Subject CA1(2): Self-assessment questions — Unit 15 Question 15.3 (#44) Outline the reasons why a general insurance company models its claims experience. 5] Question 15.4 (#) ‘A major retail company sponsors a well-funded final salary pension scheme. Recently the costs of the scheme have been increasing dramatically The finance director of the company has set the objective of reducing the future volatility of the contribution rate, without making any changes to the scheme’s benefit structure. (i) Outline the options that are available to achieve the finance director's objective. v7 ‘The company decides to control the costs of the scheme by limiting the growth in pensionable salary. Increases in pensionable salary will be restricted each year to the rate of price inflation, and non-pensionable bonuses will farm a larger element of overall remuneration. fan employee is promoted, their pensionable salary may be increased to reflect their new responsibility. This promotional increase would be in addition to the annual inflationary increase. (ii) Comment on the practical issues that will need to be addressed in order to implement this strategy. (4) It is now three years since the strategy was implemented. The inflationary increases to pensionable salary in the last three years have been 1.8%, 0.8% and 3.3% respectively. ‘The following tables are excerpts from the membership data for the actuarial valuation due to be carried out this year, and from the actuarial assumptions used in the last valuation, Table 1: details of average pensionable salaries by age for members who have been in service continuously from the last valuation to this valuation ‘Average pensionable salary at this ‘Average pensionable salary at last Age | valuation for members aged x at this valuation for members aged x at this nearest | valuation, € valuation, € 38 31378 28,980, 39 28,841 25,776 40 57,898 53,646 aL 37,640 34,676 a2 32,415, 30,160, Page 3 of 14Subject CA1(2): Self-assessment questions — Unit 15 Table 2: promotional salary scale assumption, s,, used in the last valuation Age nearestx |S 35 223 36 228 7 233 38 238 39 243 40, 247 aL 250 a2 253 ‘The promotional scale s, excludes any allowance for annual inflationary increases to pensionable salary. (iti) Extend Table 1 to show calculations for the following figures in respect of the above scheme membership over the triennial inter-valuation period: ‘© actual promotional salary growth ‘+ expected promotional salary growth + the actual/expected percentage for promotional salary growth Include details of the formulae you have used. {6] (iv) (a) Comment on the results in part (i), and (b) Describe the further investigations and actions that might be appropriate 7 {Total 24) Question 15.5 (444) ‘An insurance company is considering introducing a wedding insurance policy. The insurer intends to sell the policy through a large supermarket chain. The policy would be branded in the name of the supermarket, but the insurance company would cover the risks. (i) List the main risks that the policy should cover. (4) (ii) Explain why the insurer may wish to use the supermarket as its sales channel. (4) i) Discuss the rating factors the insurer could use in setting premiums. (6] [Total 14) Page 4 of 14Subject CA1(2): Self-assessment questions — Unit 15 n 15.6 (#4) (i) (a) Define self-insurance in the context of general insurance. {b) Explain why some organisations may choose to self-insure some of the risks that they face (3) ‘Asmall company owns a chain of 30 retail units in and around a large city. The vast majority of transactions in the business involve cash, The annual turnover for each retail unit varies between $500,000 and $3,000,000. at present, the company does not have insurance against robbery, burglary or theft. ‘The company has now decided to obtain quotations for such insurance cover. (i) Outine the general information an insurance company would need in order to set appropriate premiums. 7) (ii) Describe specific measures thatthe retailer could take to reduce the risk of a claim and hence obtain a reduction to the premiums in (ii) above. (6) (Total 16) n 15.7 (#4) ()(@)_ Explain the term “underwriting cycle” (b) Define the term “risk premium”, and state the general formula that may be used to caleulate a risk premium. (4) ‘A large general insurance company writes warranty business for construction companies that build housing. The warranties are for a period of twelve years and cover major damage caused by building defects in new homes. The company has been writing this business for the last ten years. (ii) Outline the main data issues that will need to be considered when calculating a theoretical risk premium for this business. 2] i) Outline the factors (other than the theoretical risk premium) that should be taken into account when determining the actual premium to be charged for this business. {6] ‘A particular construction company has requested that its premium rates be reviewed, (iv) Discuss the further considerations that the insurance company will take into account when responding to this request. (4) {Total 16) Page 5 of 14Subject CA1(2): Self-assessment questions — Unit 15 Question 15.8 (#44) ‘An individual, whose motor insurance policy is due for renewal, uses a website to compare quotes froma range of providers including his current insurer. ‘The individual supplies personal and other details and specifies the type of cover required. Based on this information, the website gives a wide range of premiums, all of which are lower than the premium currently being paid. Explain possible reasons for the range and size of the results of this comparison exercise. (23) Question 15.9 (#44) (i) Uist the roles that a national government can play in the provision of benefits to individuals. (3) [Agovernment is concerned about the increasing costs of providing retirement benefits for government employees (i) Describe how the government could reduce these costs. 7) {Total 10} Question 15.10 (+) ‘A merchant has just purchased goods from a supplier based in an overseas country. The goods cost $7 million, Currently these goods could be sold for $10 million in the merchant’s home country. It «will be necessary to ship these goods from their present location and the voyage should take one month. The expenses of the voyage and selling the goods are estimated to be $0.5 milion. The merchant estimates that over the duration of the voyage, one or more events could arise with the following total consequences and probabilities: Consequence Probability of event Total loss of the cargo 1% Loss of half the value of the cargo 2% Loss of 5% of the value of the cargo 40% () Calculate the insurance premium the merchant would expect to have to pay, in order to cover the risks of these events arising over the expected period of the voyage. 2] Page 6 of 14Subject CA1(2): Self-assessment questions — Unit 15 ‘The merchant decides not to take out this insurance cover. Itis estimated that, by the time the goods are sold at the end of the voyage, their sale value and the expenses incurred may change in the following ways: Value of the goods: No change: 60% chance Increase by 20%: 25% chance Decrease by 30%: 15% chance Level of expenses: No change: 40% chance Increase by 25%: 40% chance Decrease by 20%: 20% chance (ii) Calculate the expected profit the merchant will make on this venture, You should ignore tax and any interest payable or receivable. 5] The merchant takes out a contract which guarantees that the goods will be sold to the writer of the contract in one month's time, for 97.5% of today's market value. At that time, the merchant must supply the goods to the writer of the contract at the merchant's home port, for which he will receive the agreed payment. The effect of taking out the contract is to reduce the expected profit to the merchant due to the cost of the guarantee. !) Discuss the possible financial implications for the merchant if the voyage takes longer than anticipated, for example at least an extra month. (8) {Total 15) Question 15.11 (#4) ‘An insurance company is considering introducing a health insurance policy, which will cover the cost of medical treatment. Premiums will be payable annually The policy will incorporate a guarantee such that premiums will be maintained at the existing rate if no claims have been made in the previous year. Discuss the main considerations that will need to be taken into account when determining the appropriate premium to charge. You do not need to consider issues relating to expenses or investment returns and strategy. (8] Page 7 of 14Subject CA1(2): Self-assessment questions — Unit 15 Ques n 15.12 (#) Alife insurance company writes a significant volume of term assurance business, New business volumes have fallen by 30% over the past three months. Analysis of the market indicates that a 20% reduction in premium rates is required to regain lost business and achieve the target of a 10% increase in the volume of new business. (i) State possible reasons for the fall in new business. (3) (i) Describe how the impact on profitability ofthis reduction in premium rates would be determined (4) (ii) Discuss the factors that would be considered before arate reduction was implemented. fal (Total 14) Question 15.13 (#44) Alife insurance company currently sells without profits whole life assurance contracts through insurance intermediaries. It now additionally intends to market this business through a series of advertisements in a national newspaper. Discuss the factors that might cause the premium rates for policies sold through this new sales channel to differ from those for similar contracts sold through insurance intermediaries. (3) Question 15.14 (#4) Alife insurance company sells non-linked critical illness contracts through insurance intermediaries. Itis considering increasing its medical limit (the limit at which it asks for a report from the applicant s doctor) to counter rising underwriting costs. {)__ State why the company would underwrite these contracts at inception. 8] (ii) List the questions that the company would include on the proposal form in order that it could underwrite the application (6) (ill) Describe the factors the company should take into account when setting @ new medical limit and how it would determine by how much it should be increased, (6) Page 8 of 14Subject CA1(2): Self-assessment questions — Unit 15 (iv) Outline the principal methods by which special terms might be applied to the contract as a result of the underwriting process. (4) (Total 19] Question 15.15 (#4) You are the actuary ofa major insurer that forthe lat ten years has been writing twelve year warranty business covering major damage caused by building defects in new homes, The table below shows the policies issued and resulting claims outgo for a particular builder whose premium rates are under review at his own request. UMW Noof Claims paid in year after writing (thousands) Yeor poles 0 1 2 3 4 5 6 7 8 9 1 29000 7 «15 20 «30 40 95 160 195 220 230 2 18000 9 15 20 «25 $5 125 145 175 170 3 12,000 10 20 «20 40 85 135 150 155 4 11000 9 «15 30 30. 80 120 115 5 19000 8 25 40 50 70 90 6 8000 10 30 35 45 55 7 13000 «10 «20-2525 8 15000 9 15 45 9 25000 6 10 10 260004 (Describe the main claims features of this business that can be deduced from the above table. (3) (ii) You are aware that a competitor insurance company has quoted for this business. You know that the rate the competitor quoted is lower than the rate you are currently charging, but you are not sure precisely what that rate is. Explain with reasons how you would calculate the new office premium to be quoted, given that the necessary loadings for expenses, commission and reinsurance are already known. (9] {Total 12) Page 9 of 14Subject CA1(2): Self-assessment questions — Unit 15 Question 15.16 (#4) You are the actuary for a general insurance company that writes household buildings and contents insurance. List distinct rating factors that are likely to be used to rate this business. ia] Question 15.17 (#4) You are the actuary for a general insurance company and are about to perform a premium rating exercise for a class of personal ines business. (i) Ust the claims data needed to perform the premium rating exercise ta] (i) Explain briefly why the introduction of new premium rates is likely to take place sometime after the period of the base claims. B) (ii) (a) Describe briefly the problems that may arise as a result of introducing a new premium. rating basis some time after the period of the base data used in deriving the new premiums, (6) Explain how these problems may be mitigated. 9 {Wv) State the non-claims related factors to be taken into account before deriving the final premium to be charged to the customer. ts] {Total 22] Question 15.18 (#4) You are the actuary for a general insurance company writing only commercial lines business. You have recently been asked by one of the underwriters to assist with a request from the owner of a small Christmas tree farm for insurance cover against all major insurable risks in respect of that business. () Describe the main insurance products the farm is likely to need and the associated perils covered by each product. ie) (i)__Ust the rating factors you would use in premium rating each part ofthe cover in (i), m i) Describe the main characteristics of claims likely to aise under each element of cover. (10) {Total 25] Page 10 of 14