate

Band 1 0 ‐ 10000 0%
Band 2 10000 ‐ 50000 20%
Band 3 50000 ‐ 100000 40%
Band 4 100000+ 50%
For example, for a person who earns 75,000:
Tax  10,000
  0%  40,000
  20%
  25,000
  40%
  0

  18,000
50%
Band 1 Band 2 Band 3 Band 4
18,000
Average tax rate   24%
75,000
In their calculations the government assumes that pay levels in the population have the following
structure:
Level Average Number

income (million)
Level 1 5000 5
Level 2 15000 10
Level 3 25000 20
Level 4 45000 10
Level 5 75000 3
Level 6 150000 2
They wish to look at the effect on the overall amount of tax paid and the average rate of tax paid
(as a percentage of pay) by workers at each income level if they make the following changes to
the tax bands and rates:
(a) increasing the threshold between Bands 1 and 2 from 10,000 to 12,500
(b) increasing the tax rate for Band 3 to 45%
(c) increasing the tax rate for Band 4 to 60%
(d) applying all of (a), (b) and (c) together.

Audit trail
Introduction
The government of Taxland are reviewing the bands and rates currently used to calculate income
tax for workers.
They have asked us to investigate the effects of some proposed changes to their current system.
The purpose of the model is to calculate the total tax that will be collected, and the average rate
of tax, under the current system and under some proposed alternative arrangements. Graphs
comparing the total tax and the average tax rates are also produced.
The accompanying Excel spreadsheet includes all the calculations that have been carried out.
Detailed descriptions of each worksheet are set out below.
The following colour conventions have been used:

 Pale shading (orange) indicates input cells that can be changed by the user
 Dark shading (green) indicates key results
 Checks are shown in green
 Warning messages and cells requiring special attention are shown in red.
Data
The government’s tax department have provided a table showing a breakdown of income levels
within the working population.
Assumptions
The spreadsheet model makes the following assumptions:

 The population data accurately represents the worker population and this will not change.
 The tax payable by workers is calculated correctly by the authorities and collected in full.
 Pay levels will not exceed 1,000,000.
 There are no increases in pay levels.
 Changing the tax system will not affect workers' pay.

WORKSHEET ‘Population’
This tab contains the data for the income population structure.
The columns are:

 Level (1–6)
 Average income (annual)
 Number of workers (in millions).
These figures were provided by the government and entered manually.
CHECKS (in Column D)
 Checks are included on the income figures to ensure that the income for Level 1 is positive
and that the income increases as we progress through the levels.
WORKSHEET ‘Parameters’
The PARAMETERS worksheet allows the user to specify the thresholds and rates for each tax
band.
Only the coloured values should be changed. These values (including the scenario names in
Column A) follow through automatically to the subsequent calculations.
CHECKS (in Column G)
 The minimum figures for each band are checked to ensure that they are positive and
increasing.
 The tax rates are checked to ensure that they lie between 0% and 100%.
WORKSHEET ‘System0’
This tab carries out the calculations for the current tax system.
For convenience the details of the TAX BANDS AND RATES are reproduced here. These are linked
by formula to the corresponding values in the Parameters tab.
The maximum values for each band are linked by formula to the minimum for the band above.
A value of 999,999 has been entered for Band 4 to avoid having to use a different formula for
Band 4 (which has no upper limit).
If different tax rates for workers earning over 1,000,000 are introduced, this will need to be
modified.
The page headings for all the System tabs are linked to the descriptions in the Parameters tab.

The TAX CALCULATIONS section calculates the amount of income falling in each of the tax bands
for workers on each pay level.
The first column (shown in red) has a slightly different formula. It calculates the minimum of the
Average Income from the Population tab and the width of Band 1.
The subsequent columns calculate the minimum of {Average Income minus the sum of the
amounts in the lower bands} and the width of the current band.
In the RESULTS section the Tax is calculated by applying the tax rates to the figures in the previous
columns using SUMPRODUCT.
Avg rate is the average tax rate paid by workers on that income level. It is calculated by dividing
the previous column by the Average Income for that level.
CHECKS
 The total income for all bands is calculated for each level in Column G and compared with
the Average Income column in the Population tab to ensure the amounts allocated are
correct.
 Checks are included below each column in Row 18 (calculated using a MIN function) to
ensure that there are no negative entries.
WORKSHEETS ‘System1/2/3/4’
These tabs carry out the calculations for the proposed alternative tax systems.
The calculations are the same as in the System0 tab, but using the appropriate parameters
specified on the Parameters tab.
RESULTS
This tab collates the results from the various systems and includes the two graphs.
The entries in the first part of the table are linked directly to the results in the corresponding
SystemX worksheet. These are plotted in a clustered column chart.
The entries Avg rate and Tax values are also linked directly to the appropriate SystemX tabs.
The Change is calculated by subtracting the original tax amount under the current system and
these values are plotted in a column chart. Note that the display units for the vertical axis have
been set to ‘Thousands’ to display the figures in billions.
These figures are marked as Higher or Lower (using an IF function) to show whether the total tax
has gone up or down.

CHECKS
 The Higher/Lower indicators have been checked by eye to ensure that the total tax moves
in the direction expected for each proposed change. For example, increasing the width of
the 0% tax band from 10,000 to 12,500 in System 1 reduces the overall tax paid, as
expected.
 The second graph provides some reasonableness checks for the proposed system:
(1) Increasing the Band 1/2 threshold will increase the amount of income that
attracts 0%, and so will reduce the total tax paid.
(2) Increasing the Band 3 tax rate will increase the amount of tax paid on income in
this band, and so will increase the total tax paid.
(3) Increasing the Band 4 tax rate will increase the amount of tax paid on income in
this band, and so will increase the total tax paid.
END OF PAPER





using the course.

Marking deadlines – Subject CP2
You should submit your scripts by email. This is in order for us to return your marked script in plenty
of time for you act on the feedback and improve your performance in your exam. In general, the
turnaround of all scripts is likely to be quicker if you submit them well before the relevant final
deadline dates.
For the session leading to the April 2019 examination
To receive your marked script back with adequate time to reflect and improve your performance,
you should follow the recommended submission dates. Your script will not be marked if it is
submitted after the relevant final deadline date.
Recommended
submission date
X1 20 February 2019 27 February 2019
X X2 27 February 2019 6 March 2019
X3 6 March 2019 13 March 2019
Marking vouchers
CP2 20 March 2019 27 March 2019
For the session leading to the September 2019 examination
To receive your marked script back with adequate time to reflect and improve your performance,
you should follow the recommended submission dates. Your script will not be marked if it is
submitted after the relevant final deadline date.
Recommended
submission date
X X2 14 August 2019 21 August 2019
Marking vouchers





using the course.

CP2: Assignment X1 Solutions Page 1
Solution X1.1
(i) Errors in formulae
Cell D13
The error message #NAME? indicates that Excel does not recognise the function MEAN.
The correct function name to use is AVERAGE. [1]
The correct formula would be:
= AVERAGE(D2:D11) [1]
Cell D14
The entries in cells B2:B11 are text strings. Excel does not recognise any of these entries as
matching the criterion X. The X needs to be enclosed in quote marks, ie “X” or ‘X’. [1]
Surprisingly Excel accepts an invalid criterion like this without giving a warning message.
So the correct formula would be:
= SUMIF(B2:B11,“X”,D2:D11) [1]
Cell D15
The arguments of the SUMIFS function have been entered in the wrong order. With the SUMIFS
function, the range to sum must be entered first, followed by the ranges and criteria for the tests.
[1]
Note that this is different from the SUMIF function, where the range to sum goes in the last
position.
= SUMIFS(D2:D11,B2:B11,"X",C2:C11,"Y") [1]
Cell D19
Excel is giving the error message #VALUE! because the INDEX functions used here are returning
string values and this formula is attempting to combine these using the arithmetic operator +.
The correct operator to use to concatenate strings is &. [1]
= INDEX(B2:B11,D17) & INDEX(C2:C11,D17) [1]

Page 2 CP2: Assignment X1 Solutions
Cell D20
The error message #REF! indicates that Excel is attempting to look up a value outside the specified
range of cells. The range specified in the VLOOKUP function must start in the column where we
are searching (column A) and must include the column that contains the answer required
(column D). [1]
= VLOOKUP(D17,A2:D11,4,0) [1]
[Total 10]
(ii) Improvements
Possible improvements include:
 Use absolute, rather than relative, row numbers for formulae that refer to the data,
ie D$2:D$11 instead of D2:D11. [1]
This would prevent the ranges being adjusted if these formulae are copied down, which
we would not want to happen here. [1]
 It might be sensible to anchor the columns here as well, ie use $D$2:$D$11. [½]
 Use absolute, rather than relative, row numbers and column letters in formulae that refer
to the sample number, ie $D$17 instead of D17. [1]
This would prevent the ranges being adjusted if these formulae are copied, which we
would not want to happen here. [½]
 We could give a range name (eg Data) to the cells containing the data in D2:D11 and/or
the sample number (eg Sample) in D17. [½]
This might make the formulae easier to read and check. [½]
 We could use a VLOOKUP function, rather than INDEX, in the formula in cell D19. [1]
This would then still work correctly if the sample numbers are not in sequential order. [½]
 We could modify the formulae to give an error message if the user enters a sample
number that is not present, eg using the IFERROR function. [½]
This would alert the user to a problem with the sample number. [½]
 We could use an AVERAGEIF function in place of AVERAGE in cell D13 to exclude any rows
where the cM entry has not been recorded yet. [½]
This would prevent misleading results being produced. [½]
[Maximum 5]

Solution X1.2
(i) Auto‐checks
Auto‐checks can be also be used to check for:

 consistency, eg checking that the totals in a summary table are consistent with the totals
in the data they are derived from or that a set of probabilities adds up to 1 [1]
 reasonableness, eg checking that a calculated value is similar to a rough estimate or lies
within the range expected, eg probabilities lying in the range [0,1] . [1]
[Total 2]
(ii) Other types of checks
Other types of checks that can be used include:

 checking for obvious errors ‘by eye’
 calculating summary statistics (eg averages, minimum/maximum)
 using Excel’s built in features such as auto‐filter
 comparing against independent information or background information provided
 spot checks, ie calculating a few figures manually
 reasonableness checks, eg comparing a figure with a rough estimate.
[½ for each, maximum 2]
(iii)(a) Reasonableness checks
As the name suggests, a reasonableness check is intended to check whether a particular figure is
believable, ie that it is not obviously wrong. [1]
This could involve:

 comparing it with a rough estimate [½]
 checking that it lies in the range that would be expected. [½]
(iii)(b) Example of a reasonableness check
Examples in an actuarial context might include:

 a pension fund might check the total annual payroll for a large company by multiplying
the number of employees by a published average wage for companies in that sector
 a non‐life insurer might check the average claim size for a particular class of insurance by
comparing it with the corresponding figure from the previous year, adjusted for inflation
 an investment manager might check the latest value of its investments by comparing the
proportions held in each asset class with the proportions from the previous valuation.
[Award 1 mark for any of the above examples or any other sensible suggestion]
[Total 3]

(iv) Errors
For reference, the screenshot below highlights the cells containing errors and shows what the
values should have been:
A B C D E F G
1 Name Field Country Born Married Died Children
2 Sir Digby Dogby Industrialist England 1850 1883 1915 4
3 Lady Effingham Scientist England 1868 1889 1956 ?
4 Rev Isaac Huxley Campaigner England 1822 1841 1871 8
5 Princess Louise Writer England 1873 1901
6 Patrick Ryan Politician Ireland 1854 1887 1936 1
7 Ronald Macdonald Businessman Scotland 1804 1832 1871 2
8 Wilberforce Smith Architect England 1839 1917
9 John J Jones Designer Wales 1792 1817 1855 2
10 Fabio Sottovoce Artist Ireland 1835? ? 1884 ?
11 Robert Oscar Young Explorer Scotland 1838 1860? 1899 ?
Cell B4 contains a typo. A letter had been omitted. [½]
The correct spelling is Campaigner. [½]
Cell C8 contains a typo. A letter had been omitted. [½]
The correct spelling is England. [½]
The ‘born’ date in cell D9 is after both the ‘married’ and the ‘died’ date. [½]
The most likely cause of this error is entering the wrong century, as the other dates in that column
are 18XX. So this should probably say 1792. [½]
The ‘born’ and ‘married’ dates in row 6 imply that this person got married at age 13, which is too
young. [½]
The most likely cause is entering the digits in the wrong order. So, either the ‘born’ date should
be 1845 or the ‘married’ date should be 1876. [½]
The ‘died’ date in cell F7 implies that this person lived to age 167, which is too old. [½]
The ‘born’ and ‘married’ date imply that he got married at age 28, which is reasonable. So it is
most likely that the ‘died’ date is wrong. This could be a century error, ie it should be 1871, or an
anagram of the digits, ie it should be 1917. [½]
The ‘born’ date in cell D11 is missing. [½]
It would be best just to mark this entry as ?. If necessary, we could perhaps assume that he got
married at age 25 (say), ie the born data should be 1835?, or that he died at a typical age for that
time, 60 (say), ie the born data should be 1839?. But both of these would be very speculative,
especially since the ‘married’ date is marked as uncertain anyway. [½]

It is possible that there are also some inconsistencies in columns A to C, eg the person in row 10
was based in Ireland but appears to have an Italian name. [½]
We could raise these as queries. [½]
It is possible that the number of children shown in cell G9 is wrong, as this person was married for
a number of years. However, there are many reasons why he might not have had children. [½]
It would be best just to query this entry, as it is a valid value and may well be correct. Replacing it
with an average number, eg 4, would be purely speculative. [½]
[Maximum 5]
(v)(a) Checks for accuracy
We could check that all the dates are valid years, eg integers in the range 1750 to 1950. (Any ?’s
can be stripped out first.) [½]
We can check that there are no missing ‘born’ or ‘died’ dates (or ?’s if these are uncertain). [½]
We could compare the data for each individual in the spreadsheet with the information in the
main text of the book. [½]
We could check the data for each individual against an independent source, eg by googling it or
looking on Wikipedia. [½]
We could check that the countries all have one of the four names England, Scotland, Ireland or
Wales. [½]
We could spellcheck the ‘name’, ‘field’ and ‘country’ columns. [½]
(v)(b) Checks for consistency
We could check the ‘born’ and ‘died’ dates to see whether the person died between ages 20 and
100 (say). [½]
We could check the ‘born’ and ‘married’ dates to see whether people with a ‘married’ date got
married between age 16 (say) and their date of death. [½]
We could check that the people did not have more children that the number of years they were
married (although it is possible that some had twins or the men had some children born outside
their marriage). [½]
(v)(c) Checks for reasonableness
We could check the ‘born’ and ‘died’ dates to see whether the person was actually alive at some
point during the Victorian period. [½]
We could query any people whose names don’t appear to match their country. [½]
We could query any people who had children but don’t have a ‘married’ date. [½]
We could query any people who were married for a number of years but had no children. (Large
families were the norm in those days.) [½]

There is some overlap between the different types of checks here. So marks can be awarded for
suggestions that appear anywhere in part (iii) provided they can be considered to be of the type
the student has indicated.
[Maximum 1 for each of parts (v)(a), (v)(b) and (v)(c)]
[Total 3]
Solution X1.3
(i)(a) Parameters versus assumptions
A parameter is a key variable in the model (usually numerical) that may be used in a number of
calculations whose value the user is able to specify. [1]
An assumption is a factual statement (usually expressed in words) that underlies the calculations
in the model and may affect the validity of the results. [1]
There is no set wording for the definitions of parameters and assumptions, so markers should
award marks to students based on how clearly they have explained each concept and made clear
the distinction between the two.
(i)(b) Examples of parameters and assumptions
Suitable examples would include:
Parameter Assumption
The interest rate used in the The interest rate is assumed to be constant OR
calculations (set to 4%, say) Interest has been ignored
The inflation rate used in the The inflation rate is assumed to be constant OR
calculations (set to 3%, say) Inflation has been ignored
The term of investment used in the The term of investment is fixed OR
calculations (set to 10 years, say) Investments cannot be realised before the maturity date
An adjustment made to the mortality Mortality is assumed to follow … table OR
rates (eg 90% of the … table) Mortality has been ignored
The name of an investment fund Investments will be made in a single fund
(to appear in all the tables and graphs)
The type of an option (CALL or PUT) The option is a standard call or put option
An indicator variable specifying The calculations are / are not adjusted to allow for
whether results are to be shown in future inflation
real or nominal amounts
The step size used (in a calculation The step size is small enough to give a sufficiently
where the time frame is subdivided) accurate approximation
Markers should award marks for any suitable examples of a pair of parameters and assumptions
that are related (1 mark each).
[Total 4]

(ii) Assumptions
The assumptions of this model include:
 The formula given (based on an adjusted form of the Black‐Scholes model) provides a
sufficiently accurate basis for calculating the option price.
 The distribution function  * ( x ) provides a sufficiently accurate description of the

underlying price movements.
 The option can only be exercised on the maturity date (ie it is a European option).
 The estimated value of q used in the calculations is appropriate. (The precise value of the
future dividend rate cannot be known in advance.)
 Treating dividends as payable continuously at a constant rate is a sufficiently accurate
approximation.
 The estimated value of  used in the calculations is appropriate. (The precise value of
the future volatility cannot be known in advance.)
 Consistent units of measurement have been used for all the parameters, eg all are based
on annual time units.
 The figure for the interest rate r is based on the correct compounding frequency that is
assumed in the formula (which appears to be a force of interest, ie continuous
compounding).
 The actual timing of the dividend payments is consistent with the timing assumed in the
formula (which appears to be continuous payments).
 The adjustments that will be applied to the theoretical price to allow for the bid‐offer
spread are appropriate for the market.
[1 mark each, Maximum 6]
Note that the wording of the question implies that there are no assumptions involved in
determining the values that should be used for S , T , K and r in the calculations.
Solution X1.4
(i) Reasons for producing an audit trail
The syllabus and background reading state that the audit trail should enable detailed checking
and high‐level scrutiny of the model by a fellow student and a senior actuary. [1]
The audit trail explains how the spreadsheet works so that a new user (or the original author
returning to the project at a later time) can easily understand how it was used. [½]
The audit trail highlights any areas requiring special attention when using the spreadsheet
(eg where a goalseek needs to be rerun or an entry or formula needs amending manually). [½]
The audit trail explains how the spreadsheet works so that a colleague or manager can check that
the model has been set up correctly and can check the calculations and the results. [½]

The audit trail saves a colleague who is checking the spreadsheet from having to study the
formulae in the spreadsheet in detail to understand how the calculations have been done. [½]
The audit trail provides a permanent record of the work carried out on the spreadsheet. This can
save time ‘reinventing the wheel’ (eg finding the source of the data) or going through the same
thought process (eg working out how a particular calculation works). [½]
The audit trail provides a record of the source(s) of the data, how the data was analysed and any
issues with the data (eg unresolved errors). [½]
The audit trail provides a record in case any aspect of the work is challenged at a later date. [½]
Where several spreadsheets with different outputs have been used in a project, the audit trail can
help to identify the correct spreadsheet required or to provide information about different
versions of the spreadsheet. [½]
The audit trail identifies the author of the spreadsheet and when the work was done. [½]
The audit trail explains the model used for the project and the assumptions it relies on. [½]
The audit trail can describe some reasonableness checks to prevent any obvious errors in the
calculations. [½]
The audit trail describes the outputs of the spreadsheet (eg tables and graphs) so that these can
easily be updated in the future, if required. [½]
[Maximum 5 for part (i)]
(ii)(a) Meaning of hard coding
Hard coding is where a calculation has been set up on a spreadsheet in such a way that it would
not update correctly if changes were made to the data values or other inputs used in the
calculation. [1]
The most obvious form of hard coding is where a data value or some other input value is typed
directly into a cell or a cell formula, rather than using a formula that refers to the cell where that
value is stored. [1]
Other forms of hard coding can occur where …

 a formula includes a reference to a particular cell that might not be the correct cell to use
in all circumstances [½]
 a formula refers to a particular column that will not update automatically if new columns
are added (eg when using a VLOOKUP when there are parallel columns for each year) [½]
 a formula refers to data in a particular worksheet that will not update automatically if a
worksheet with new data is added (eg if there are parallel worksheets for each year) [½]
 a heading or description in a graph includes an element (eg the category of data or the
year it relates to) that has been typed directly into the heading and will not update
automatically when new data values or different parameter values are used. [½]
[Maximum 2 for part (ii)(a)]

(ii)(b) Reasons for avoiding hard coding
The spreadsheet may produce wrong answers if a user is not aware that hard coding has been
used. [1]
Hard coding makes the spreadsheet harder to use and maintain because the hard‐coded entries
will need to be updated manually when changes are made. [1]
Hard coding makes the spreadsheet less robust by allowing for the possibility of errors not being
detected. [½]
Hard coding makes the spreadsheet harder and slower to check because all cells containing hard
coding will need to be examined. [½]
Hard coding means that the manual interventions required when using the spreadsheet will need
to be described and highlighted in the spreadsheet and in the audit trail. [½]
A spreadsheet containing hard coding cannot easily be updated to use for another purpose (eg to
carry out a similar exercise for another client). [½]
Hard coding increases workloads in terms of updating, checking and correcting errors, and
flagging areas where manual intervention is required. [½]
Hard coding may result in wrong information being provided to clients or to the supervising
authorities. [½]
This may result in clients making incorrect payments, charging incorrect amounts to customers,
setting up incorrect reserves, paying the wrong amount of tax or making misleading statements to
customers. [½]
A client may be prosecuted if hard coding results in misleading statements being made in adverts
for their products. [½]
This may result in a company being sued for any financial losses caused by the hard coding. [½]
Companies will operate more efficiently if they encourage the culture of making spreadsheets
robust and flexible. [½]
[Maximum 3 for part (ii)(b)]
[Total 5]





using the course.

Solution X2.1
(i) Parameters and scenarios
There are three parameters (in the shaded cells B4:B6):
Start date, End date and Claims cutoff [1]
Note that the variables represented by the Greek letters are not parameters of the Excel model, as
their values are calculated from the data and are not specified directly by the user.
There are three scenarios (in columns E, F and G), corresponding to the three claims distributions
(Exponential, Normal and Pareto). [1]
[Total 2]
(ii) Assumptions
The claim amounts in the data contain no material errors, so that they can be considered to be
complete and accurate. [1]
All the claims have been fully processed so that the claim amounts are the total that will
ultimately be paid. [1]
Claims are homogeneous and can all be considered to come from the same distribution. [1]
All claims were paid in pounds so that there are no issues relating to variations in currency
exchange rates. [1]
Inflation of claim amounts since 2017 has been ignored. [1]

[Maximum 3]
(iii)(a) Warnings
These are most likely to be checks on the fitted parameter values that will warn the user of any
possible errors. [1]
(iii)(b) Aspects included
The warnings might contain:

 a check that the fitted parameter values fall in the permitted ranges shown in the tables
eg that the calculated value of  for the Pareto distribution is greater than 2 (so that the
mean and standard deviation are both meaningful). [1]
 a check that the fitted parameter values correctly reproduce the sample mean and, where
appropriate, the standard deviation (shown in cells B10 and B11). [1]
[Total 3]

(iv) Columns E, F and G
To obtain full marks, the descriptions should make clear which item(s) in the spreadsheet are being
described or referred to and should minimise the need for another user to look at the formulae
used in those cells.
The word count was given to indicate how much detail was expected. There is no penalty for
going outside this range.
Columns E, F and G calculate the results of fitting three different statistical distributions to the
data. [1]
The ‘Type’ indicates the particular distribution used, eg exponential. [½]
The ‘Method of estimation’ indicates which method of estimation is to be used to fit the
distribution, ie to estimate the parameter values based on the data in the summary statistics. [½]
The methods available include maximum likelihood estimation (MLE) or method of moments
estimation (Moments). [½]
The methods available also included the method of percentiles, but this cannot be seen from the
screenshot in the question.
The ‘Parameters’ indicates the symbols used to denote the unknown parameter(s) for that
distribution. [½]
If the distribution has only one parameter, the second parameter is shown as ‘(not used)’. [½]
The ‘Estimated values’ (in rows 7 and 8) are calculated using standard formulae based on the
method of estimation selected. [1]
More specifically:
 for the exponential distribution, λ is estimated as the reciprocal of the average claim size
[½]
 for the normal distribution, μ and σ are estimated as the sample mean and sample
standard deviation of the claim sizes [½]
 for the Pareto distribution, α and λ are estimated by solving two simultaneous equations
obtained by equating the sample moments to their theoretical formulae. [½]
The ‘Warnings’ in row 9 indicate whether the fitted values for the parameters fall within the
permitted ranges. [½]
The values of λ and σ must be positive. For the Pareto distribution the permitted values of the
parameter α are restricted to α>2 to ensure that the mean and standard deviation of the fitted
distribution are both finite. [½]
The ‘Warnings’ should say ‘OK’. If this is not the case, this needs to be investigated to ensure that
the data inputs and the formulae used to estimate the parameter values are correct. [1]

Rows 10, 11 and 12 then show the mean, standard deviation and 95th percentile of the fitted
distribution. [½]
The mean has been calculated using the usual formulae, eg 1/ λ for the exponential distribution
and the variance has been calculated as the square root of the variance formula, eg 1/ λ for the
exponential distribution. [½]
The 95th percentile is the claim size below which 95% of the claims would be expected to lie. It is
calculated by equating the distribution function F(x) to 0.95 and solving for x, eg –ln0.05 / λ for
the exponential distribution. [½]
The ‘Mean’, ‘Standard deviation’ and ‘95th percentile’ allow us to assess how good the fit is and
to carry out some reasonableness checks. [½]
For example, we can see here that the standard deviation for the exponential distribution is equal
to the mean, as it should be. [½]
[Maximum 6]
Solution X2.2
(i) Purpose of the summary report
The syllabus and background reading state that the project summary should give a reasonable
overview of the model and the results. [1]
The summary document should describe:

 the purpose [½]
 the data [½]
 the approach and assumptions [½]
 the results and conclusions and [½]
 suggested next steps [½]
This should be in a form suitable for the actuary managing the project. [½]
[Maximum 2]
(ii) Improvements to the student’s project summary
The project summary should indicate what checks (if any) were applied to the data. [½]
This is because any material errors in the data would invalidate the results. [½]
The report should indicate whether the ‘clean’ data can be considered to be complete and
accurate. [½]
This is a professional standards requirement. [½]
The report should say which summary statistics were calculated. [½]
The report should show all the summary statistics that were calculated. [½]

This will allow the actuary to form a clear picture of the data and to apply some reasonableness
checks. [½]
The report should say which statistical distributions were used. [½]
This will allow the actuary to decide whether these were the most suitable ones to use. [½]
The report should say which methods of estimation were used. [½]
This will allow the actuary to decide whether a suitable method was chosen for each distribution,
as some methods are not reliable in certain situations. [½]
The summary report need not mention the drop‐down menu. [½]
The actuary should be able to read the summary report without having to consider the details of
how the spreadsheet was set up. [½]
The typo ‘calculate’ should be corrected to ‘calculated’. [½]
Spelling errors and mistakes in the use of English make the report harder to understand and could
lead to misunderstandings. [½]
Errors in the report make it look unprofessional and could cast doubt on the accuracy of the
numbers shown in the report. [½]
The report should describe in words how the parameter α was calculated, rather than quoting an
Excel formula. [½]
The actuary should not need to consult the spreadsheet to see what the variables B12 etc are. [½]
The report should indicate how the parameters were calculated for the other distributions. [½]
Otherwise, the actuary would need to consult the spreadsheet to check that the method used
was correct. [½]
The method should be described at a higher level than describing the specific formulae used in
the spreadsheet. [½]
The report should include the actual results for all the scenarios. [½]
The actuary will need to review these and apply some high‐level checks to them. [½]
The report should say why the Pareto distribution was considered the best fit. [½]
The actuary needs to understand the criteria that were applied when choosing between the
different distributions that were tested. [½]
The report should explain the purpose of the warning messages and what they checked for. [½]
The actuary will need to understand whether the checks applied were thorough enough. [½]
The report should say what reasonableness checks were applied, rather than just saying that the
results all look sensible. [½]

The report should not refer to cells in the spreadsheet, eg cells E9:G11. (In fact, this is not even
the correct range. It should say E10:G12.) [½]
The actuary should be able to follow the summary report without referring back to the
spreadsheet. [½]
The report should include some other comments on the results. [½]
The actuary will need to present the key conclusions and raise any important issues arising from
the project to the board of directors. [½]
[Maximum 4]
(iii) Reasonableness checks
Cell E11
The variance of the exponential distribution is 1  2 . So the standard deviation is 1  . [½]
This is the same as the formula for the mean. [½]
The standard deviation shown in cell E11 (£225,841) is the same as the mean shown in cell E10.
So this appears to be correct. [1]
This is also the same as the average claim size in the data shown in cell B10. [½]
Cell F12
The 95th percentile should be significantly higher than the median (the 50th percentile). [½]
This is true for the normal distribution in this example since the 95th percentile shown in cell F12
(£868,392) is significantly higher than the median in cell F10 (£225,841). [½]
In fact, the 95th percentile should equal   1.6449 , which equals:
225,841  1.6449  390,632  868,392 [1]
This agrees with the figure in cell F12. [½]

[Total 4]
(iv) Comments
The means of the fitted distributions are all equal to the mean claim size in the data. [½]
This is to be expected for the methods of estimation of the parameters used here. [½]
The standard deviations of the fitted distributions are equal to the standard deviation of the claim
size in the data for the normal and Pareto distributions. [½]
This is to be expected for the methods of estimation used here, where the two parameters in
these distributions allow the fitting process to match both the mean and the variance. [½]
However, for the exponential distribution, the standard deviation of the fitted distribution does
not match the standard deviation of the claim size in the data. [½]

This is because the exponential distribution has only one parameter and the standard deviation is
forced to equal the mean. [½]
With the exponential distribution, the actual standard deviation is significantly different – in fact,
much higher – than the predicted value. [½]
So the exponential distribution would not be suitable for modelling the large claims. [½]
The 95th percentile is significantly higher than the mean for all three fitted distributions. [½]
The 95th percentile for the fitted distributions is closest to the actual value for the Pareto
distribution, being only 3% too high. [½]
The sample size (92) is quite small, so there will still be a significant amount of uncertainty in the
underlying distribution, which will be reflected in the fitted values. [½]
The 95th percentile is 10% too low for the exponential distribution and 16% too high for the
normal distribution. [½]
These errors are large, indicating that the exponential distribution and the normal distribution
would not be suitable for modelling the large claims. [½]
The 95th percentile is important because it indicates the size of the very large claims, which will
have the highest financial impact. [½]
The 95th percentile may affect the company’s decision whether to use excess of loss insurance for
the very large claims. [½]
[Total 4]
(v) Next steps
Plot graphs of the fitted distributions overlaid on the observed distribution. This will allow us to
compare the shapes of the distributions to see where the fit is good/bad. [1]
Compare the results with the fitted distributions for previous years. This will establish whether
there have been any significant changes. [1]
Apply the same distribution type and fitting method to data from previous years. This will
establish whether the results have been consistent from year to year. [1]
Try other distributions, eg an extreme value distribution. This may give a better fit. [1]
Include the skewness, as well as the standard deviation. This gives an indication of the thickness
of the tail, ie the likelihood of the largest claims. [1]
Apply a chi‐square test to the distribution of the individual large claims. This will give an
indication of whether any differences between the fitted distributions can be attributed to
chance. [1]
Check the data if this has not already been done. Any material errors could lead to misleading
results. [1]
Adjust the individual claims for inflation. This will remove a possible distorting factor. [1]

Include an adjustment to allow for claims that have not yet been fully processed. This will prevent
the amounts of the large claims being underestimated. [1]
Subdivide the claims further to make sure they do form homogeneous groups. This will validate
the assumption made in the model. [1]
If claims were not all paid in pounds, analyse the effect of currency movements on the claim
amounts. This will remove a possible distorting factor. [1]
Redo the calculations using the percentile method for estimating the parameters. This may be
better at ensuring that the fitted distribution in the right‐hand tail matches the observed claim
amounts. [1]
Redo the calculations using the 99th percentile. This will indicate whether the very large claims
behave in the way expected. [1]
Calculate confidence intervals for the parameter values. This will give an indication of the amount
of random variation present in the estimates. [1]
[Maximum 6]

Solution X2.3
(i) Chart types
The first chart is a stacked column chart. [½]
This one is actually a ‘2D 100% stacked column’ chart.
The second chart is a line chart. [½]

This one is actually a ‘line with markers’ chart.
[Total 1]
(ii)(a) Improvements
A title should be added to each chart … to make clear what each chart is showing. [1]
The axes on each chart should be labelled … to avoid any ambiguity. [1]
It would be a better to relabel the horizontal axis on the second chart as 6, 7, …, 10 … to make
clear that it relates to a later 5‐year period. [1]
The order of the parties should be reversed on one of the charts … to make them consistent. [1]
The gridlines could be shown at intervals of 10% on the second chart … to make the chart look
less cluttered. [1]
To aid comparison … we could add data labels on both charts showing the actual percentages for
the main parties. [1]
Arguably, a clustered, rather than a stacked, column chart could be used … as this might make it
easier to see how the voting patterns have changed over time. [1]
The two charts should be combined … to make it easier to see what has happened over the whole
period. [1]
The same chart type should be used for both periods … to make them easier to compare. [1]
We could consider using different markers on the second chart, eg circles consistently throughout
… provided the different parties can easily be distinguished. [1]
[½ for each valid suggestion, ½ for each valid reason, maximum 3]

(ii)(b) Instructions
For reference only, here are our ‘improved’ versions. We’ve kept the two periods separate so that
you can see the issues for the two different chart types.
Popularity of political parties for Years 1 to 5

100%
90% Preservatives
80% 39% 37% 39% 32% 37%
Percentage of voters
Unionisers
70%
Federal Liberators
60%
27% 22% Presidential Party
50% 28% 25% 27%
40% 9% 7% Draconian Party
30% 9%
9% 13%
None of the above
20%
10% 17% 14% 17% Don't know
11% 12%
0%
1 2 3 4 5
Year

50%
42%
38%
40%
33% 33% Preservatives

30%
Unionisers
30%
22% 22% 21% 22%
Federal Liberators
28%
20% Presidential Party
10% Draconian Party

None of the above
0%
Don't know
6 7 8 9 10
Year
A combined version would look like this:

50%
42%
39% 39% Preservatives
37% 37% 38%
40%
33% 33% Unionisers

32% 30%
28% 27%
30% 25% Federal Liberators
22% 22% 22% 21% 22%
27% 28% Presidential Party
20%
Draconian Party
10% None of the above
Don't know
0%
1 2 3 4 5 6 7 8 9 10
Year

Full marks [2 for each improvement] should be awarded either for full instructions or for
instructions in an abbreviated form (such as the ones we’ve shown below) provided that they
would be sufficiently clear for a less experienced user to follow. Marks for partially correct
answers should be scaled down accordingly.
Note that there may be equally good alternative methods of carrying out these tasks and that the
precise steps and menu options will depend on the particular version of Excel the student is using.
Adding titles
Click on the chart to select it.
Click on the Layout menu at the top of the screen.
Click on Chart Title.
Select Above Chart (say).
Enter the text you wish to appear in the title. [2]
OR
Click on the chart > Layout > Chart Title > Above Chart > Enter text
Labelling the axes
Click on the chart to select it.
Click on the Layout menu at the top of the screen.
Click on Axis Title.
Click on the Primary Horizontal Axis Title (for the x‐axis)
Select Title Below Axis (say).
Enter the text you wish to appear as a label on the axis. [2]
OR
Click on the chart > Layout > Axis Title > Dropdown to Primary Horizontal Axis Title > Title Below
Axis > Enter text
Changing the values shown on the horizontal axis
Right‐click on the chart.
Click on ‘Select Data’.
Click the ‘Edit’ button the right‐hand side.
Enter the values you wish to show (6,7,8,9,10 in this case) or select a range where these values
will be entered and enter that cell range. [2]

OR
Right‐click on the chart > Select data > Edit (on right‐hand side) > Enter values 6,7,8,9,10 (or select
a range where these values will be entered)
Changing gridlines
Right‐click on the vertical axis of the chart.
Click on ‘Format Axis’.
Next to ‘Major Units’, click fixed and enter 0.01 in the shaded box. [2]
OR
Right‐click on vertical axis > Format Axis > Major Units > 0.01
We’ve removed the gridlines completely from the first chart using:
Click on the chart > Layout > Gridlines > Primary Horizontal Gridlines > None
Adding data labels
Right click on one of the main series.
Click ‘Add Data Labels’. [2]
OR
Right click on one of the main series > Add Data Labels
Changing the marker symbols
Right click on the line for one of the series.
Click ‘Format Data Series’.
Click ‘Marker Options’.
Click ‘Built‐in’ and select the circle symbol (say). [2]
OR
Right click on the line for one series > Format Data Series > Marker Options > Built‐in > Circle
symbol
Our graph is in colour, so it is easy to see which line is which.
We’ve also made the bars wider on the first chart using:
Right click on the bar for one series > Format Data Series > Gap width = 50%
[2 marks for each instruction, maximum 6]

[Total 9 for part (ii)]

(iii)(a) Generating comments
Other methods of generating comments include:

 comment on the salient features brought out by the graph
 comment on any trends or other patterns that can be seen from the graph
 relate aspects of the graph to previous results or background information
 apply reasonableness checks to some of the results shown in the graph
 make comparisons between scenarios (where applicable)
 comment on any inadequacies of the graph / suggest areas for improvement.
[½ mark for each valid method, maximum 2]
(iii)(b) Comments on the graphs
There are some noticeable changes between the first 5‐year period and the second.
These changes could be related to the political crisis.
The dominant party seems to have changed from the Preservatives to the Unionisers. Voters may
now have a preference for the Unionisers’ policies or their leaders or their track record.
The Draconian Party has become much more popular. They may be proposing a new policy that is
popular.
In the second period the rises and falls in the Unionisers and Federal Liberators are mirror images
with the total roughly constant. This could indicate voters switching between these two parties.
The percentage of ‘Don’t know’ respondents has dropped, suggesting that the political crisis may
have polarised voters’ opinions.
There is a fair amount of ‘random’ variation from year to year. However, there now appears to be
a consistent ranking of the main parties in the order Unionisers, Preservatives, Federal Liberators
and the Draconian Party.
The Presidential Party has never had much support.

[1 mark for each valid comment, maximum 4]
[Total 6]
For reference, here is the original data on which these charts were based:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Preservatives 39% 37% 39% 32% 37% 22% 22% 21% 28% 22%
Unionisers 28% 25% 27% 27% 22% 33% 38% 42% 33% 30%
Federal Liberators 9% 9% 13% 9% 7% 17% 14% 8% 17% 20%
Presidential Party 4% 2% 1% 6% 6% 7% 2% 6% 0% 1%
Draconian Party 2% 1% 4% 1% 2% 11% 10% 16% 12% 12%
None of the above 8% 9% 5% 10% 9% 4% 6% 3% 4% 6%
Don't know 11% 17% 12% 14% 17% 7% 7% 4% 5% 9%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Assignment X3 Solutions will be provided when we return your marked script or through our Virtual
Learning Environment (VLE) at vle.bpp.com. If you do not already have a username and password for
the VLE then you will receive an email with this information.





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Before you start

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Core study material

Background reading and Guide to CP2

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2.1 Subject CP2 – background

Subject CP2 is Modelling Practice.

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2.2 Subject CP2 – Syllabus

Links to other subjects

1. Preparation and exploratory analysis of data (2%) (0% – 10%)

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Detailed syllabus objectives

1. Preparation and analysis of data (10%)

2. Development of a model with clear documentation (30%)

2.1 Plan and produce a spreadsheet model to solve a specified problem.

3. Analysis of methods used and model outputs (15%)

4. Application and interpretation of results (20%)

4.1 Apply the results to the problem set, suggesting solutions.

5. Communication of results and conclusions (25%)

Two computer‐based modelling assignments.

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2.3 Subject CP2 – the course structure

 Chapter 1 provides an introduction to CP2.

1 Introduction to Subject CP2 10

2 Analysing data 12 1.1 – 1.5

10 Worked example Paper 1 21

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2.4 Subject CP2 – summary of ActEd products