Subjectct52005 2009 PDF

Faculty of Actuaries
Institute of Actuaries
EXAMINATION
6 April 2005 (pm)
Subject CT5 Contingencies Core Technical

Time allowed: Three hours INSTRUCTIONS TO THE CANDIDATE 1. Enter all the candidate and examination details as requested on the front of your answer booklet. You must not start writing your answers in the booklet until instructed to do so by the supervisor. Mark allocations are shown in brackets. Attempt all 14 questions, beginning your answer to each question on a separate sheet. Candidates should show calculations where this is appropriate.
2.
3. 4. 5.
Graph paper is not required for this paper.
AT THE END OF THE EXAMINATION Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this question paper. In addition to this paper you should have available the 2002 edition of the Formulae and Tables and your own electronic calculator.
CT5 A2005
Faculty of Actuaries Institute of Actuaries
1 2
Explain the difference between a profit vector and a profit signature.
[2]
A 20-year temporary annuity-due of 1 per annum is issued to a life aged 50 exact. (a) Express the expected present value of the annuity in terms of an assurance function. Hence calculate the value using the mortality table AM92 Ultimate with 4% interest. [3]
(b)
A life insurance company sells an annual premium whole life assurance policy where the sum assured is payable at the end of the year of death. Expenses are incurred at the start of each policy year, and claim expenses are nil. (a) Write down a recursive relationship between the gross premium provisions at successive durations, with provisions calculated on the premium basis. Define all the symbols that you use. Explain in words the meaning of the relationship. [4]
(b)
A life insurance company issues an annuity to a life aged 60 exact. The purchase price is 200,000. The annuity is payable monthly in advance and is guaranteed to be paid for a period of 10 years and for the whole of life thereafter. Calculate the annual annuity payment. Basis: Mortality Interest AM92 Ultimate 6% per annum [4]
CT5 A2005
A three-state transition model is shown in the following diagram:
Alive
Sick
Dead
Assume that the transition probabilities are constant at all ages with = 1% and = 5%.
= 2%, = 4%,
Calculate the present value of a sickness benefit of 2,000 p.a. paid continuously to a life now aged 40 exact and sick, during this period of sickness, discounted at 4% p.a. and payable to a maximum age of 60 exact. [4]
Calculate the probability of survival to age 60 exact using ELT15 (Males) for a life aged 45 exact using two approximate methods. State any assumptions you make. [5]
A joint life annuity of 1 per annum is payable continuously to lives currently aged x and y while both lives are alive. The present value of the annuity payments is expressed as a random variable, in terms of the joint future lifetime of x and y. Derive and simplify as far as possible expressions for the expected present value and the variance of the present value of the annuity. [5]
A pension scheme provides a pension on ill-health retirement of 1/80th of Final Pensionable Salary for each year of pensionable service subject to a minimum pension of 20/80ths of Final Pensionable Salary. Final Pensionable Salary is defined as the average salary earned in the three years before retirement. Normal retirement age is 65 exact. Derive a formula for the present value of the ill-health retirement benefit for a member currently aged 35 exact with exactly 10 years past service and salary for the year before the calculation date of 20,000. [5]
Explain how an insurance company uses risk classification to control the profitability of its life insurance business. [5]
CT5 A2005
PLEASE TURN OVER
10
You are given the following statistics in respect of the population of Urbania: Males Age band Exposed to risk 125,000 200,000 100,000 90,000 Observed Mortality rate 0.00356 0.00689 0.00989 0.01233 Exposed to risk 100,000 250,000 200,000 150,000 Females Observed Mortality rate 0.00125 0.00265 0.00465 0.00685
20 30 40 50
29 39 49 59
Calculate the directly and indirectly standardised mortality rates for the female lives, using the combined population as the standard population. [6]
11
A life insurance company issues a 25-year with profits endowment assurance policy to a male life aged 40 exact. The sum assured of 100,000 plus declared reversionary bonuses are payable on survival to the end of the term or immediately on death, if earlier. Calculate the monthly premium payable in advance throughout the term of the policy if the company assumes that future reversionary bonuses will be declared at a rate of 1.92308% of the sum assured, compounded and vesting at the end of each policy year. Basis: Interest Mortality Initial commission Initial expenses Renewal commission 6% per annum AM92 Select 87.5% of the total annual premium 175 paid at policy commencement date 2.5% of each monthly premium from the start of the second policy year 65 at the start of the second and subsequent policy years 2.5% of the claim amount [10]
Renewal expenses Claim expense
CT5 A2005
12
(i)
By considering a term assurance policy as a series of one year deferred term assurance policies, show that:
A1 = x:n
(ii)
A1 x:n
[5]
Calculate the expected present value and variance of the present value of a term assurance of 1 payable immediately on death for a life aged 40 exact, if death occurs within 30 years. Basis: Interest Mortality 4% per annum AM92 Select
Expenses: None [6] [Total 11]
CT5 A2005
PLEASE TURN OVER
13
A life insurance company issues a 4-year unit-linked endowment assurance contract to a male life aged 40 exact under which level premiums of 1,000 per annum are payable in advance. In the first year, 50% of the premium is allocated to units and 102.5% in the second and subsequent years. The units are subject to a bid-offer spread of 5% and an annual management charge of 0.5% of the bid value of the units is deducted at the end of each year. If the policyholder dies during the term of the policy, the death benefit of 4,000 or the bid value of the units after the deduction of the management charge, whichever is higher, is payable at the end of the year of death. On surrender or on survival to the end of the term, the bid value of the units is payable at the end of the year of exit. The company uses the following assumptions in its profit test of this contract: Rate of growth on assets in the unit fund Rate of interest on non-unit fund cashflows Independent rates of mortality Independent rate of withdrawal 6% per annum 4% per annum AM92 Select 10% per annum in the first policy year; 5% per annum in the second and subsequent policy years. 150 plus 100% of the amount of initial commission 50 per annum on the second and subsequent premium dates 10% of first premium 2.5% of the second and subsequent years premiums 8% per annum
Initial expenses
Renewal expenses
Initial commission Renewal commission
Risk discount rate (i)
Calculate the profit margin on the assumption that the office does not zeroise future negative cashflows and that decrements are uniformly distributed over the year. [13] Suppose the office does zeroise future negative cashflows. (a) Calculate the expected provisions that must be set up at the end of each year, per policy in force at the start of each year. Calculate the profit margin allowing for the cost of setting up these provisions. [4] [Total 17]
(ii)
(b)
CT5 A2005
14
(i)
Write down in the form of symbols, and also explain in words, the expressions death strain at risk , expected death strain and actual death strain . [6] A life insurance company issues the following policies: 15-year term assurances with a sum assured of 150,000 where the death benefit is payable at the end of the year of death 15-year pure endowment assurances with a sum assured of 75,000 5-year single premium temporary immediate annuities with an annual benefit payable in arrear of 25,000 On 1 January 2002, the company sold 5,000 term assurance policies and 2,000 pure endowment policies to male lives aged 45 exact and 1,000 temporary immediate annuity policies to male lives aged 55 exact. For the term assurance and pure endowment policies, premiums are payable annually in advance. During the first two years, there were fifteen actual deaths from the term assurance policies written and five actual deaths from each of the other two types of policy written. (a) (b) Calculate the death strain at risk for each type of policy during 2004. During 2004, there were eight actual deaths from the term assurance policies written and one actual death from each of the other two types of policy written. Calculate the total mortality profit or loss to the office in the year 2004. Basis: Interest Mortality 4% per annum AM92 Ultimate for term assurances and pure endowments PMA92C20 for annuities [13] [Total 19]
(ii)
END OF PAPER
CT5 A2005
EXAMINATION
April 2005
Subject CT5 Contingencies Core Technical EXAMINERS REPORT
Introduction The attached subject report has been written by the Principal Examiner with the aim of helping candidates. The questions and comments are based around Core Reading as the interpretation of the syllabus to which the examiners are working. They have however given credit for any alternative approach or interpretation which they consider to be reasonable.
M Flaherty Chairman of the Board of Examiners 15 June 2005
Subject CT5 (Contingencies Core Technical)
April 2005
Examiners Report
The profit vector is the vector of expected end-year profits for policies which are still in force at the start of each year. The profit signature is the vector of expected end-year profits allowing for survivorship from the start of the contract.
(a)
50:20
A50:20
1 A50:20 d
A50 v 20 20 p50 (1 A70 )
(b)
0.32907 0.45639
0.480093
8054.0544 (1 0.60097) 9712.0728
50:20
1 0.480093 13.5176 d
(a)
( tV ' OP et )(1 i ) where

tV '
qx t ( S )
p x t ( t 1V ' )
gross premium provision at time t
OP = office premium et expenses incurred at time t
i = interest rate in premium/valuation basis S = sum assured p x t is the probability that a life aged x + t survives one year on the premium/valuation mortality basis qx t is the probability that a life aged x + t dies within one year on the premium/valuation mortality basis
Page 2
Subject CT5 (Contingencies Core Technical) (b)
April 2005
Examiners Report
Income (opening provision plus interest on excess of premium over expense, and provision) equals outgo (death claims and closing provision for survivors) if assumptions are borne out.
The value of a pension of 1 p.a. is (12)

10 (12) 10 | 60
where first term is an annuity certain

1 0.55839 0.058128
(12)
10
1 v10 d
(12)
@ 6%
7.59720
(12) 10 | 60 10 p60 (12) 70
(12) 60 (12)
60:10
(12) v10 10 p60 70
8054.0544 9287.2164
0.867219
70 11/ 24 9.140 11/ 24 8.682
So value of a pension of 1 p.a. is 7.59720 + v10 0.867219 8.682 = 11.801
So annuity purchased by 200,000 is 200000/11.801 = 16,948
Page 3

20
April 2005
Examiners Report
The present value is

0
t ii t p40
2000.e
t t
ii p40 dt where
ln(1.04)
exp
0
)ds
exp( .05t )
So value is
20
2000 e
0
5%t
dt where
20
ln(1.04)
2000 18, 653
e t (.05 ln(1.04)) (.05 ln(1.04))
Require to calculate
14 p46
14 p45
p45 .14 p46
l60 l46
86714 95266
0.91023
constant
(a)
Assume deaths uniformly distributed so t p x . Then

q45
x t
(1 )q45 (1 q45 )
0.00266 (1 .00266)
.001332
So (b)
14 p45
(1 .001332) 0.91023 0.909018
Assume that force of mortality is constant across year of age 45 to 46

p45 45 p45
45
ln(1 q45 ) e
0.002664
ln(1 0.00266) 0.002664 0.998669
So
14 p45
0.998669 0.91023 0.909018
Page 4
April 2005
Examiners Report
Define a random variable Txy, the lifetime of the joint life status The expected value at a rate of interest i is
axy E
E (aTxy ) 1 v
Txy
1 E (v 1 Axy
Txy
The variance is
1 v
Txy
var 1
2
var(v
Txy
1
2
( 2 Axy ( Axy ) 2 )
where 2 Axy is at (1 i ) 2 1
Past Service
29 i35 t v35 t z35 t 10 20000 a35 80 s34 v35 t 0 l35
or
z ia M 10 20000 s 35 80 D35
Page 5
Subject CT5 (Contingencies Core Technical) Future Service

z ia M 10 20000 s 35 80 D35 z ia R 1 20000 s 45 80 D35
April 2005
Examiners Report
9
Insurance works on the basis of pooling independent homogeneous risks The central limit theorem then implies that profit can be defined as a random variable having a normal distribution. Life insurance risks are usually independent Risk classification ensures that the risks are homogeneous Lives are divided by risk factors More factors implies better homogeneity But the collection of more factors is restricted by The cost of obtaining data Problems with accuracy of information The significance of the factors The desires of the marketing department
10
Age band Males Exposed to risk Observed Mortality rate Females Exposed to risk Observed Mortality rate Male Actual deaths Female Actual deaths Total Actual deaths Total Exposed to risk Female Expected deaths using total mortality rates 253.333333 1133.61111 1279.33333 1335.75 4002.02778 Direct Indirect Total Expected deaths using female rates 281.25 1192.5 1395 1644 4512.75 0.003714 0.003764
20 30 40 50
29 39 49 59
125000 200000 100000 90000
0.00356 0.00689 0.00989 0.01233
100000 250000 200000 150000
0.00125 0.00265 0.00465 0.00685
445 1378 989 1109.7 3921.7
125 662.5 930 1027.5 2745
570 2040.5 1919 2137.2 6666.7
225000 450000 300000 240000 1215000
Page 6
April 2005
Examiners Report
11
Let P be the monthly premium. Then: EPV of premiums: 12 Pa (12) a (12)

[40]:25
155.124 P 11 (1 24
25 p[40]v 25
[40]:25
a[40]:25
) 12.927
13.290
11 1 (1.06) 24
25
8821.2612 9854.3036
EPV of benefits:
100, 000 (1.06)1/ 2 {q[40] (1 b)v (1 b) ....
24 1
q[40] (1 b) 2 v 2
q[40] (1 b)25 v 25 } 100, 000 25 p[40] (1 b) 25 v 25
where b = 0.0192308 D65 100, 000 1 (1.06)1/ 2 A[40]:25 @ i ' 100, 000 @ i' (1 b) D[40] 100, 000 (1.06)1/ 2 (.38896 .33579) 100, 000 .33579 38949.90 1.0192308 where i '
1.06 1 0.04 1 b
EPV of expenses:
.875 12 P 175 0.025 12 P(a (12) a (12) ) 65[a[40]:25 1] 14.086 P 973.85
[40]:1
[40]:25
a (12)
[40]:1
a[40]:1
11 (1 24
p[40]v ) 1
11 1 (1.06) 24
9846.5384 9854.3036
0.974
EPV of claim expense: .025 38949.9 =973.748
Page 7
April 2005
Examiners Report
Equation of value gives 155.124P = 38949.9 + 14.086P + 973.85 + 973.75
and P = 289.98
12
(i)
A1 x:n
n 1 t 0
n 1 t 0
1 t |Ax:1
vt t p x A1 x
1
t:1
A1 x
t:1 0
vs s p x
x t s ds
Assuming a uniform distribution of deaths, then s p x

1 1
x t s
qx
A1 x
t:1 0
v s q x t ds iv
qx
t 0
v s ds
qx
A1 x:n i
n 1 t 0
n 1 t 0
vt . t p x .qx
iv
t
vt 1. t px .q x
A1 x:n
Page 8

2
April 2005
Examiners Report
(ii)
var( A1 x:n
i
2
var(
A1 x:n
var( A1 ) x:n
( 2 A1 x:n
( A1 )2 ) x:n
A140 :30
A 40
v30 . 30 p 40 . A70 8054.0544 0.60097 0.078970 9854.3036

v30 . 30 p 40 . 2 A70
0.23041 v30
2 1 A 40 :30 2
A 40
0.06775 v30
8054.0544 0.38975 0.037469 9854.3036
where v = 1/1.0816
var( A1 ) x:n
0.04 ln(1.04)
(0.037469 (0.078970)2 ) 0.032486
Expected value =
1 A[40]:30
0.04 0.078970 0.080539 ln(1.04)
13
Annual premium Risk discount rate Interest on investments Interest on sterling provisions Minimum death benefit 1000.00 8.0% 6.0% 4.0% 4000.00 Initial expense Renewal expense 150 50 % prm 20.0% 2.5% Total 350 75 Allocation % (1st yr) Allocation % (2nd yr +) Man charge B/O spread 50.0% 102.50% 0.50% 5.0%
Page 9
Subject CT5 (Contingencies Core Technical) (i) Multiple decrement table x 40 41 42 43 x 40 41 42 43

d qx s qx
April 2005
Examiners Report
0.000788 0.000962 0.001104 0.001208 (aq ) d x 0.000749 0.000938 0.001076 0.001178
0.10 0.05 0.05 0.05 (aq ) s x 0.09996 0.04998 0.04997 0.04997
(ap)
0.899291 0.949086 0.948951 0.948852
t 1 ( ap )
1.000000 0.899291 0.853504 0.809934
Unit fund (per policy at start of year) yr 1 value of units at start of year alloc B/O interest management charge value of units at year end 0.000 500.000 25 28.500 2.518 500.983 yr 2 500.983 1025.000 51.25 88.484 7.816 1555.400 yr 3 1555.400 1025.000 51.25 151.749 13.404 2667.495 yr 4 2667.495 1025.000 51.25 218.475 19.299 3840.421
Page 10
Subject CT5 (Contingencies Core Technical) Cash flows (per policy at start of year) yr 1 unallocated premium B/O spread expenses interest man charge extra death benefit end of year cashflow 500.000 25.000 350.000 7.000 2.518 2.619 181.898 yr 2 25.000 51.250 75.000 1.950 7.816 2.293 45.177
April 2005
Examiners Report
yr 3 25.000 51.250 75.000 1.950 13.404 1.434 38.730
yr 4 25.000 51.250 75.000 1.950 19.299 0.188 31.589
probability in force discount factor expected p.v. of profit premium signature expected p.v. of premiums profit margin (ii) (a)
1 0.925925926 88.54607934 1000 3207.370861 2.76%
0.899291 0.85733882
0.853504
0.809934
0.793832241 0.735029853
832.67667
731.74245
642.95174
To calculate the expected provisions at the end of each year we have (utilising the end of year cashflow figures and decrement tables in (i) above):
3V
31.589 30.374 1.04 2V (1.04) ( ap ) 42 3V (1.04) (ap ) 41

2V
38.73 45.177
2V
64.9552 102.7164
V 1
V 1
Page 11
April 2005
Examiners Report
These need to be adjusted as the question asks for the values in respect of the beginning of the year. Thus we have: Year 3 Year 2 Year 1 (b) Based on the expected provisions calculated in (a) above, the cash flow for years 2, 3 and 4 will be zeroised whilst year 1 will become: 181.898 92.372 = 89.526 30.374(ap)42 = 28.823 64.9552(ap)41 = 61.648 102.7164(ap)40 = 92.372
Hence the table blow can now be completed for the revised profit margin. revised end of year cash flow probability in force discount factor expected p.v. of profit profit margin
89.526 1 0.925925926 82.89461768 2.58%
0 0.899291 0.85733882
0 0.853504 0.793832241
0 0.809934 0.735029853
14
(i)
The death strain at risk for a policy for year t + 1 (t = 0, 1, 2 ) is the excess of the sum assured (i.e. the present value at time t + 1 of all benefits payable on death during the year t + 1) over the end of year provision. i.e. DSAR for year t + 1 S V t 1
The expected death strain for year t + 1 (t = 0, 1, 2 ) is the amount that the life insurance company expects to pay extra to the end of year provision for the policy. i.e. EDS for year t + 1 q ( S V) t 1
The actual death strain for year t + 1 (t = 0, 1, 2 ) is the observed value at t+1 of the death strain random variable i.e. ADS for year t + 1 ( S t 1V ) if the life died in the year t to t + 1 = 0 if the life survived to t + 1
Page 12
Subject CT5 (Contingencies Core Technical) (ii)
April 2005
Examiners Report
Annual premium for pure endowment with 75,000 sum assured given by: P PE 75, 000 D60 a45:15 D45 75, 000 882.85 11.386 1677.97 3465.71
Annual premium for term assurance with 150,000 sum assured given by:
PTA P EA 2 P PE 150, 000 A45:15 a45:15 2 P PE
150, 000 0.56206 2 3465.71 473.20 11.386
Provisions at the end of the third year: for pure endowment with 75,000 sum assured given by:
3V PE
75, 000
D60 D48
P PE a48:12
75, 000
882.85 3465.71 9.613 11289.63 1484.43
for term assurance with 150,000 sum assured given by:

3V TA 3V EA 3V PE
150, 000 A48:12
(2 3465.71 473.20)a48:12
2 11289.63
150, 000 0.63025 7, 404.62 9.613 22,579.26 777.63 for temporary immediate annuity paying an annual benefit of 25,000 given by:
3V IA
25, 000a58:2 1)
25, 000(a58:3
25, 000(a58 v3 3 p58 a61 1) 25, 000 16.356 (1.04)

3
9802.048 15.254 1 9864.803
47, 037.91
Page 13
Subject CT5 (Contingencies Core Technical) Sums at risk: Pure endowment: Term assurance: Immediate annuity: DSAR = 0
April 2005
Examiners Report
11,289.63 = 11,289.63 777.63 = 149,222.37
DSAR = 150,000
DSAR = (47,037.91 + 25,000) = 72,037.91 ADS
Mortality profit = EDS For term assurance

EDS ADS
4985 q47 149, 222.37
4985 .001802 149, 222.37 1,340, 460.07
8 149, 222.37 1,193, 778.96
mortality profit = 146,681.11 For pure endowment

EDS 1995 q47 ADS 1 11, 289.63 1995 .001802 11, 289.63 11, 289.63 40,586.11
11, 289.63
mortality profit = 29,296.48 For immediate annuity

EDS 995 q57 72, 037.91 995 .001558 72, 037.91 72, 037.91 111, 673.89
ADS 1
72, 037.91
mortality profit = 39,635.98 Hence, total mortality profit = 77,748.65
END OF EXAMINERS REPORT
Page 14
EXAMINATION
7 September 2005 (pm)

2.
3. 4. 5.
CT5 S2005
Describe what is meant by adverse selection in the context of a life insurance company s underwriting process and give an example.
[2]
2 3
Describe how occupation affects morbidity and mortality.
[3]
A graph of f0(t), the probability density function for the random future lifetime, T0, is plotted on the vertical axis, with t plotted on the horizontal axis, for data taken from the English Life Table No. 15 (Males). You are given that f0(t) = t p0 t 80 and then falls.
t.
You observe that the graph rises to a peak at around
Explain why the graph falls at around t
80 .
[3]
Calculate the value of 1.75 p45.5 on the basis of mortality of AM92 Ultimate and assuming that deaths are uniformly distributed between integral ages.
[3]
A population is subject to a constant force of mortality of 0.015. Calculate: (a) (b) The probability that a life aged 20 exact will die before age 21.25 exact. The curtate expectation of a life aged 20 exact. [4]
Define (12)
60:50:20
fully in words and calculate its value using PMA92C20 and [5]
PFA92C20 tables for the two lives respectively at 4% interest.
CT5 S2005
A life insurance company prices its long-term sickness policies using the following three-state continuous-time Markov model, in which the forces of transition , , and are assumed to be constant:
Healthy
Sick
Dead The company issues a particular long-term sickness policy with a benefit of 10,000 per annum payable continuously while sick, provided that the life has been sick continuously for at least one year. Benefit payments under this policy cease at age 65 exact. Write down an expression for the expected present value of the sickness benefit for a healthy life aged 20 exact. Define the symbols that you use. [5]
A life insurance company issues an annuity contract to a man aged 65 exact and his wife aged 62 exact. Under the contract, an annuity of 20,000 per annum is guaranteed payable for a period of 5 years and thereafter during the lifetime of the man. On the man s death, an annuity of 10,000 per annum is payable to his wife, if she is then alive. This annuity commences on the monthly payment date next following, or coincident with, the date of his death or from the 5th policy anniversary, if later and is payable for the lifetime of his wife. Annuities are payable monthly in advance. Calculate the single premium required for the contract. Basis: Mortality Interest Expenses PMA92C20 for the male and PFA92C20 for the female 4% per annum none
[9]
CT5 S2005
PLEASE TURN OVER
A life insurance company issues an annuity policy to two lives each aged 60 exact in return for a single premium. Under the policy, an annuity of 10,000 per annum is payable annually in advance while at least one of the lives is alive. (i) Write down an expression for the net future loss random variable at the outset for this policy. [2] Calculate the single premium, using the equivalence principle. Basis: Mortality Interest Expenses (iii) PMA92C20 for the first life, PFA92C20 for the second life 4% per annum ignored
(ii)
[3]
Calculate the standard deviation of the net future loss random variable at the outset for this policy, using the basis in part (ii). You are given that a60:60 = 11.957 at a rate of interest 8.16% per annum. [4]
[Total 9]
CT5 S2005
10
A life insurance company issued a with profits whole life policy to a life aged 20 exact, on 1 July 2002. Under the policy, the basic sum assured of 100,000 and attaching bonuses are payable immediately on death. The company declares simple reversionary bonuses at the start of each year. Level premiums are payable annually in advance under the policy. (i) Give an expression for the gross future loss random variable under the policy at the outset. Define symbols where necessary. [3] Calculate the annual premium, using the equivalence principle. Basis: Mortality Interest Bonus loading Expenses Initial Renewal AM92 Select 6% per annum 3% simple per annum 200 5% of each premium payable in the second and subsequent years
(ii)
Assume bonus entitlement earned immediately on payment of premium. [4] (iii) On 30 June 2005 the policy is still in force. A total of 10,000 has been declared as a simple bonus to date on the policy. The company calculates provisions for the policy using a gross premium prospective basis, with the following assumptions: Mortality Interest Bonus loading Renewal expenses AM92 Ultimate 4% 4% per annum simple 5% of each premium [4] [Total 11]
Calculate the provision for the policy as at 30 June 2005.
CT5 S2005
PLEASE TURN OVER
11
A life insurance company issues a three-year unit-linked endowment assurance contract to a male life aged 62 exact under which level annual premiums of 10,000 are payable in advance throughout the term of the policy or until earlier death. 85% of each year s premium is invested in units at the offer price. There is a bid-offer spread in unit values, with the bid price being 95% of the offer price. There is an annual management charge of 1.25% of the bid value of units. Management charges are deducted at the end of each year, before death or maturity benefits are paid. On the death of the policyholder during the term of the policy, there is a benefit payable at the end of the year of death of 20,000, or the bid value of the units allocated to the policy, if greater. On maturity, 115% of the full bid value of the units is payable. The company holds unit provisions equal to the full bid value of the units. It sets up non-unit provisions to zeroise any negative non-unit fund cashflows, other than those occurring in the first year. The life insurance company uses the following assumptions in carrying out profit tests of this contract: Mortality Expenses Initial Renewal AM92 Ultimate 600 100 at the start of each of the second and third policy years 8% per annum
Unit fund growth rate Non-unit fund interest rate Non-unit fund provision basis Risk discount rate
4% per annum
AM92 Ultimate mortality, interest 4% per annum 15% per annum [14]
Calculate the profit margin on the contract.
CT5 S2005
12
On 1 January 2000, a life insurance company issued joint life whole life assurance policies to couples. Each couple comprised one male and one female life and both were aged 50 exact on 1 January 2000. Under each policy, a sum assured of 200,000 is payable immediately on the death of the second of the lives to die. Premiums under each policy are payable annually in advance while at least one of the lives is alive. (i) Calculate the annual premium payable under each policy. Basis: Mortality PMA92C20 for the male PFA92C20 for the female 4% per annum Initial Renewal 1,000 5% of each premium payment [5] (ii) On I January 2004, 5,000 of these policies were still in force. Under 100 of these policies only the female life was alive. Both lives were alive under the other 4,900 policies. The company calculates provisions for the policies on a net premium basis, using PMA92C20 and PFA92C20 mortality for the male and female lives respectively and 4% per annum interest. During the calendar year 2004, there was one claim for death benefit, in respect of a policy where the female life only was alive at the start of the year. In addition, one male life died during the year under a policy where both lives were alive at the start of the year. 4,999 of the policies were in force at the end of the year. Calculate the mortality profit or loss for the group of 5,000 policies for the calendar year 2004. [9] [Total 14]
Interest Expenses
CT5 S2005
PLEASE TURN OVER
13
Under the rules of a pension scheme, a member may retire due to age at any age from exact age 60 to exact age 65. On age retirement, the scheme provides a pension of 1/60th of Final Pensionable Salary for each year of scheme service, subject to a maximum of 40/60ths of Final Pensionable Salary. Only complete years of service are taken into account. Final Pensionable Salary is defined as the average salary over the three-year period before the date of retirement. The pension scheme also provides a lump sum benefit of four times Pensionable Salary on death before retirement. The benefit is payable immediately on death and Pensionable Salary is defined as the annual rate of salary at the date of death. You are given the following data in respect of a member: Date of birth Date of joining the scheme Annual rate of salary at 1 January 2005 Date of last salary increase (i) 1 January 1979 1 January 2000 50,000 1 April 2004
Derive commutation functions to value the past service and future service pension liability on age retirement for this member as at 1 January 2005. State any assumptions that you make and define all the symbols that you use. [12] Derive commutation functions to value the liability in respect of the lump sum payable on death before retirement for this member as at 1 January 2005. State any assumptions that you make and define all the symbols that you use. [6] [Total 18]
(ii)
END OF PAPER
CT5 S2005
EXAMINATION
September 2005
September 2005
Examiners Report
In general, this examination was done well by students who were well prepared. Several questions gave difficulties particularly Question 7 and 12(ii) the latter one being very challenging. To help students comments are attached to those questions where particular points are of relevance. Absence of comments can be indicate that the particular question was generally done well.
Adverse selection is the manner in which lives form part of a group, which acts against a controlled process of selecting the lives with respect to some characteristic that affects mortality or morbidity. An example is where a life insurance company does not distinguish between smokers and non-smokers in proposals for term assurance cover. A greater proportion of smokers are likely to select this company in preference to a company that charges different rates to smokers and non-smokers. This would be adverse to the company s selection process, if the company had assumed that its proportion of smokers was similar to that in the general population. Other examples were credited.
Occupation can have several direct effects on mortality and morbidity. Occupation determines a person s environment for 40 or more hours each week. The environment may be rural or urban, the occupation may involve exposure to harmful substances e.g. chemicals, or to potentially dangerous situations e.g. working at heights. Much of this is moderated by health and safety at work regulations. Some occupations are more healthy by their very nature e.g. bus drivers have a sedentary and stressful occupation while bus conductors are more active and less stressed. Some work environments e.g. pubs, give exposure to a less healthy lifestyle. Some occupations by their very nature attract more healthy workers. This may be accentuated by health checks made on appointment or by the need to pass regular health checks e.g. airline pilots. Some occupations can attract less healthy workers, for example, former miners who have left the mining industry as a result of ill health and then chosen to sell newspapers. This will inflate the mortality rates of newspaper sellers. A person s occupation largely determines their income, which permits them to adopt a particular lifestyle e.g. content and pattern of diet, quality of housing. This effect can be positive or negative e.g. over-indulgence. Other appropriate examples were credited.
As t increases,
increases, but t p0 decreases. At t = 80 approximately, the decrease

t
in t p0 is greater than the increase in
, hence f 0 t
p0
decreases.
A deceptively straightforward answer which many students struggled to find. The key point is to compare the 2 parameters as shown.
Page 2
September 2005
Examiners Report
1.75 p45.5
0.5 p45.5 * p46 * 0.25 p47
1 q45 *(1 q46 ) *(1 0.25q47 ) 1 0.5q45
1 0.001465 *(1 0.001622) *(1 0.25*0.001802) 1 0.5*0.001465

0.999267 *0.998378*0.99955 0.997197
(a)
The required probability is
1 e
1.25 0.015dt 0
1 e
0.01875
0.018575
(b)
The curtate expectation is
k k 1
p20
k 1
k 0.015dt 0
e
k 1
0.015k
0.015 0.015
1 e
66.168.
(12)
60:50:20
is the present value of 1 p.a. payable monthly in advance while two lives
aged 60 and 50 are both still alive, for a maximum period of 20 years.
(12)
60:50:20
(12) (12) 60:50 v 20 20 p60:50 80:70
(a60:50 11
) v 20 20 p60:50 (a80:70 11 ) 24 24 6953.536 9392.621 (6.876 0.458) 12.747 9826.131 9952.697
(15.161 0.458) v 20
Page 3

45 0 t
September 2005
44 t 0
Examiners Report
7
where
t hh p20
EPV = 10, 000
hh p20 *
20 t
ss * 1 p20 t*
t u 1 u
ss p21 t du dt
is the force of interest is the probability of a healthy life aged 20 being healthy at age 20 t is the probability that a life who is sick at age 20 t is sick continuously for one year thereafter is the probability that a life who is sick at age 21 t is still sick at age 21 t u
ss 1 p20 t
ss p21
This question was not done well and few students obtained the whole result. Partial credits were given for correct portions. There were other potentially correct approaches which were credited provided proper definitions of symbols given.
Premium = 20, 000 a
12 5
D70 12 a D65 70
10, 000 1
l70 D67 12 a l65 D62 67
l70 D67 12 a l65 D62 70|67
12 5
4.5477
v5 9238.134 9647.797
D70 D65 a70

12
0.787027
11.562 0.458 11.104
l70 l65
a67
12
0.957538
14.111 0.458 13.653
D67 D62
a70|67
12
v5
9605.483 9804.173
12
0.80527
a67
a70:67
12)
(14.111 0.458) (10.233 0.458) 3.878
Premium = 265,736.96 + 34,570.77 = 300,308 to nearer
Page 4
September 2005
Examiners Report
(i)
10, 000a
A B max K 60 1, K 60 1|
P , where A and B refer to the first and second lives
and P is the single premium. (ii)

A B A B P 10, 000 a60 a60 a60 * a60
10, 000* 15.632 16.652 14.09
181,940
2
Variance =
108 d2
60 :60
60 :60
108 0.038462
2
* 1 0.075444*11.957
1 0.038462*18.194
standard deviation = 22,936.7
10
(i)
The gross future loss random variable is

100, 000 1 bK 20
1
vT20
I eaK
20
fvT20
GaK
20
where b is the annual rate of bonus I is the initial expense e is the annual renewal expense and f is the claim expense G is the gross annual premium (ii) The premium is given by
Ga 20 100,000 A 20 3,000 IA
20
200 0.05Ga 20
G * 16.877 100,000 * 1.06 0.5 * 0.04472 3,000 * 1.06 0.5 * 2.00874 200 0.05G *(16.877 1) 1] 16.083G 4604.206 6204.373 200
G 684.49
Page 5
Subject CT5 (Contingencies Core Technical) (iii) The required provision is
September 2005
Examiners Report
110,000 A23
4,000 IA
23
0.95 * 684.48 * a 23
110,000 * 1.04 0.5 * 0.12469 4,000 * 1.04 0.5 * 6.09644 0.95 * 684.49 * 22.758
13,987.528 24,868.693 14, 798.742
24, 057.48
11
Unit fund Year Fund at the start of the year Premium Allocation to units Interest Management charge Fund at the end of the year 1 0 10000 8075 646 109.0123 8611.988 2 8611.988 10000 8075 1334.959 225.274 17796.67 3 17796.67 10000 8075 2069.734 349.268 27592.14
Non-unit fund before provisions Year Premium margin Expenses Interest Death cost Maturity cost Management charge Profit 1 1925 600 53 115.156 0 109.013 1371.857 2 1925 100 73 24.995 0 225.274 2098.28 3 1925 100 73 0 4138.821 349.268 1891.55
Provision required at the start of year 3 = (1891.55 = 1768.192 Reduced profit at the end of year 2 = 2098.28
4138.821 (1
p64)) / 1.04
1768.192*p63 = 350.146
Page 6
Subject CT5 (Contingencies Core Technical) Revised profit vector: 1371.857,350.146, 0

p62
2 p62
September 2005
Examiners Report
0.989888 0.978659
1371.857 1.15 350.146* p62 1.152 1455.003
Net Present Value =
Present value of premiums = 10000* 1
p62 2 p62 1.15 1.152
26007.788
Profit margin =
1455.003 26007.788
5.59%
Most students completed the tables satisfactorily in this question but struggled to get the revised profit vectors. Very few produced a complete result.
12
(i)
Let P be the annual premium.

0.95* P * a
50m :50 f
1000 200000* A
50m :50 f
50m :50 f
a50m
a50 f
a50m:50 f
18.843 19.539 17.688 20.694
50m :50 f
1.040.5 * A
50m :50 f
1.040.5 *(1 d * a
50m :50 f
1.040.5 *(1 0.038462* 20.694) 0.208109

0.95* P * 20.694 1000 200000*0.208109
P
(ii)
2,168.02 .
From part (i) the net premium is:

200000 * (1.04)0.5 * 1 a
50 :50
m f
at 4%
= 200000 * (1.04)0.5 * = 2011.39
1 20.694
.04 1.04
We require 3 provisions at end of 5th policy year Page 7
Subject CT5 (Contingencies Core Technical) Both lives alive
September 2005
Examiners Report
200000 * (1.04)0.5 * 1
a a
55m :55 f
50m :50 f
= 200000 * (1.04)0.5 1 = 11196.46 Male only alive
17.364 18.210 16.016 18.843 19.539 17.688
200000 A55m
= 200000 * (1.04)0.5 * 1 = 32820.60 Female only alive
200000 A55 f 2011.39 a55 f
2011.39 a55m
2011.39 *17.364
.04 *17.364 1.04
= 200000 * (1.04)0.5 * 1 = 24482.39 Mortality Profit Loss = Expected Death Strain
.04 *18.210 1.04
2011.39 *18.210
Actual Death Strain
In this case there are 4 components: (a) Both lives die during 2004 Result = (4900 * q54m * q54 f
0) (200000 *1.040.5 11196.46)
no actual claims
= (4900 * 0.000986 * 0.000912) (192764.32) = 849.37 (b) Female alive at begin 2004, death during 2004 Result = (100 * q54 f Page 8
1) (200000 *1.040.5 24482.39)
1 actual claim
Subject CT5 (Contingencies Core Technical) = (100 * 0.000912 = 163109.96 1) (179478.39)
September 2005
Examiners Report
(c) Both lives alive beginning 2004, males only die during 2004 -1 actual claim. Here the claim cost is the change in provision from joint lives to female only surviving i.e. Result = (4900 * q54m * q54 f
1) (24482.39 11196.46)
1) (13285.93)
= (4900 * 0.000986 * 0.999088 = 50845.17
(d) Both lives alive beginning 2004, females only die during 2004 no actual claims. Claim cost change in provision from joint lives to male only surviving Result = (4900 * p54m * q54 f
0) (32820.611 11196.46)
= (4900 * 0.999014 * 0.000912) (21624.14) = 96538.66 Hence overall total = 849.37 163109.16 + 50845.17 + 96538.66 = 14876.77
i.e. a mortality loss of 14877 when rounded. For part (i) assuming renewal expenses did not include the first premium (answer 2162.62) was also fully acceptable. Part (ii) was very challenging and very few students realised the extension of mortality profit/loss extended to joint life contracts involved reserve change costs on first death. Most just considered the first 2 components of the answer and in many cases failed to correctly cost this part. A few exceptional students did manage to reach the final result.
13
(i)
Define a service table:

l26 t = no. of members aged 26 + t last birthday r26 t = no. of members who retire age 26 + t last birthday
sx t / sx = ratio of earnings in the year of age x + t to x + t + 1 to the earnings in the year of age x to x + 1
Page 9
September 2005
Examiners Report
1 s26 t 3 s26 t 3 to a retiree aged exactly 26 + t.

Define z26
t
s26
t 1
r ; a26
= value of annuity of 1 p.a.
Past service: Assume that retirements take place uniformly over the year of age between 60 and 65. Retirement for those who attain age 65 takes place at exact age 65. Consider retirement between ages 26 + t and 26 + t + 1, 34 t
38 .
The present value of the retirement benefits related to past service:

26 t 1 2 r26 t r 50000*5 z26 t 12 v a 26 60 s25.25 l26 26 v
ra where zC26 26 t
1
ra 50000*5 zC26 t s 60 D26
z26
r r26 t a26
and
D26
s25.25v 26l26
For retirement at age 65, the present value of the benefits is:
50000*5 z65 v65 r65 r a65 60 s25.25 v 26 l26
ra where zC65 r z65v65r65 a65
ra 50000*5 zC65 s 60 D26
Summing over all ages, the value is:

ra 50000*5 z M 60 s 60 D26
ra where z M 60
39 t 34
ra C26
Future service: Assume that retirements take place uniformly over the year of age, between ages 60 and 65. Retirement at 65 takes place at exactly age 65. If retirement takes place between ages 60 and 61, the number of future years service to count is 34. If retirement takes place at age 61 or after, the number of future years service to count is 35. For retirement between ages 60 and 61, the present value of the retirement benefits is: Page 10
September 2005
Examiners Report
60 1 2 r60 i 34*50000 z60 1 2 v a 26 60 s25.25 v l26 60
ra 34*50000 zC60 s 60 D26
For retirement at later years, the formula is similar to the above, with 35 in place of 34. Adding all these together gives:
50000 60 D26
s ra ra 34 z C60 35( z C61 ... z ra C65 )
50000 60 D26
5 t 0
ra M 60
where
ra M 60
ra 35* zC60
z t
ra C60
(ii)
Define a service table, with l26 t and s x t / s x defined as in part (i). In addition, define d 26 t as the number of members dying age 26 t last birthday. Assume that deaths take place on average in the middle of the year of age. The present value of the death benefit, for death between ages 26 t and 26 t 1 , is
s v 50000* 4* 26.25 t s25.25 v 26
d where sC26 t
26 t
1 2
d 26 t l26
t
50000* 4*
d C26 s
D26
s26.25 t v
26 t
d 26
Adding the present value of benefits for all possible years of death gives
38 s
50000* 4*
t 0
d C26 s
s t
D26
200000*
d M 26
D26
d where s M 26
38 t 0
d C26
Examiners felt that this question was quite simple provided students constructed proper definitions and followed them through logically allowing of course for the adjusted salary scale. The above answer is one of a number possible and full credit was given for credible alternatives. Page 11
September 2005
Examiners Report
Many students, however struggled with this question despite these remarks.
Page 12
EXAMINATION
5 April 2006 (pm)

2.
3. 4. 5.
CT5 A2006
It is possible to model the mortality of current active members of a pension scheme using the following three-state continuous-time Markov model, with age-dependent forces of transition x, x and x:
x
Active
Retired
Dead
A pension scheme provides a benefit of 10,000 payable on death regardless of whether death occurs before or after retirement. Give an expression to value this benefit for an active life currently aged x. [2]
(i)
In the context of with-profit policies, describe the super compound method of adding bonuses. [2] Suggest a reason why a life insurance company might use the super compound method of adding bonuses as opposed to the compound method. [1] [Total 3]
(ii)
Using the PMA92C20 table for both lives calculate: (a) (b) (c)
65:60
5 p65:60
1 2 q65:65
[4]
State the main difference between an overhead expense and a direct expense incurred in writing a life insurance policy and give an example of each. [4]
CT5 A2006 2
A life office issues term assurance policies to 500 lives all aged 30 exact with a term of 25 years. The benefit of 10,000 is payable at the end of the year of death of any of the lives into a special fund. Calculate the expected share of this fund for each survivor after 25 years. Basis: Mortality Interest AM92 Select 4% per annum [4]
A life office has issued for a number of years whole-life regular premium policies to a group of lives through direct advertising. Assured lives are only required to complete an application form with no further evidence of health. Outline the forms of selection that the insurer should expect to find in the mortality experience of the lives. [5]
(i)
Show that:
t
(ii)
px
px t (
x t
x t s)
[2]
Prove Thiele s differential equation for a whole-life assurance issued to a life aged x to be as follows:
tV x
(1
tV x ) x t
tV x
Px
[4] [Total 6]
(i)
Calculate the expected present value of an annuity-due of 1 per annum payable annually in advance until the death of the last survivor of two lives using the following basis: First life: male aged 70, mortality table PMA92C20 Second life: female aged 67, mortality table PFA92C20 Rate of interest: 4% per annum [2]
(ii)
Give an expression for the variance of the annuity-due in terms of annuity functions. [5] [Total 7]
CT5 A2006 3
PLEASE TURN OVER
(i)
Express fully in words:
axy:n
(ii)
[3]
Express a xy:n as the expected value of random variables and hence show that
1 Axy:n
a xy:n
[4] [Total 7]
10
A 20-year special endowment assurance policy is issued to a group of lives aged 45 exact. Each policy provides a sum assured of 10,000 payable at the end of the year of death or 20,000 payable if the life survives until the maturity date. Premiums on the policy are payable annually in advance for 15 years or until earlier death. You are given the following information: Number of deaths during the 13th policy year Number of policies in force at the end of the 13th policy year (i) (ii) Basis: Mortality Interest Expenses AM92 Ultimate 4% per annum none [Total 9] 4 195 [7] [2]
Calculate the profit or loss arising from mortality in the 13th policy year. Comment on your results.
11
An employer wishes to introduce a lump-sum retirement benefit payable immediately on retirement at 65 or earlier other than on the grounds of ill-health. The amount of the benefit is 1,000 for each year of an employee s service, with proportionate parts of a year counting. (i) Give a formula to value this benefit for an employee currently aged x with n years of past service, defining all terms used. [5] Using the Pension Scheme Tables from the Actuarial Formulae and Tables, calculate the value for an employee currently aged 30 exact with exactly 10 years past service. [2] Calculate the level annual contribution payable continuously throughout this employee s service to fund the future retirement benefit. [3] [Total 10]
(ii)
(iii)
CT5 A2006 4
12
(i)
Define the following terms without giving detailed formulae: (a) (b) (c) Crude Mortality Rate Directly Standardised Mortality Rate Indirectly Standardised Mortality Rate [3]
(ii)
The data in the following table are taken from data published by the Office of National Statistics in 2001. England and Wales Population Under 25 25 35 35+ (a) 3,149,000 3,769,000 3,927,000 Number of births 153,000 339,000 103,000 Tyne and Wear Population 71,000 74,000 82,000 Number of births 4,000 6,000 1,000
Using the population for England and Wales as the standard population calculate crude birth rates and the directly and indirectly standardised birth rates for Tyne and Wear. State an advantage of using the Indirectly Standardised Birth Rate and comment briefly on the answers you have obtained. [8] [Total 11]
(b)
CT5 A2006 5
PLEASE TURN OVER
13
A life aged 35 exact purchases a 30-year with-profit endowment assurance policy. Level premiums are payable monthly in advance throughout the duration of the contract. The sum assured of 250,000 plus declared reversionary bonuses are payable at maturity or at the end of the year of death if earlier. (i) Show that the monthly premium is 647.47 if the life insurance company assumes that future simple reversionary bonuses will be declared at the rate of 2% per annum and vesting at the end of each policy year (i.e. the death benefit does not include any bonus relating to the policy year of death). Basis: mortality interest initial expenses renewal expenses claims expenses AM92 Select 4% per annum 250 plus 50% of the gross annual premium 3% of the second and subsequent monthly premiums 300 on death; 150 on maturity [7] (ii) At age 60 exact, immediately before the premium then due, the life wishes to surrender the policy. The life insurance company calculates a surrender value equal to the gross retrospective policy value, assuming the same basis as in (i) above. Calculate the surrender value using the retrospective policy value at the end of the 25th policy year immediately before the premium then due and just after the declared bonus has increased the sum assured plus reversionary bonuses to 375,000. Assume that the life insurance company has declared a simple bonus throughout the duration of the policy consistent with the bonus loading assumption used to derive the premium in (i) above. [6] (iii) State with a reason whether the surrender value would have been larger, the same or smaller than in (ii) above if the office had used the prospective gross premium policy value, on the same basis. [1] [Total 14]
CT5 A2006 6
14
A life insurance company issues a 3-year unit linked endowment policy to a life aged 45 exact under which level premiums are payable yearly in advance. In the 1st year, 35% of the premium is allocated to units and 105% in the 2nd and 3rd years. The units are subject to a bid-offer spread of 5% and an annual management charge of 0.5% of the bid value of units is deducted at the end of each policy year. Management charges are deducted from the unit fund before death and surrender benefits are paid. If the policyholder dies during the term of the policy, the death benefit of the bid value of the units is payable at the end of the year of death. The policyholder may surrender the policy only at the end of each year. On surrender or on survival to the end of the term, the bid value of the units is payable at the end of the year of exit. The company uses the following assumptions in its profit test of this contract: Rate of growth on assets in the unit fund Rate of interest on non-unit fund cash flows Independent rates of mortality Independent rates of withdrawal Initial expenses Renewal expenses Initial commission Renewal commission 5% per annum 4% per annum AM92 Ultimate 5% per annum 250 50 per annum on the 2nd and 3rd premium dates 20% of 1st premium 2.5% of the 2nd and 3rd years premiums
The company sets premiums so that the net present value of the profit on the policy is 15% of the annual premium. (i) Using a risk discount rate of 8% per annum, calculate the premium for the policy on the assumption that the company does not zeroise future expected negative cash flows. [12] Explain why the company might need to zeroise future expected negative cash flows on the policy. [2] [Total 14]
(ii)
END OF PAPER
CT5 A2006 7
EXAMINATION
April 2006

M Flaherty Chairman of the Board of Examiners June 2006
Comments No comments are given.
April 2006
Examiners Report
10, 000 e
0
aa ( t px
x t
ar px
x t ) dt
(i)
The super compound bonus method is a method of allocating bonuses (mostly these days on an annual basis) under which two bonus rates are declared each year. The first rate, usually the lower, is applied to the basic sum assured and the second rate is applied to the bonuses already declared. The sum assured and bonuses increase more slowly than under other methods for the same ultimate benefit, enabling the office to retain surplus for longer and thereby providing greater investment freedom.
(ii)
(a) (b)
65:60
65
60
0.005543 0.002266 0.007809
5 p65:60
l70 l65 . l65 l60

. 2 q65:65
2 p65 . 2 p65 )
9238.134 9647.797 . 9647.797 9826.131

.(1
2 p65:65 )
0.940160
(c)
1 2 q65:65
(1
9521.065 9521.065 . 9647.797 9647.797
0.013050
Overhead expenses are those that in the short term do not vary with the amount of business. An example of an overhead expense is the cost of the company s premises (as the sale of an extra policy now will have no impact on these costs). Direct expenses are those that do vary with the amount of business. An example of a direct expense is commission payment to a direct salesman (as the sale of an extra policy now will have an impact on these costs).
Page 2
April 2006
Examiners Report
The expected share of the fund is

1 10, 000(1.04) 25 . A[30]:25
. 25 p[30]
10, 000(1.0425 ( A[30] v 25 . 25 p[30] . A55 ))
25 p[30]
2.66584(0.16011 0.37512 x 9557.8179 10, 000 9557.8179 9923.7497
9923.7497
x0.38950)
536.65
The insurer should expect to find: Time selection the experience would be different in different time periods; in developed economies mortality has tended to improve with time. Class selection The insurer may price policies differently depending on fixed factors such as age/sex. Also different groups of recipients may have different mortality based on factors such as occupation. Temporary Initial Selection if there is no evidence of health required then there is an expectation that poor lives would be likely to take out the insurance and in the short term the experience would be adverse. This effect should reduce with duration. Conversely, if there are medical questions on the application form then we would expect to see some form of self selection and mortality experience would be better in the short term. This is also evidence of adverse selection as highlighted above. Spurious selection If there is no evidence of health required then the duration effect would be confounded by the differential mortality experience of withdrawals, as those lives withdrawing would be expected to have lighter mortality.
Page 3
April 2006
Examiners Report
(i)
1 s px
px
ln( s px t )
(ln l x
t s
ln l x t )
x t s
x t
Multiplying through by s px (ii) Now

t Vx
gives the required result.
Ax
Px ax
ax t ax
s
ax
e
0
s s
p x t ds
0
p x t ds
e
0
s s
px t (
x t
x t s )ds
x t ax t
Ax
t Vx
x t ax t
Ax t )
ax
t Vx )
x t (1
t Vx )
(1
ax t ) ax
x t (1
ax t ax
1 ax
(1
t Vx ) x t
t Vx
ax ax
(1
t Vx ) x t
t Vx
Px
Page 4
April 2006
Examiners Report
(i)
Expected present value:
70:67
70 67 70:67
11.562 14.111 10.233
15.440
(ii)
Variance:
1 d
2 2
Axy ( Axy ) 2
1 d
2
(1 (1 v 2 ). 2xy ) (1 d .xy ) 2
where normal functions are at a rate of interest i and functions with a left superscript are at a rate of interest i2+2i. The expression (1-v2) in the right hand side of the above equation can also be expressed as 2d.
(i)
The expected present value of 1 per annum payable continuously until the second death of 2 lives currently age x and y for a maximum n years
a xy:n E (amin(max(T
x ,Ty ),n )
(ii)
Tx and Ty are random variables which measures the complete lifetime of two lives aged x and y
1 v
min(max(Tx ,Ty ),n )
E (amin(max(T
x ,Ty ), n )
1 E (v
min(max(Tx ,Ty ),n )
1 Axy:n
Page 5
April 2006
Examiners Report
10
(i)
Let P be the net premium for the policy payable annually in advance. Then, equation of value becomes:
Pa45:15 10, 000( A45:20 v 20 20 p45 )
11.386 P 10, 000(0.46998 0.41075)

P 773.52
Net premium reserve at the end of the 13th policy year is

13V
10, 000( A58:7
v 7 7 p58 ) Pa58:2
10, 000(0.76516 0.71209) 773.52 1.955 14, 772.48 1,512.23 13, 260.25
Death strain at risk per policy = 10,000 13,260.25 = 3,260.25 3, 260.25 3, 665.66
EDS 199q57 3, 260.25 199 0.00565 ADS 4 3, 260.25 13, 041.00
mortality profit = 3,665.66 + 13,041.00 = 9,375.34 (ii) The death strain at risk is negative. Hence, the life insurance company makes money on early deaths. More people die than expected during the year considered so the company makes a mortality profit.
11
(i)
Mr 1, 000.n. x Dx
Where Dx
r Cx r C65
Rx 1, 000. Dx
v xlx
vx
rx for x < 65
v r65
65 x t 0 r Cx
65
r Mx
Mx
r r Mx C x for x < 65
Page 6

64 x t 0
April 2006
Examiners Report
Rx
Mx
(ii) (iii)
1, 000.10.
782 25,502 1000. 7,874 7,874
4, 231.902
Given contribution of C then C. Nx Dx 4, 231.902

90684, D30 7874
N 30
Therefore C
367.45
12
Definitions: (i) (a) Crude Mortality Rate the ratio of the total number of deaths in a category to the total exposed to risk in the same category. Directly Standardised Mortality Rate the mortality rate of a category weighted according to a standard population. Indirectly Standardised Mortality Rate an approximation to the directly standardised mortality rate being the crude rate for the standard population multiplied by the ratio of actual to expected deaths for the region. This is the same as the crude rate for the local population multiplied by the Area Comparability Factor.
(b)
(c)
Page 7
Subject CT5 (Contingencies Core Technical) (ii) (a) Calculations.
April 2006
Examiners Report
England and Wales Population Total 10,845,000 Number of births 595,000
Tyne and Wear Population 227,000 Number of births 11,000
Crude birth rate: England and Wales 595,000/10,845,000 = 5.49% Tyne and Wear: 11,000/227,000 = 4.85%
England and Wales Population Under 25 25 35 35+ Total 3,149,000 3,769,000 3,927,000 10,845,000 Tyne and Wear Fertility rate 0.0563 0.0811 0.0122 Expected number of births 177,408 305,595 47,890 530,893
Directly standardised rate: 530,893/10,845,000 = 4.90%

England and Wales Fertility rate Under 25 25 35 35+ Total 0.0486 0.0899 0.0262 Tyne and Wear Population 71,000 74,000 82,000 227,000 Expected Births 3,450 6,656 2,151 12,256
Indirectly standardised rate: 5.49%/(12,256/11,000) = 4.93% (b) The indirectly standardised rate does not require local records of births to be analysed by age grouping. The standardised rates are similar so the approximation is acceptable. Both standardised rates are higher than the crude rate, showing that the reason for the low cruder rate compared to the national population is due to population distribution by age. Both standardised rates are below the crude rate for England and Wales so the birth rate of Tyne and Wear is lower, even allowing for the age distribution.
Page 8
April 2006
Examiners Report
13
(i)
Let P denote the monthly premium for the contract. Then EPV of premiums =
(12) 12 Pa[35]:30
12 a[35]:30
11 (1 v30 30 p[35] ) 24
207.5841P
12 P 17.631
11 689.23 1 24 2507.02
EPV of benefits and expenses =

(245, 000 300) A[35]:30 5000 IA
1 [35]:30
(155, 000 150)v30 30 p[35]
0.03 12 Pa (12)
[35]:30
0.03P 250 0.5 12 P
where
IA
1 [35]:30
IA
[35]
v30 30 p[35] ( IA)65 30 A65
7.47005
689.23 7.89442 30 0.52786 2507.02
0.946137
EPV of benefits and expenses =
245,300 0.32187 5, 000 0.946137 154,850

0.03 12 P 17.298675 0.03P 250 0.5 12 P
689.23 2507.02
Equating EPV of premiums with EPV of benefits and expenses gives
207.5841P
78,954.711 4, 730.685 42,571.366 6.227523P 0.03P 250 6 P
126,506.762 195.3866
647.47
Page 9
Subject CT5 (Contingencies Core Technical) (ii)

retrospective 25V
April 2006
Examiners Report
(a) (1 i ) 25 (12) 0.97 12 Pa[35]:25 p 25 [35] where

IA
1 [35]:25
1 245,300 A[35]:25
5, 000 IA
1 [35]:25
0.03P 250 0.5 12 P
IA
[35]
v 25 25 p[35] IA
60
25 A60
7.47005
1 A[35]:25
882.85 8.36234 25 0.4564 2507.02

v 25 25 p[35]
0.507198
A[35]:25
0.3835 0.35215 0.03135
a (12)
25V retrospective
[35]:25
a[35]:25
11 (1 v 25 25 p[35] ) 16.029 0.29693 15.73207 24
2.83969(11.64 P 15.73207 245,300 0.03135 5000 0.507198 0.03P 250 6 P)
2.83969(177.151295P 10476.145) 295,963.86

(b) Surrender value would be the same i.e. 25V retrospective 25V prospective at 4% per annum rate of interest as the equality of bases ensures that the prospective and retrospective reserves of any policy at any given time t should be equal.
Page 10
April 2006
Examiners Report
14
(i)
Let P be the annual premium required to meet the company s profit criteria. Then: (a) Multiple decrement table Here not all decrements are uniform as whilst deaths can be assumed to be uniformly distributed over the year, surrenders occur only at the year end. Hence: (aq ) d x
d qx and (aq ) w x w qx w d qx (1 qw ) d x w x
x 45 46 47
d qx
aq
aq
ap
t 1 ( ap ) x
0.001465 0.001622 0.001802 (b)
0.05 0.05 0.05
0.001465 0.001622 0.001802
0.049927 0.948608 1 0.049919 0.948459 0.948608 0.049910 0.948288 0.899716
Unit fund cashflows (per policy at start of year) Year 1 0 0.35P 0.0175P 0.016625P 0.001746P 0.347379P Year 2 0.347379P 1.05P 0.0525P 0.067244P 0.007061P 1.405063P Year 3 1.405063P 1.05P 0.0525P 0.120128P 0.012613P 2.510077P
Value of units at start of year Allocation Bid/offer Interest Management charge Value of units at start of year
Page 11
Subject CT5 (Contingencies Core Technical) (c) Non-unit fund cashflows Year 1 0.65P 0.0175P 0.2P+250 0.0187P-10 0.001746P 0.487946P-260
April 2006
Examiners Report
Unallocated premium Bid/offer Expenses Interest Management charge End of year cashflows Probability in force Discount factor Expected present value of profit
Year 2 -0.05P 0.0525P 0.025P+50 -0.0009P-2 0.007061P
Year 3 -0.05P 0.0525P 0.025P+50 -0.0009P-2 0.012613P
-0.016339P-52 -0.010787P-52
1 0.925926 0.430809P320.170863
0.948608 0.857339
0.899716 0.793832
NPV = .15P = 0.430809P 320.170863 => P = 1140.17 (ii) Later expected future negative cashflows should be reduced to zero by establishing reserves in the non-unit fund at earlier durations so that the company does not expect to have to input further money in the future. The expected non-unit fund cashflows derived in (i) are negative in years 2and 3 so need to be eliminated.
Page 12
EXAMINATION
12 September 2006 (pm)

2.
3. 4. 5.
CT5 S2006
In a certain country, pension funds always provide pensions to retiring employees. At the point of retirement, the fund can choose to buy an annuity from a life insurance company, or pay the pension directly themselves on an ongoing basis. A mortality study of pensioners has established that the experience of those whose pension is received through annuities paid by insurance companies is lighter than the experience of those being paid directly by pension funds. Explain why the mortality experiences of the two groups differ. Your answer should include reference to some form of selection. [4]
A life insurance company uses the following three-state continuous-time Markov model, with constant forces of transition, to price its stand-alone critical illness policies:
Healthy
Critically ill
Dead
Under these policies, a lump sum benefit is payable on the occasion that a life becomes critically ill during a specified policy term. No other benefits are payable. A 20-year policy with sum assured 200,000 is issued to a healthy life aged 40 exact. (i) Write down a formula, in integral terms, for the expected present value of benefits under this policy. [2] Calculate the expected present value at outset for this policy. Basis: : : : Interest: 0.01 0.02 3 8% per annum [3] [Total 5]
(ii)
Calculate the exact value of A
70: 1
assuming the force of mortality is constant
between consecutive integer ages. Basis: Mortality: ELT15 (Males) Interest: 7.5% per annum [5]
CT5 S2006
A life insurance company issues a reversionary annuity contract. Under the contract an annuity of 20,000 per annum is payable monthly for life, to a female life now aged 60 exact, on the death of a male life now aged 65 exact. Annuity payments are always on monthly anniversaries of the date of issue of the contract. Premiums are to be paid monthly until the annuity commences or the risk ceases. Calculate the monthly premium required for the contract. Basis: Mortality: Interest: Expenses: PFA92C20 for the female PMA92C20 for the male 4% per annum 5% of each premium payment 1.5% of each annuity payment [6]
Tx and Ty are the complete future lifetimes of two lives aged x and y respectively: Let the random variable g(T) take the following values aT aT
x y
if if
Tx Tx
Ty Ty [2] [2]
g(T) =
(i) (ii) (iii)
Describe the benefit which has present value equal to g(T). Express E[g(T)] as an integral.
Write down an expression for the variance of g(T) using assurance functions. [2] [Total 6]
CT5 S2006
PLEASE TURN OVER
A member of a pension scheme is aged 55 exact, and joined the scheme at age 35 exact. She earned a salary of 40,000 in the 12 months preceding the scheme valuation date. The scheme provides a pension on retirement for any reason of 1/80th of final pensionable salary for each year of service, with fractions counting proportionately. Final pensionable salary is defined as the average salary over the three years prior to retirement. Using the functions and symbols defined in, and assumptions underlying, the Example Pension Scheme Table in the Actuarial Tables: (i) (ii) Calculate the expected present value now of this member s total pension. [4]
Calculate the contribution rate required, as a percentage of salary, to fund the future service element of the pension. [2] [Total 6]
The following data relate to a certain country and its biggest province: Country Population Deaths 2,900,000 3,500,000 2,900,000 700,000 10,000,000 580 2,450 20,300 49,000 72,330 Province Population 800,000 1,000,000 900,000 300,000 3,000,000
Age-group 0-19 20-44 45-69 70 and over Total
The population figures are from a mid-year census along with the deaths that occurred in that year. There were 25,344 deaths in the province in total. Calculate the Area Comparability Factor and a standardised mortality rate for the province. [6]
A pure endowment policy for a term of n years payable by single premium is issued to lives aged x at entry. (i) Derive Thiele s differential equation for t V , the reserve for this policy at time t (0 < t < n). [5] Explain the effect of each term in your answer in (i). State the boundary condition needed to solve the equation in (i). [2] [2] [Total 9]
(ii) (iii)
CT5 S2006
A life insurance company issues a 3-year unit-linked endowment assurance contract to a female life aged 60 exact under which level premiums of 5,000 per annum are payable in advance. In the first year, 85% of the premium is allocated to units and 104% in the second and third years. The units are subject to a bid-offer spread of 5% and an annual management charge of 0.75% of the bid value of the units is deducted at the end of each year. If the policyholder dies during the term of the policy, the death benefit of 20,000 or the bid value of the units after the deduction of the management charge, whichever is higher, is payable at the end of the year of death. On survival to the end of the term, the bid value of the units is payable. The company holds unit reserves equal to the full bid value of the units but does not set up non-unit reserves. It uses the following assumptions in carrying out profit tests of this contract: Mortality: Surrenders: Expenses: AM92 Ultimate None 600 100 at the start of each of the second and third policy years 6% per annum 4% per annum 10% per annum [10]
Initial: Renewal:
Unit fund growth rate: Non-unit fund interest rate: Risk discount rate: (i) (ii)
Calculate the expected net present value of the profit on this contract.
State, with a reason, what the effect would be on the profit if the insurance company did hold non-unit reserves to zeroise negative cashflows, assuming it used a discount rate of 4% per annum for calculating those reserves. (You do not need to perform any further calculations.) [2] [Total 12]
CT5 S2006
PLEASE TURN OVER
10
A life insurance company is reviewing the 2005 mortality experience of its portfolio of whole life assurances. You are given the following information: Age exact on 1 Jan 2005 Sum assured in force on 1 Jan 2005 500,000 400,000 Reserves at 31 Dec 2005 of policies in force on 31 Dec 2005 175,000 150,000
69 70
There were 2 death claims during 2005 arising from these policies as follows: Date of issue of policy 1 Jan 1980 1 Jan 1982 Age exact at issue of policy 45 46 Sum assured 12,000 10,000
All premiums are payable annually on 1st January throughout life. Sums assured are payable at the end of the year of death. Net premium reserves are held, based on mortality of AM92 Ultimate and interest of 4% per annum. (i) Calculate the mortality profit or loss for 2005 in respect of this group of policies. (a)
[8]
(ii)
Calculate the amount of expected death claims for 2005 and compare it with the amount of actual claims. Suggest a reason for this result compared with that obtained in (i). [4] [Total 12]
(b)
CT5 S2006
11
A life insurance company issues identical deferred annuities to each of 100 women aged 63 exact. The benefit is 5,000 per annum payable continuously from a woman s 65th birthday, if still alive at that time, and for life thereafter. (i) Write down an expression for the random variable for the present value of future benefits for one policy at outset. [3] Calculate the total expected present value at outset of these annuities. Basis: Mortality: Interest: PFA92C20 4% per annum
(ii)
[2]
(iii)
Calculate the total variance of the present value at outset of these annuities, using the same basis as in part (ii). [8] [Total 13]
12
A life insurance company issues a 10-year decreasing term assurance to a man aged 50 exact. The death benefit is 100,000 in the first year, 90,000 in the 2nd year, and decreases by 10,000 each year so that the benefit in the 10th year is 10,000. The death benefit is payable at the end of the year of death. Level premiums are payable annually in advance for the term of the policy, ceasing on earlier death. (i) Calculate the annual premium. Basis: Interest: Mortality: Initial expenses: 6% per annum AM92 Select 200 and 25% of the total annual premium (all incurred on policy commencement) Renewal expenses: 2% of each premium from the start of the 2nd policy year and 50 per annum, inflating at 1.923% per annum, at the start of the second and subsequent policy years Claim expenses: 200 inflating at 1.923% per annum Inflation: For renewal and claim expenses, the amounts quoted are at outset, and the increases due to inflation start immediately. [8] (ii) Write down an expression for the gross future loss random variable at the end of the ninth year, using whatever elements of the basis in (i) that are relevant. [3] Calculate the gross premium reserve at the end of the ninth year, using the premium basis. [3] Comment on any unusual aspect of your answer. [2] [Total 16]
(iii)
(iv)
END OF PAPER
CT5 S2006 7
EXAMINATION
September 2006

Introduction The attached subject report has been written by the Principal Examiner with the aim of helping candidates. The questions and comments are based around Core Reading as the interpretation of the syllabus to which the examiners are working. They have however given credit for any alternative approach or interpretation which they consider to be reasonable. M A Stocker Chairman of the Board of Examiners November 2006
Comments No comments are given
Subject CT5 (Contingencies Core Technical) September 2006 Examiners Report
If funds chose at random which annuities to insure and which to self-insure, we would expect approximately the same mortality experience in both groups. The self-insured experience is heavier, meaning their lives are somehow below standard on average. The most likely explanation is that the pension funds make informed decisions based on the health or reason for retirement of the pensioners. Those retiring early due to ill-health or those known to have poor health are retained for payment directly by the fund. That should be cheaper than paying a premium to the insurer based on normal mortality for these lives. The remainder of the lives, known to be on reasonable health are insured. This is adverse selection. Sensible comments regarding other forms of selection are also acceptable.
(i)
EPV = 200, 000 e

0 20 0
20
HH t p40 40+t dt
t
HH = 200, 000 et t p40 40+t dt 0
20
= 200, 000 e t e where:

t
( 40 + r +40 + r ) dr
0
40+t dt
HH p40 is the probability that the healthy life aged 40is healthy at age 40+t
HH p40 is the probability that the healthy life aged 40 is healthy at all points up to age 40+t (These 2 probabilities are the same for this model) t
= ln(1.08) = 0.076961 (ii)

From EPV = 200, 000 e t e
0 20 0 20 ( 40 + r +40 + r ) dr
0 t
40+t dt
EPV = 200, 000 e (0.076961)t e = 200, 000 e

0 20
{(0.01) +(0.02)}dr
0
(0.02)dt
20 0
(0.076961)t (0.03)t
(0.02)dt = 200, 000 e (0.106961)t (0.02)dt
(200, 000)(0.02) (0.106961)t 20 e = = 37,396.79[1 0.11775] = 32,993.32 0 0.106961
Page 2

1
A1
70:1
= e.075t t p7070+t dt in the general case.

0
Here, assuming is constant for 0 < t < 1, we get = -ln(p70) = -ln(1 - .03930) = 0.040093 t p70 = exp(-t) = exp(-.040093t) .075 = ln(1.075) = 0.07232
A1 70:1
= e 0.07232t e0.040093t (0.040093)dt

0 1 (0.040093) e (0.07232+0.040093)t 0 (0.07232 + 0.040093) = (0.35610)(0.89368 1) = 0.0379
EPV of benefits:
(12) (12) (12) 20, 000a65|60 = 20, 000(a60 a65:60 ) = 20, 000(a60 a65:60 ) = 20, 000(15.652 11.682)
= 79, 400 EPV premiums: (The premium term will be the joint lifetime of the two lives because if his death is first the annuity commences or if her death is first, there will never be any annuity.) Let P be the monthly premium
(12) 65:60 65:60 11 12 Pa = 12 P(a ) = 12 P(12.682 0.458) = 146.688 P 24
Equation of value allowing for expenses: 1.015(79,400) = (1 - 0.05)(146.688P) 80,591 = 139.3536P P = 578.32 per month
(i)
This is the present value of a joint life annuity of amount 1 per annum payable continuously until the first death of 2 lives (x) and (y).
E[ g (T )] = t pxy x +t: y +t at dt or E[ g (T )] = t pxy e t dt
0 0

(ii)
Page 3

2
(iii)
evaluated at force of interest 2.

2
Var[ g (T )] =
A xy ( A xy ) 2
where A xy indicates that the function is to be
(i)
EPV past service benefits:

40, 000
ia ra + z M 55 ) 20 ( z M 55 20 (34, 048 + 128, 026) = 40, 000 = 119, 737 80 s54 D55 80 (9.745)(1,389)
EPV future service benefits:
40, 000 ( R55 + R55 ) 40, 000 (163, 063 + 963,869) = = 41, 628 80 s54 D55 80 (9.745)(1,389) EPV total pension benefits = 119,737 + 41,628 = 161,365 (k )(40, 000) N 55 88, 615 = 41, 628 ( k )(40, 000) = 41, 628 k = .159 s54 D55 (9.745)(1,389)
s
ia
ra
(ii)
i.e. 15.9% salary per annum
ACF =
s Exc,t s mx,t
x
Exc,t s mx,t
x
c Ex ,t
Exc,t
x
Here
s c Ex ,t s c s Ex ,t m x ,t c Ex ,t
leading to
m x ,t
c s Ex ,t m x ,t
Age-group 019 2044 4569 70 and over Total
Population 2,900,000 3,500,000 2,900,000 700,000 10,000,000
Deaths 580 2,450 20,300 49,000 72,330
Population 800,000 1,000,000 900,000 300,000 3,000,000 0.0002 160 0.0007 700 0.007 6,300 0.07 21,000 28,160
Page 4
Subject CT5 (Contingencies Core Technical) September 2006 Examiners Report ACF = 72,330 10, 000, 000 28,160 = 3, 000, 000 (0.007233 0.0093867) = 0.77056
Indirectly standardised mortality rate = (ACF)*(Province crude rate) 25,344 = (0.77056) = (0.77056)(0.008448) = 0.00651 3, 000, 000
8
tV
(i) =
n t
px +t e( nt )
( nt px +t e( nt ) ) = {e( nt ) ( nt px+t )} + { nt px +t (e( nt ) )} tV = t t t t 1 l ( nt px +t ) = ln( nt px +t ) = ln x + n = {ln(l x+ n ) ln(l x +t )} = x+t t t l x +t t n t p x +t t ( nt px +t ) = ( x +t )( nt px+t ) t ( nt ) (e ) = e( nt ) t ( n t ) ( x +t )( nt px +t )} + { nt px+t e( nt ) } = nt px +t e( nt ) ( x+t + ) t V = {e t t V = ( x +t + ) t V t (ii) The change in reserve at time t consists of the interest earned and the release of reserves from the deaths. (The release may be more easily seen if the last line of (i) is rewritten as: t V = t V x+t (0 t V ) where the pure endowment has zero death t benefit.) (iii)
nV
= 1.
Page 5
(i)
Survival table
x
60 61 62 Unit fund
qx
0.008022 0.009009 0.010112
px
0.99198 0.99099 0.98989
t-1px
1 0.991978 0.983041
Value of units at start of year

Year 1 Year 2 Year 3 0.00 4,247.65 9,665.87
Allocation
Bid/offer
Interest
Management charge
Value of units at end of year

4,247.65 9,665.87 15,366.10
4,250.00 5,200.00 5,200.00
212.50 260.00 260.00
242.25 551.26 876.35
32.10 73.04 116.12
Non-unit fund
Unallocated premium
Bid/offer
Expenses
Interest
Management charge
Extra death benefit

126.37 93.10 46.86
End of year cashflows
Year 1 Year 2 Year 3
750.00 -200.00 -200.00
212.50 260.00 260.00
600.00 100.00 100.00
14.50 -1.60 -1.60
32.10 73.04 116.12
282.73 -61.66 27.66
Non-unit fund cash flow (profit vector)

Year 1 Year 2 Year 3 Total NPV Expected NPV = 226.91 (ii) 282.73 -61.66 27.66
Probability in force at start of year

1 0.991978 0.983041
Profit signature
Discount factor
Expected present value of profit

257.03 -50.55 20.43 226.91
282.73 0.909091 -61.16 0.826446 27.19 0.751315
The NPV would decrease. Holding reserves would delay the emergence of some of the Year 1 cash flow, and as the non-unit fund earns 4%, well below the risk discount rate, the NPV would reduce.
Page 6
10
(i)
The 2 deaths were 70 and 69 respectively at 1/1/2005. The reserves for these policies at 31/12/2005 were
26V
a 9.998 = 12, 000 1 71 = 12, 000 1 = 5, 626.10 and 45 18.823 a a 10.375 = 10, 000 1 70 = 10, 000 1 = 4, 410.92 46 18.563 a
24V
Total death strain at risk, sorted by age at 1/1/2005: Age 69: 500,000 - (175,000 + 4,410.92) = 320,589.08 Age 70: 400,000 - (150,000 + 5,626.10) = 244,373.90 Expected death strain: (q69)(320,589.08) + (q70)(244,373.90) = (0.022226)(320,589.08) + (0.024783)(244,373.90) = 7,125.41 + 6,056.32 = 13,181.73 Actual death strain: (12,000-5,626.10)+(10,000-4,410.92) = 6,373.90+5,589.08 = 11,962.98 Mortality profit = EDS ADS = 13,181.73-11,962.98 = 1,218.75 profit (ii) (a) Expected claims: (q69)(500,000)+(q70)(400,000) = (0.022226)(500,000) + (0.024783)(400,000) = 11,113 + 9,913.2 = 21,026.20 Actual claims: 12,000 + 10,000 = 22,000 (b) Actual claims were higher than expected claims but the company still made a mortality profit. This can only have occurred because the deaths were disproportionately concentrated on lower DSAR lives (policies more mature on average). (This can be seen by comparing the ratio of reserves to sum assured for the death claim policies with the corresponding ratio for the full portfolio.)
Page 7

5, 000v 2 aT 0 if T63 2 (or 5, 000(aT if T63 < 2 a2 )
11
(i)
g(T) =
63 2
63
(ii)
E[ g (T )] = (100)(5, 000)v 2 2 p63a65 = (500, 000)(0.92456)(0.992617)(14.871 0.5) = (500, 000)(13.1887) = 6,594,350
(iii)
Var[ g (T )] = E[ g (T ) 2 ] E[ g (T )]2
For 1 of annuity:
E[ g (T ) ] = t p6363+t [v 2 at 2 ]2 dt
2 2
Let t = r + 2
E[ g (T ) ] = r + 2 p6363+ r + 2 [v 2 ar ]2 dr
2 0
1 v r = r p652 p6365+ r v dr 0
4
= =
2 p63v 2
4 0 4
r p6565+r [1 2v
2
+ v 2 r ]dr
2 p63v 2
[1 2 A65 + A65 ]
where
0.04 65 ) = 1.019804{1 A65 = (1.04)0.5 (1 da (14.871)} = 0.436515 1.04 and A65 = (1.04)( 2 A65 ) = (1.04)(0.20847) = 0.21681
E[ g (T ) 2 ] = (0.992617)(0.85480) (0.039221) 2 [1 (2)(0.436515) + (0.21681)] = 189.622
2
Var[ g (T )] = 189.622 (13.1887)2 = 15.680
Page 8
Subject CT5 (Contingencies Core Technical) September 2006 Examiners Report For annuity of 5,000 we need to increase by 5,0002 and for 100 (independent) lives we need to multiply by 100. Total variance = (15.680)(5,0002)(100) = 39,200,000,000 = (197,999)2
12
EPV benefits:
110, 000 A 1
[50]:10
10, 000( IA)
1 [50]:10
(functions @ 6% p.a.)
= 110, 000{ A[50] v10 10 p[50] A60 } 10, 000{( IA)[50] v10 10 p[50] (10 A60 + ( IA)60 )} = 110, 000 A[50] 10, 000( IA)[50] + v10 10 p[50]{10, 000(( IA)60 A60 )} = (110, 000)(0.20463) (10, 000)(4.84789) + (0.55839)(0.95684){10, 000(5.46572 0.32692)} = 22,509.30 48, 478.90 + 27, 456.09 = 1, 486.49
EPV gross premiums Let P be annual premium

6% [50]:10 Pa = 7.698 P
EPV expenses
6% 4% 200 + 0.25 P + 0.02 Pa[50]:9 + 50a[50]:9 + 200 A 1 4% 4% p A ) (4%) 10 [50] 60
[50]:10
6% 4% [50]:10 [50]:10 = 150 + 0.23P + 0.02 Pa + 50a + 200( A[50] v10
= 150 + 0.23P + 0.02 P(7.698) + (50)(8.318) + 200(0.32868 (0.67556)(0.95684)(0.45640)) = 150 + 415.90 + 6.73 + P(.23 + 0.15396) = 572.63 + 0.38396 P Equation of value: 7.698P = 1,486.49 + 572.63 + 0.38396P 7.31404P = 2,059.12 so P = 281.53 p.a. (ii) If K59 1 GFLRV = 50(1.01923)9 0.98(281.53) else (i.e. K59 = 0) GFLRV = 10, 000v
.06
+ 200(1.01923)9 v
.04
+50(1.01923)9 0.98(281.53) or GFLRV = 10, 000v

9 .06
+ 200(1.01923)10 v
.06
+50(1.01923) 0.98(281.53)
Page 9
Subject CT5 (Contingencies Core Technical) September 2006 Examiners Report (iii)
9V
= 10, 000q59v.06 + 200(1.01923)9 q59v.04 +50(1.01923)9 0.98(281.53) = (10, 000)(0.007140)(0.94340) + (237.40)((0.007140)(0.96154) + 59.35 275.90 = 67.36 + 1.63 + 59.35 275.90 = 147.56
(iv)
The reserve is negative. The expected future income exceeds expected future outgo, because past outgo exceeded past income, meaning the office needs a net inflow in the last year to recoup previous losses. However, it is at risk of the policy lapsing, and never getting this net inflow.
Page 10
EXAMINATION
17 April 2007 (am)

2.
3. 4. 5.
CT5 A2007
Calculate (i) (ii) Basis: Mortality: AM92 Select [3]

5|10q[52]
p[50]:[60] for two independent lives
State, with examples, three distinct types of selection in the membership of a pension scheme. [3] A three-state transition model is shown in the following diagram: x a =able x d = dead Assume that the transition probabilities are constant at all ages with = 2%, = 6%, = 1% and = 3%. An able life age 55 exact takes out a 10-year sickness contract that provides a noclaim bonus of 100 if the insured remains able for the full duration of the contract. Calculate the expected present value of the bonus at the beginning of the contract with a force of interest of 0.04. [4] x i = ill x
(i)
In the context of net premiums and reserves, state the conditions necessary for equality of prospective and retrospective reserves. [2] Give two reasons why, in practice, these conditions may not hold. [2] [Total 4]
(ii)
CT5 A20072
An assurance contract provides a death benefit of 1,000 payable immediately on death, with a savings benefit of 500 payable on every fifth anniversary of the inception of the policy. The following basis is used: Force of mortality: x = 0.05 for all x Force of interest: = 0.04 Expenses: None Calculate the level premium payable annually in advance for life. [5]
A pension scheme provides a benefit on death in service of 4 times the members salary at the date of death. Normal Pension Age is 65. State a formula, without using commutation functions, for the present value of this benefit to a life aged 35 exact with salary of 25,000 who has just received a salary increase. Define all symbols used. [5]
A term assurance contract for a life aged 50 exact for a term of 10 years provides a benefit of 10,000 payable at the end of the year of death. Calculate the expected present value and variance of benefits payable under this contract. Basis: Mortality: AM92 Select Interest: 4% per annum [6]
You are given the following statistics in relation to the mortality experience of Actuaria and its province Giro: Age 019 2039 4059 6079 (i) Actuaria Exposed to risk Number of deaths 300,000 275,000 200,000 175,000 25 35 100 500 Exposed to risk 12,000 10,000 9,000 8,000 Giro Number of deaths 2 3 6 50 [2]
Explain, giving a formula, the term Standardised Mortality Ratio (SMR). Define all the symbols that you use.
(ii)
Comment on the relative mortality of the province, by calculating the SMR for Giro. [4] [Total 6]
CT5 A20073
PLEASE TURN OVER
A life insurance company issues an annuity to a life aged 60 exact to provide an annual income of 15,000. The annuity is payable monthly in advance and is guaranteed to be paid for a period of 5 years and for the whole of life thereafter. On the annuitants death a survivors pension is paid at the rate 7,500 per annum for the remainder of life for the spouse of the annuitant who is currently aged 55 exact under the following circumstances: (a) If the life dies within the guarantee period then the survivors pension commences with the first payment immediately after the end of the guarantee period. If the life dies after the guarantee period has expired then the survivors pension commences with the first payment immediately after the death of the first life.
(b)
Calculate the single premium: Basis: Annuitant mortality: PMA92C20 Spouse mortality: PFA92C20 Interest: 4% per annum [6]
10
Let X be a random variable representing the present value of the benefits of a whole of life assurance, and Y be a random variable representing the present value of the benefits of a temporary assurance with a term of n years. Both assurances have a sum assured of 1 payable at the end of the year of death and were issued to the same life aged x. (i) Describe the benefits provided by the contract which has a present value represented by the random variable X - Y. Show that
[1]
(ii)
Cov[ X , Y ] = 2 A1 Ax * A1 x:n x:n and hence or otherwise that

Var( X Y ) =
2
Ax ( n | Ax ) 2 2 A1 x:n
where the functions A are determined using an interest rate of i, and functions 2A are determined using an interest rate of i2 + 2i.
[7] [Total 8]
CT5 A20074
11
A five-year unit-linked policy issued to a life aged 50 exact has the following pattern of end of year cashflows per policy in force at the start of each year: (-95.21, -30.18, -20.15, 77.15, 120.29) (i) Explain why a life office might need to set up non-unit reserves in respect of a unit-linked life assurance policy. [2] Calculate the non-unit reserves required for the policy in order to zeroise negative cashflows assuming AM92 Ultimate mortality and that reserves earn interest at the rate of 5% per annum. [2] Determine the net present value of the profits before and after zeroisation assuming the risk discount rate used is 8% per annum and state with reasons which of these figures you would expect to be higher. [6] [Total 10]
(ii)
(iii)
12
A life office issued 750 identical 25-year temporary assurance policies to lives aged 30 exact each with a sum assured of 75,000 payable at the end of year of death. Premiums are payable annually in advance for 20 years or until earlier death. (i) Show that the annual net premium for each policy is approximately equal to 104 using the basis given below. [2] Calculate the net premium reserve per policy at the start and at the end of the [4] 20th year of the policy. Calculate the mortality profit or loss to the life office during the 20th year if twelve policyholders die during the first nineteen years of the policies and two [4] policyholders die during the 20th year.
(ii)
(iii)
Basis: Mortality: Interest: AM92 Ultimate 4% per annum [Total 10]
CT5 A20075
PLEASE TURN OVER
13
A life office issues with-profit whole of life contracts, with the sum assured payable immediately on death of the life assured. Level premiums are payable monthly in advance to age 65 or until earlier death. The life office markets two versions of this policy, one assumed to provide simple bonuses of 4% per annum of the sum assured vesting at the end of each policy year and the other assumed to provide compound bonuses of 4% of the sum assured, again vesting at the end of each policy year. The death benefit under each version does not include any bonus relating to the policy year of death. The following basis is assumed to price these contracts: Mortality Interest Initial expenses Renewal expenses Initial commission Renewal commission Claims expenses AM92 Select 4% per annum 300 2.5% of the second and subsequent monthly premiums 50% of the gross annual premium 2.5% of the second and subsequent monthly premiums 250 at termination of the contract
Calculate the level monthly premium required for each version of this policy issued to a life aged 30 exact at outset for an initial sum assured of 50,000. [12]
14
A life office issues a 4-year non profit endowment assurance policy to a male life aged 61 exact for a sum assured of 100,000 payable on survival to the end of the term or at the end of the year of death if earlier. Premiums are payable annually in advance throughout the term of the policy. There is a surrender benefit payable equal to a return of premiums paid, with no interest. This benefit is payable at the end of the year of surrender. The life office uses the following assumptions to price this contract: Mortality Surrenders Interest Initial expenses Renewal expenses (on the second and subsequent premium dates) AM92 Select None 4% per annum 500 50 per annum plus 2.5% of the premium
In addition, the company holds net premium reserves, calculated using AM92 Ultimate mortality and interest of 4% per annum. In order to profit test this contract, the life office assumes the same mortality and expense assumptions as per the pricing basis above. In addition, it assumes it earns 5% per annum on funds and that 5% of all policies still in force at the end of 1, 2, and 3 years then surrender. Calculate, using a risk discount rate of 8% per annum, the expected profit margin on this contract. [18]
END OF PAPER
CT5 A20076
EXAMINATION
April 2007

M A Stocker Chairman of the Board of Examiners June 2007
Comments Comments, where applicable, are given in the solutions that follow.
Subject CT5 (Contingencies Core Technical) April 2007 Examiners Report
(i)
5|10 q[52]
= (l57 l67 ) / l[52] = (9467.2906 8557.0118) / 9652.6965 = 0.094303
(ii)
p[50]:[60] = p[50] p[60] = (1 0.001971) (1 0.005774) = 0.992266
Class selection different classes of members experience different mortality rates. e.g. works versus staff. Alternatively ill-health retirements, other early retirement and normal retirements experience different mortality Temporary Initial selection employee turnover rates vary with duration of employment, recent joiners are most likely to leave. Time selection turnover rates vary with economic conditions. Other answers given credit if properly defined with pension fund specific examples.
EPV = 100e
(0.02+ 0.03+ 0.04) dx

55
65
= 100e0.09*[6555] = 100e 0.9 = 40.66
(i)
The conditions are: The retrospective and prospective reserves are calculated on the same basis. The basis is the same as the basis used to calculate the premiums used in the reserve calculation.
(ii)
Two reasons are: The assumptions used for the retrospective calculation (for which the experienced conditions over the duration of the contract up to the valuation date are used) are not generally appropriate for the prospective calculation (for which the assumptions considered suitable for the remainder of the policy term are used). The assumptions considered appropriate at the time the premium was calculated may not be appropriate for the retrospective or prospective reserve some years later.
Page 2
Value of death benefit: 1000* 0.05*exp( 0.09ds )dt =

0 0 t
1000* 0.05*e 0
= 555.56
0.09t
dt = 1000*0.05 / 0.09
Value of survival benefit every 5th year: 500*(e-0.45 + e-0.9 + e-1.35 +) = 500*e-0.45/(1 - e-0.45) = 500*0.63763/0.36237 = 879.81 Value of premiums: P*(1 + e-.09 + e -.18 + e-.27 +.) = P*(1/1 - e-.09) = 11.619*P Hence 11.619*P = 555.56+879.81 P = 123.54
4 25, 000 t =0
definitions:
s35+t +1d35+t v35+t +0.5

s36l35v35
29
s x salary in year to age x d x number of deaths in year of age x to x + 1 l x number of lives alive at age x exact Other schemes given credit if properly defined.
Page 3
Present value
1 10000 A[50]:10 = 10000( A[50] v10
l60
l[50]
A60 )
= 10000(0.32868 v10 9287.2164 Variance

1 1 = 100002 ( 2 A[50]:10 ( A[50]:10 )2 )
9706.0977
0.45640) = 336.60
= 100002 (( 2 A[50] v 20
l60
l[50]
A60 ) (336.66 /10000) 2 )
= 100002 ((0.13017 v 20 9287.2164
9706.0977
0.23723) 0.0336662 ) = 2543992
The function with the 2 suffix is calculated at rate i2+2i i.e 8.16% in this case.
(i)
The standardised mortality ratio is the ratio of the indirectly standardised mortality rate to the crude mortality rate in the standard population.
SMR =
Ecx,t mx,t Ecx,t s mx,t

x x
c Ex ,t = central exposed to risk in population being studied between age x and age x + t
mx,t = central mortality rate in population being studied for ages x to x + t

s
mx,t = central mortality rate in standard population for ages x to x + t SMR = (2 + 3 + 6 + 50) / (25 12/300 + 35 10/275 + 100 9 / 200 + 500 8 / 175) = 2.058 As the SMR is greater than 1, Giro experiences heavier mortality than Actuaria
(ii)
Page 4
Equation of present value:

(12) (12) + 7500 5 a 60 (12) Purchase price = 15, 000a + 7500 5 a 60:55 5
5 (12) (12) +7500v5 (1 5 p 60) 5 p55 a 60 + 7500v (1 5 p 55) 5 p60 a 65
= 15, 000(1 v5 ) / d (12) + 7500 v5 l65l60 l60l55
l65
l60
65 11/ 24) + 7500v5 (a
65 + a 60 a 65:60 11/ 24) (a
60 11/ 24) + (1 l 60 / l 55)l 65 / l 60)(a 65 11/ 24)] +7500v5 [(1 l 65 / l 60)l 60 / l 55)(a
= 15000 (1 0.82193) / 0.039157 + 7500 0.82193 9647.797 +7500 0.82193 9647.797 9848.431
9826.131
(13.666 11/ 24)
9826.131
9917.623
(13.666 + 16.652 12.682 11/ 24)
+7500 0.82193 (1 9647.797 / 9826.131) 9848.431/ 9917.623 (16.652 11/ 24) +7500 0.82193 (1 9848.431/ 9917.623) 9647.797 / 9826.131 (13.666 11/ 24) = 68213.86 + 79940.67 + 103244.12 + 1799.09 + 557.72
= 253755 to nearest
The following is an alternative derivation of the formula for the purchase price above.
(12) (12) (12) 5| 65 60 15, 000a + 15, 000v5 5 p60 (1 5 p55 )a + 7,500v5 5 p55 (1 5 p60 )a (12) (12) (12) 65 60 65:60 + v5 5 p60 5 p55 (15, 000a + 7,500[a a ])
10
(i)
X Y is the present value of a deferred whole of life assurance with a sum assured of 1 payable at the end of the year of death of a life now aged x provided the life dies after age x + n. X = vk+1
all k
v k +1 0 k < n Y= kn 0
(ii)
Cov(X, Y)
= E[XY] E[X] E[Y]
Page 5

k = n 1
Now E[XY] =
k =0
k = n 1
(v k +1 ) 2 P[ K x = k ] +
k = k =n
vk +1 0 P[ K x = k ]
k =0
(v 2 ) k +1 P[ K x = k ]
= 2 A1 x:n Where 2A is determined using a discount function v2 , i.e. using an interest rate i* = (1 + i)2 1 = 2i + i2 Then: Cov(X, Y) = 2 A1 Ax . A1 x:n x:n Now: Var(X Y) = Var(X) + Var(Y) 2 Cov(X, Y) = ( 2 Ax ( Ax ) 2 ) + ( 2 A1 ( A1 ) 2 ) 2( 2 A1 Ax . A1 ) x:n x:n x:n
x:n
= ( 2 Ax + 2 A1 2 2 A1 ) (( Ax ) 2 + ( A1 ) 2 ) 2 A1 Ax ) x:n x:n x:n

x:n
( Ax A1 )2 = 2 Ax 2 A1 x:n x:n
( nAx ) 2 = 2 Ax 2 A1 x:n
The Examiners regret that two typographical errors occurred in the question wording set in the Examination:
2 1 In line 2 of 10(ii) the symbol shown as 2 A1 x should have been Ax:n .
In the same line the function on the left hand side of the equation should have read Cov(X,Y) and not have included in the brackets 2 assurance functions (which as erroneously stated would have equated to zero).
In the event this question was done well despite the errors. The majority of students attempting the question noticed the first error as obvious and adjusted accordingly. The second error was rarely noticed by students who often went on to produce an otherwise good proof. The question has been corrected for publication. The Examiners wish to sincerely apologise for these errors and wish to assure students that the marking system was sympathetically adjusted to meet the circumstances.
Page 6
11
(i)
It is a principle of prudent financial management that once sold and funded at outset a product should be self-supporting. Many products produce profit signatures that usually have a single financing phase. However, some products, particularly those with substantial expected outgo at later policy durations, can give profit signatures which have more than one financing phase. In such cases these later negative cashflows should be reduced to zero by establishing reserves in the non-unit fund at earlier durations. These reserves are funded by reducing earlier positive cashflows. The reserves required at the end of year 2 and year 1 are: 20.15 = 19.190 1.05 1 1 V= (30.18 + p51 19.190) = (30.18 + 0.99719 19.190) = 46.968 1 1.05 1.05
2V
(ii)
(iii)
Before zeroisation, the net present value (based on a risk discount rate of 8%) is:
95.21 p50 30.18 2 p50 20.15 3 p50 77.15 4 p50 120.29 + + 1.08 1.082 1.083 1.084 1.085 95.21 0.99749 30.18 0.99469 20.15 0.99155 77.15 0.98804 120.29 + + 1.08 1.082 1.083 1.084 1.085
NPV =
= 88.157 25.810 15.911 + 56.228 + 80.888 = 7.238
After zeroisation, the profit in year 1 becomes: Profit in year 1 = 95.21 p50 1V = 95.21 0.99749 46.968 = 142.06 So profit vector will become (-142.06, 0, 0, 77.15, 120.29) And NPV after zeroisation will be:
NPV = p 77.15 4 p50 120.29 142.06 + 0 + 0 + 3 50 4 + 1.08 1.08 1.085 142.06 0.99155 77.15 0.98804 120.29 +0+0+ + 1.08 1.084 1.085
= 131.537 + 56.228 + 80.888 = 5.579
Page 7

As expected, the NPV after zeroisation is smaller because the emergence of the profits has been deferred and the risk discount rate is greater than the accumulation rate.
12
(i)
1 30:20 = 75, 000 A30:25 Net premium per policy is P where Pa
P=
75, 000 A30 v 25 25 p30 A55

30 v 20 20 p30 a 50 a
9557.8179 75, 000 0.16023 1.0425 0.38950 9925.2094 = 9712.0728 21.834 1.0420 17.444 9925.2094 ( 0.16023 0.14070 ) = 104.30 = 75, 000 ( 21.834 7.7903) (ii) Net premium reserve per policy at the end of the 20th year
1 = 75, 000 A50:5 0 = 75, 000 A50 v5 5 p50 A55
9557.8179 = 75, 000 0.32907 1.045 0.38950 = 75, 000 0.014014 = 1051.06 9712.0728
Net premium reserve per policy at the start of the 20th year
Sq49 + 20Vp49 P 1+ i 75, 000q49 + 1051.06 p49 = 104.30 1.04 75, 000 0.002241 + 1051.06 0.997759 = 104.30 1.04 = 1065.68
(iii)
Death strain at risk = 75,000 1051 = 73,949 EDS = 738q49 73,949 = 122,301 ADS = 2 73,949 = 147,898 Mortality profit = 122,301 147,898 = -25,597 (i.e. a loss)
Page 8
13
(i)
Let P be the monthly premium for the contract with simple bonus. Then equation of value (at 4% p.a. interest) is:
(12) 12 P(.95a
[30]:35
) 5.95 P = (48, 000 + 250) A[30] + 2, 000( IA)[30] + 300
(12) where a
[30]:35
[30]:35 =a
11 11 8821.2612 1 v35 35 p[30] = 19.072 1 1.0435 24 24 9923.7497
= 18.7169
Therefore:
12 P(.95 18.7169) 5.95 P = (48, 000 + 250) 1.040.5 0.16011 + 2, 000 1.040.5 6.91644 + 300
i.e. 207.42266 P = 7,878.299 + 14,106.825 + 300
P= (ii)
22, 285.124 = 107.44 207.42266
Let P be the monthly premium for the contract with compound bonus. Then equation of value (at 4% p.a. interest) is:
@ 4% (12) [30]:35 12 P(.95a ) 5.95 P = 50, 000 v 0.5 q[ x ] + v1.5 p[ x ]q[ x ]+1 (1.04) + ... + 250 A[30] + 300
50, 000 0.5 @ 4% + 300 v 1.04q[ x ] + v1.5 1.042 p[ x ]q[ x ]+1 + ... + 250 A[30] 1.04
50, 000 @ 4% v 1.04q[ x ] + v 2 1.042 p[ x ]q[ x ]+1 + ... + 250 A[30] + 300 0.5 (1.04 ) 50, 000
@ 0% @ 4% A[30] + 250 A[30] + 300
(1.04 )
0.5
@ 0% =1 where A[30]
12 P(.95 18.7169) 5.95P =
50, 000
(1.04 )
0.5
+ 250 1.040.5 0.16011 + 300
207.42266 P = 49, 029.034 + 40.820 + 300

P = 49,369.854 = 238.02 207.42266
Page 9
14
Multiple decrement table: X

q[dx ] = ( aq )[ x ]
d
q[sx ] 0.05 0.05 0.05

t 1 ( ap )[61]
( aq )[sx] = q[sx]
0.04968 0.04952 0.04943
(1 ( aq ) )
d [ x]
61 62 63 64 T 1 2 3 4
0.006433 0.009696 0.011344 0.012716 (ap)[61]+t 1 0.943887 0.940784 0.939226 0.987284
1 0.94389 0.88799 0.83403
Let P be the annual premium payable. Then equation value is:

[61]:4 = 100, 000 A[61]:4 + (50 + 0.025 P)(a [61]:4 1) + 500 Pa [61]:4 + 0.025) = 100, 000 A[61]:4 + 50(a [61]:4 1) + 500 P(0.975a
P(0.975 3.730 + 0.025) = 100, 000 0.85654 + 50 2.730 + 500

P= 85, 654 + 636.5 = 23,565.37 3.66175
Reserves required on the policy per unit sum assured are:

V61:4 1
= 1
62:3 a 61:4 a
63:2 a 61:4 a 64:1 a 61:4 a
= 1
2.857 = 0.23240 3.722 1.951 = 0.47582 3.722 1.000 = 0.73133 3.722
2V61:4
= 1
= 1
3V61:4
= 1
= 1
Page 10
Year t
Prem
Expense
Opening reserve 0 23240.0 47582.0 73133.0
Interest
Death Claim 643.3 969.6 1134.4 1271.6
Surr Claim 1170.7 2333.9 3494.5 0
Mat Claim 0 0 0 98728.4
Closing reserve 21935.9 44764.4 68688.4 0
Profit vector 468.8 406.7 716.4 862.3
1 2 3 4
23565.4 23565.4 23565.4 23565.4
500 639.1 639.1 639.1
1153.3 2308.3 3525.4 4803.0
Year t
Profit signature
Discount factor
NPV of profit signature
1 2 3 4
468.8 383.9 636.2 719.2
.92593 .85734 .79383 .73503
434.1 329.1 505.0 528.6
NPV of profit signature = 1,796.8 Year t Premium

t 1 p[61]
Discount factor
NPV of premium
1 2 3 4
23565.4 23565.4 23565.4 23565.4
1 0.94389 0.88799 0.83403
1 .92593 .85734 .79383
23565.4 20595.6 17940.6 15602.1
NPV of premiums = 77,703.7 Profit margin = 1, 796.8 = 0.0231 i.e. 2.31% 77, 703.7
Page 11
EXAMINATION
28 September 2007 (am)

2.
3. 4. 5.
CT5 S2007
Calculate t+1Vx given the following: Px tVx i qx+t = = = = 0.017 0.468 0.03 0.024
[2]
In a special mortality table with a select period of one year, the following relationships are true for all ages:
0.5 q[ x ]
= (0.33)qx = (0.5)qx [3]
0.5 q[ x ]+ 0.5
Express p[ x ] in terms of px .
A twelve-year life insurance contract has the following profit signature before any non-unit reserves are created: (+1, -1, +1, +1, +1, -1, 0, -1, +1, -1, +1, +1) Non-unit reserves are to be set up to zeroise the negative cash flows. Write down the revised profit signature, ignoring interest. [3]
An annuity makes monthly payments in arrear to a life aged 65 exact where each payment is 1.0039207 times greater than the one immediately preceding. The first monthly amount is 1,000. Calculate the expected present value of the annuity using the following basis: Mortality: PFA92C20 Interest: 9% per annum
[4]
(i) (ii)
Write down the formula for a directly standardised mortality rate.
[2]
State the main disadvantage of this rate and outline how is it overcome in practice. [2] [Total 4]
CT5 S20072
For a certain group of pensioners, q75 = 0.05 and q76 = 0.06. Calculate the probability that a pensioner aged 75 exact will die between ages 75.5 and 76.5 assuming: (a) (b) a uniform distribution of deaths between consecutive birthdays a constant force of mortality between consecutive birthdays.
[5]
A life insurance company sells two whole life contracts to lives aged 40 exact at entry. Level monthly premiums are payable in advance until the death of the life assured. Death benefits are paid at the end of the year of death. Under policy A, the sum assured is 100,000 during the first year and it increases by 5,000 at the end of each year for surviving policyholders. Policy B is a with profit policy with initial sum assured of 100,000. The company intends to declare simple annual reversionary bonuses of 5% of the original sum assured each year, vesting at the end of each policy year. After ten years, the total declared bonuses under the with profit policy amount to 50,000. Calculate the net premium reserve required for each policy after ten years. Basis: Mortality: AM92 Select Interest: 4% per annum
[6]
Explain the following terms and give an example of each: (a) (b) (c) class selection spurious selection time selection.
[6]
CT5 S20073
PLEASE TURN OVER
A life office issues an annuity to a woman aged 65 exact and a man aged 68 exact. The annuity of 20,000 per annum is payable annually in arrears for as long as either of the lives is alive. The office values this benefit using the following basis: Interest: Mortality: 4% per annum PFA92C20 PMA92C20 [2]
Female: Males:
(i) (ii)
Calculate the expected present value of this benefit.
Calculate the probability that the life office makes a profit in this case if it charges a single premium of 320,000. [4] [Total 6]
10
A policy provides a benefit of 500,000 immediately on the death of (y) if she dies after (x). (i) Write down an expression in terms of Tx and Ty (random variables denoting the complete future lifetimes of (x) and (y) respectively) for the present value of the benefit under this policy. [2] Write down an expression for the expected present value of the benefit in terms of an integral.
(ii)
[2]
(iii)
Suggest, with a reason, the most appropriate term for regular premiums to be payable under this policy. [2] [Total 6]
11
Let X be a random variable representing the present value of the benefits of a pure endowment contract and Y be a random variable representing the present value of the benefits of a term assurance contract which pays the death benefit at the end of the year of death. Both contracts have unit sum assured, a term of n years and were issued to the same life aged x. (i) Derive and simplify as far as possible using standard actuarial notation an expression for the covariance of X and Y. [4] Hence or otherwise, derive an expression for the variance of (X+Y) and simplify it as far as possible using standard actuarial notation. [4] [Total 8]
(ii)
CT5 S20074
12
On 1 January 1992 a life insurance company issued a number of 20-year pure endowment policies to a group of lives aged 40 exact. In each case, the sum assured was 75,000 and premiums were payable annually in advance. On 1 January 2006, 500 policies were still in force. During 2006, 3 policyholders died, and no policy lapsed for any other reason. The office calculates net premiums and net premium reserves on the following basis: Interest: Mortality: (i) 4% per annum AM92 Select
Calculate the profit or loss from mortality for this group for the year ending 31 December 2006. [7] Explain why the mortality profit or loss has arisen. [2] [Total 9]
(ii)
13
A life insurance company issues a 35-year endowment assurance contract to a life aged 30 exact. The sum assured of 200,000 is payable at maturity or at the end of the year of death if earlier. Level premiums are payable annually in advance for the duration of the contract. (i) Show that the annual premium is approximately 2,007, using the following basis: Interest: Mortality: Expenses: 6% p.a. AM92 Ultimate 300 plus 50% of the annual premium 2% of the second and subsequent annual premiums 600 on death; 200 on maturity [6]
Initial: Renewal: Claim:
(ii)
Write down the gross premium future loss random variable after 25 years, immediately before the premium then due is paid. [3] Calculate the retrospective policy reserve after 25 years, using the same basis as in (i), but with 4% p.a. interest. [6] Explain whether the reserve in (iii) would have been smaller, the same or greater than in (iii) if the office had used the prospective gross premium reserve, on the same basis. [3] [Total 18]
(iii)
(iv)
CT5 S20075
PLEASE TURN OVER
14
A life office uses the following three-state model to calculate premiums for a 2-year accelerated critical illness policy issued to healthy policyholders aged 63 exact at entry.
H: Healthy
C: Critically ill
D: Dead
In return for a single premium payable at entry, the office will pay benefits of: 100,000 if the policyholder dies from the healthy state; 60,000 if he is diagnosed as having a critical illness; 40,000 if he dies from the critically ill state. All benefits are payable at the end of the relevant policy year. Let St represent the state of the policyholder at age 63 + t, so that S0 = H and for t = 1, 2, St = H, C or D. The transition probabilities are defined as follows:
ij p63 +t = Pr(St+1= j | St = i ).
Their values are: t 0 1 (i) (ii)

HC p63 +t HD p63 +t CD p63 +t
0.04 0.06
0.02 0.03
0.25 0.33 [3]
Identify all 6 possible outcomes under this policy. Calculate the net present value at entry of the benefits assuming a rate of interest of 10% per annum for each of the outcomes in (i). Calculate the probability that each outcome occurs. Calculate the mean and variance of the present value at entry of the total benefits per policy.
[3] [3]
(iii) (iv)
[5]
(v)
The office expects to sell 10,000 of these policies. The single premium is set at a level which will ensure that the probability that the office makes a profit is 0.95. Calculate the amount of the single premium, assuming the profit is normally distributed. [6] [Total 20]
END OF PAPER
CT5 S20076
EXAMINATION
September 2007
Introduction The attached subject report has been written by the Principal Examiner with the aim of helping candidates. The questions and comments are based around Core Reading as the interpretation of the syllabus to which the examiners are working. They have however given credit for any alternative approach or interpretation which they consider to be reasonable. M A Stocker Chairman of the Board of Examiners December 2007
( tVx + Px )(1 + i ) = qx +t + px +t ( t +1Vx ) (0.468 + 0.017)(1.03) = 0.024 + (0.976)( t +1Vx ) Vx t +1 = (0.49955 0.024) / 0.976 = 0.487
p[ x ] = ( 0.5 p[ x ] )( 0.5 p[ x ]+0.5 ) = (1 0.5 q[ x ] )(1 0.5 q[ x ]+0.5 ) = (1 0.33qx )(1 0.5qx ) = (1 0.33(1 px ))(1 0.5(1 px )) = (0.67 + 0.33 px )(0.5 + 0.5 p x ) = 0.335 + 0.5 px + 0.165 p x 2
(+1, -1, +1, +1, +1, -1, 0, -1, +1, -1, +1, +1) (+1, -1, +1, +1, +1, -1, 0, -1, 0, 0, +1, +1) (+1, -1, +1, +1, +1, -1, -1, 0, 0, 0, +1, +1) (+1, -1, +1, +1, +1, -2, 0, 0, 0, 0, +1, +1) (+1, -1, +1, +1, -1, 0, 0, 0, 0, 0, +1, +1) (+1, -1, +1, 0, 0, 0, 0, 0, 0, 0, +1, +1) (0, 0, +1, 0, 0, 0, 0, 0, 0, 0, +1, +1)
(Following not necessary for marks but to help explain) All positives after last negative remain unchanged. Consider last negative in year 10. The underlying cash flow that year, per policy in force at start of year 10, is
9
1 px
= ( NUCF )10 .
The reserve needed at t = 9 to counter this is

( NUCF )10 1+i
= ( NUCF )10 since i = 0 .
This is funded from year 9 cash flows at a cost of = ( px +8 )(( NUCF )10 ) per policy in force at the start of year 9. The change in year 9 cash flow is ( NUCF )9 = ( p x +8 )(( NUCF )10 ) = p x +8 ( NUCF )10
Page 2
Subject CT5 (Contingencies Core Technical) September 2007 Examiners Report and the change in year 9 profit signature becomes ( PS )* 9 = 8 p x px +8 ( NUCF )10 = 9 p x ( NUCF )10 = 1 resulting in a revised year 9 profit signature of +1-1=0. The other results follow by repeating this step from year 9 towards year 1 wherever there are negative values in the profit signature.
EPV = 1, 000( 1/12 p65
1 1.091/12
1.0039207 + + + 2 /12 p65 1.0039207 2 /12 + 3/12 p65 3/12 1.09 1.09
1 leading to = 1.04
But 1.003920712 = 1.048076 and

1,000 EPV = 1.0039207 ( 1/12 p65 1 1.041/12
1.048076 1.09
+ 2 /12 p65
1 1.042 /12
+ 3/12 p65
1 1.043/12
++
12,000 (12) = 1.0039207 a65 @ 4%p.a.
EPV = 11,953.14 * (14.871 - 1+(11/24)) = 11,953.14 * 14.329 = 171,276
s Exc,t mx,t
5
(i) Directly standardised mortality rate = Where:
s c Ex ,t : Central exposed to risk in standard population between ages x and x+t
x
c Ex ,t
m x,t : central rate of mortality either observed or from a life table in

population being studied for ages x to x+t (ii) The main disadvantage is that it requires age-specific mortality rates, mx,t , for the group / population in question, and these are often not available conveniently. To overcome this, indirect standardisation, which relies on easily available data, can be used.
Page 3
0.5| q75
0.5 p75 ( q75.5 )
0.5 p75 [ 0.5 q75.5
+ ( 0.5 p75.5 )( 0.5 q76 )]
= [( 0.5 p75 )( 0.5 q75.5 ) + ( p75 )( 0.5 q76 )]
(a)
0.5| q75
UDD t qx = (t )qx , 0 t 1
= =
0.5 p75 ( q75.5 ) 0.5 p75
0.5 p75 (1
p75.5 ) =
0.5 p75 [1 ( 0.5 p75.5 )( 0.5 p76 )]
( p75 )( 0.5 p76 ) = (1 0.5 q75 ) (1 q75 )(1 0.5 q76 )
= (1 (0.5)(.05) (1 0.05)(1 (0.5)(.06)) = 0.975 (0.95)(0.97) = 0.0535 or
using
0.5| q75
= [( 0.5 p75 )( 0.5 q75.5 ) + ( p75 )( 0.5 q76 )] = [(1 0.5 q75 )( 0.5 q75.5 ) + (1 q75 )( 0.5 q76 )] = [((1 (0.5)(.05))(1(0.5)(.05) ) + (1 .05)(0.5)(.06)] = 0.025 + 0.0285 = 0.0535
(0.5)(.05)
(b)
t t t Constant force of mortality t px + r = e = (e ) = ( px ) , 0 r + t 1 0.5| q75
0.5 p75 [1 ( 0.5 p75.5 )( 0.5 p76 )]
= (0.95)0.5 [1 (0.95)0.5 (0.94)0.5 ] = (0.974679)[1 0.944987] = 0.05362
Policy A:
10V (12) 50 = 145, 000 A50 + 5, 000( IA)50 ( NP)a where NP from
(12) 95, 000 A[40] + 5, 000( IA)[40] = ( NP)a

[40]
and
NP
10V
= {(95,000)(0.23041) + (5,000)(7.95835)}/(20.009 - 0.458) = 3,154.86 = {(145,000)(0.32907) + (5,000)(8.55929)}- (3,154.86)(17.444 - 0.458) = 36,923.15
Policy B:
10V (12) 50 = 150, 000 A50 ( NP)a where NP from
(12) 100, 000 A[40] = ( NP )a

[40]
NP = (100,000)(0.23041)/(20.009 - 0.458) = 1,178.51
Page 4
Subject CT5 (Contingencies Core Technical) September 2007 Examiners Report and
10V
= (150,000)(0.32907) - (1,178.51)(17.444 - 0.458) = 29,342.33
(a)
Class selection: groups with different permanent attributes having different mortality e.g. sex, male and female rates differ at all ages
(b)
Spurious selection: ascribing mortality differences to groups formed by factors which are not the true causes of these differences. The influence of some confounding factor has been ignored. e.g. Regional mortality differences actually explained by the different composition of occupations in the different regions.
(c)
Time selection: within a population, mortality varies over calendar time. The effect is usually noticed at all ages and usually rates become lighter over time e.g. ELT12 male mortality vs. ELT15male
m
(i)
EPV = 20, 000a
= 20, 000(11.412 + 13.871 10.112) = 20, 000(15.171) = 303, 420 (ii) The office loses money if PV of payments > 320,000 i.e. if 20,000 an >320,000 or an >16. At 4% p.a., a26 =15.9828 and a27 = 16.3296 so if the office makes the 27th payment under this annuity, it incurs a loss. It therefore makes a profit so long as both lives have died before this time, with probability 27 q
68:65 27 68:65
68:65
f = 20, 000(a68 + a65 a68:65 )
f m = ( 27 q68 )( 27 q65 ) = (1
m l95 m l68
)(1
f l92 f l65
1,020.409 3,300.559 = (1 9,440.717 )(1 9,703.708 ) = (0.891914)(0.65987) = 0.5885
Page 5

Ty 500, 000v g (T ) = 0
10
(i)
Ty > Tx Ty Tx
(ii)
E[ g (T )] = 500, 000 vt (1 t px ) t p y y +t dt
0
(iii)
Lifetime of (y). If (y) dies first, no benefit is possible and if (y) dies second, SA becomes payable immediately. (x)s lifetime is irrelevant in this context. Premium could be payable for joint lifetime of (x) and (y) but this is shorter than (y) and therefore we use (y)s lifetime. vn X = 0 0 Y = K +1 x v Kx n Kx < n
11
(i)
Kx n Kx < n
XY = 0 for all K x
COV ( X , Y ) = E[ XY ] E[ X ]E[Y ] = 0 ( Ax:n1 )( A1 ) x:n
(ii)
VAR( X + Y ) = VAR( X ) + VAR(Y ) + 2COV ( X , Y )

) 2 2( Ax:n1 )( A1 ) = 2 Ax:n1 ( Ax:n1 ) 2 + 2 A1 ( A1 x:n x:n x:n } {( Ax:n1 ) 2 + ( A1 ) 2 + 2( Ax:n1 )( A1 )} = { 2 Ax:n1 + 2 A1 x:n x:n x:n } {( Ax:n1 ) + ( A1 )}2 = { 2 Ax:n1 + 2 A1 x:n x:n = 2 Ax:n ( Ax:n ) 2
12
(i)
1 [40]:20 = 75, 000 A[40]:20 Pa = 75, 000v 20 20 p[40]
P(13.930) = (75, 000)(0.45639)(0.94245) P = 32, 259.45 /13.93 = 2,315.83 Mortality profit = Expected Death Strain Actual Death Strain
1 55:5 ) DSAR = 0 15V = (75, 000 A55:5 Pa
55:5 ) = (75, 000v5 5 p55 Pa
= {(75, 000)(0.82193)(0.97169) (2,315.83)(4.585)} = 49, 281.51 EDS = (q54)(500)(-49,281.51) = (0.003976)(500)(-49,281.51) = -97,971.64 ADS = (3)(-49,281.51) = -147,844.53
Page 6
Subject CT5 (Contingencies Core Technical) September 2007 Examiners Report Mortality Profit = -97,971.64 - (-147,844.53) = 49,872.89 profit.
(ii)
We expected 500q54 = 1.988 deaths. Actual deaths were 3. With pure endowments, the death strain is negative because no death claim is paid and there is a release of reserves to the company on death. In this case, more deaths than expected means this release of reserves is greater than required by the equation of equilibrium and the company therefore makes a profit.
13
(i)
1 30:35 = 200, 600 A30:35 400 A30:35 30:35 0.02 P + 300 + (0.5)( P) Pa + (0.02) Pa
Expected present value of premiums:

30:35 = 15.150 P Pa
EPV of benefit and claim expenses:

A30:35 = 0.14246
1 A30:35 = v35 35 p30 = (0.13011)(0.88877) = 0.11563
EPV of benefits and claim expenses = (200,600)(0.14246) - (400)(0.11563) = 28,577.48 - 46.25 = 28,531.23 EPV of remaining expenses: [(0.02)(15.150P)] - 0.02P + 0.5P + 300 = 0.783P + 300 Equation of value: 15.150P = 28,531.23 + 300 + 0.783P 14.367P = 28,831.23 P = 2,006.77 per annum = 2,007 p.a.
K55 +1 K +1 ) (0.98)(2, 007)(a 200, 600v 55 GFLRV = 10 200, 200v (0.98)(2, 007)(a10 )
(ii)
K55 < 10 K55 10
Page 7
Subject CT5 (Contingencies Core Technical) September 2007 Examiners Report (iii)
25V
retro
1 30:25 {0.98Pa v 25 25 p30
1 } 0.48 P 300 200, 600 A30:25
v 25 25 p30 = (0.37512)(0.96298) = 0.36123

30:25 = a 30 v 25 25 p30 a 55 = 21.834 (0.36123)(15.873) = 16.100 a
1 A30:25 = A30 v 25 25 p30 A55 = 0.16023 (0.36123)(0.38950) = 0.01953
25V retro
= =
1 {[2, 007][(0.98)(16.100) (0.48)] 300 (200, 600)(0.01953)} 0.36123 1 {30, 703.09 300 3,917.72} = 73,319.96 0.36123
(iv)
It would have been larger. At 6% both would be the same but

pro pro retro retro V@ 4% < V@6% = V@ 6% < V@ 4%
since retrospective reserves are accumulating premiums in excess of claims and expenses and lower interest leads to lower reserves but prospective reserves are meeting the excess of future benefits claims over future premiums and lower interest leads to higher reserves.
14
(i), (ii) and (iii) Transition probabilities not given explicitly are t 0 1
HH p63 +t CC p63 +t DD p63 +t
0.94 0.91 PV Ben
0.75 (not needed) 0.67 (PV Ben)2
1.00 (not needed) 1.00 Prob. Prob. E[PVB] E[PVB2]
Outcome
PV of Cash flow (000's) 0 60v2 100v2 60v 60v+40v2 100v
HH HC HD CC CD DD
0.00 49.59 82.64 54.55 87.60 90.91
0.00 0.94*0.91 0.8554
2458.85 0.94*0.06 0.0564 2.79669 138.67905 6830.13 0.94*0.03 0.0282 2.33058 192.60979 2975.21 0.04*0.67 0.0268 1.46182 79.73554
7674.34 0.04*0.33 0.0132 1.15636 101.30128 8264.46 0.02 0.02 1.81818 165.28926
Total
9.56364 677.61492
Page 8
Subject CT5 (Contingencies Core Technical) September 2007 Examiners Report (iv) Mean = (1,000)(9.56364) = 9,563.64 Var. = (1,000)2{(677.61492 - (9.56364)2} = 586,151,710 = (24,210.57)2 (v) Var.(profit) = Var.(SP - EPV(bens)) = Var.(EPV(bens)) EPV(profit) = (10,000)(SP - 9,563.64) = 10,000SP - 95,636,400 Var.(profit) = Var.(SP - EPV(bens)) = Var.(EPV(bens)) For 10,000 independent policies, Var.(profit) = (10,000)(586,151,710) = (2,421,057)2 St. Dev.(profit) = 2,421,057 We need SP so Prob.(profit > 0) = 0.95 profit ( EPV (profit) 0 (10, 000SP 95, 636, 400) Pr . > = 0.95 StDev(profit) 2, 421, 057 Assuming profit is normally distributed
95, 636, 400 10, 000 SP 95, 636, 400 10, 000 SP Pr . z > = 0.95 = 0.05 2, 421, 057 2, 421, 057 95, 636, 400 10, 000 SP = 1 (0.05) = 1.6449 2, 421, 057 95, 636, 400 + (1.6449)(2, 421, 057) SP = = 9,961.88 = 9,962 10, 000
Page 9
EXAMINATION
14 April 2008 (am)

2.
3. 4. 5.
AT THE END OF THE EXAMINATION Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this question paper.
In addition to this paper you should have available the 2002 edition of the Formulae and Tables and your own electronic calculator from the approved list.
CT5 A2008
(a) (b)
Express
5|10 q40
in words. [2]
Calculate its value using AM92 mortality.
Describe three types of reversionary bonus that may be given to a with-profits contract.
[4]
Explain why a life insurance company will need to set up reserves for the endowment assurance contracts it has sold. [4]
A life insurance company sells a term assurance and critical illness policy with a 20 year term to a life aged 40 exact. The policy provides a benefit of 50,000 payable immediately on death or earlier diagnosis of critical illness. No further benefit is paid in the event of death within the term after a prior critical illness claim has been paid. The company prices the policy using the following multiple state model: x
Healthy (h) x
Critically Ill (i) x
Dead (d)
Calculate the expected present value of the benefits under the policy. Basis: i = 5% per annum x = 0.005 at all ages x = 0.006 at all ages x = 0.003 at all ages
[5]
A reversionary annuity is payable continuously beginning on the death of a life aged x to an annuitant aged y. (a) (b) Derive an expression for the present value of the reversionary annuity using random variables for the future lifetimes. Derive an expression for the expected present value of the reversionary annuity in terms of assurance functions. [5]
CT5 A20082
A parent who has just died left a bond in their will that provides a single payment of 15,000 in 10 years time. The payment of 15,000 will be shared equally between the local cats home and such of the parents two sons (currently aged 25 and 30 exact) who are then still alive. Calculate the expected present value of the share due to the cats home. Basis: Mortality AM92 Ultimate Interest 3% per annum [5]
A defined benefit pension scheme provides a pension on retirement for any reason of one-sixtieth of final pensionable salary for each year of service (with proportion for part years of service). Final pensionable salary is average salary over the three years immediately preceding retirement. Calculate the cost of providing future service benefits for a new member aged 40 exact as a percentage of salary. Basis: Example Pension Scheme Table in the Formulae and Tables for Examinations Handbook [6]
(i)
Show that
t s qx+ s
(t s )qx , (1 sqx )
( 0 s < t 1)
[4]
using an assumption of a uniform distribution of deaths. (ii) Calculate the value of 0.5q62.25 using assumptions of: (a) (b) a uniform distribution of deaths a constant force of mortality
Basis: Mortality PMA92C20
[3] [Total 7]
CT5 A20083
PLEASE TURN OVER
A life insurance company prices annuities using a basis which incorporates the location of the proposing annuitants as an additional rating factor. (i) Identify three factors that influence mortality and would cause the insurance company to adopt location as a rating factor. State which form of selection is demonstrated by the use of location as a rating factor. [4] The company has produced the following data in respect of two locations. Calculate the standardised mortality ratio for each location based on the standard mortality table ELT15(Males). Location A Initial exposed Number to risk of deaths 100 1 175 3 190 2 210 3 Location B Initial exposed Number to risk of deaths 200 3 150 3 170 3 100 2 [4] [Total 8]
(ii)
Age 60 61 62 63
10
A male life aged 60 exact wants to buy the following benefits within one policy: (a) an annuity of 5,000 per annum payable monthly in arrear to his wife currently aged 55 exact commencing on his death and for the rest of her life, and an annuity of 2,000 per annum payable monthly in arrear to his grandson currently aged 13 exact commencing on the death of either grandparent and ceasing when the grandson reaches age 21
(b)
Calculate the overall single premium. Basis: Mortality Male life PMA92C20 Wife PFA92C20 Grandson ignore 4% per annum [10]
Interest
CT5 A20084
11
A life insurance company issues a 10-year with-profits endowment policy to a life then aged 50 exact. Under the policy, the basic sum assured of 75,000 and attaching bonuses are payable at maturity or immediately on death, if earlier. The company declares compound reversionary bonuses vesting at the end of each policy year (i.e. the death benefit does not include any bonus relating to the policy year of death). Level premiums are payable annually in advance under the policy. (i) Show that the annual premium, using the equivalence principle, is approximately 7,487. Basis: Mortality Interest Bonus loading Expenses AM92 Select 6% per annum 1.92308% of the sum assured, compounded and vesting at the end of each policy year Initial 350 plus 50% of the annual premium Renewal 5% of each premium payable in the second and subsequent years [7] At aged 55 exact, immediately before the premium then due and just after the declared bonus relating to the 5th policy year has been added to the policy, the policy is still in force. (ii) Calculate the reserve for the policy at this point in time using a gross premium prospective basis assuming the same basis as in (i) above. You should also assume that the life insurance company has declared a compound bonus throughout the duration of the policy consistent with the bonus loading assumption used to derive the premium in (i) above. [5] [Total 12]
CT5 A20085
PLEASE TURN OVER
12
A life assurance company issues the following policies: 10-year term assurances with a sum assured of 50,000 where the death benefit is payable at the end of the policy year of death 10-year pure endowment assurances with a sum assured of 50,000 payable on maturity
For the term assurance and pure endowment policies, premiums are paid annually in advance. The company sold 5,000 policies of each type to lives then aged 50 exact. During the first policy year, there were five actual deaths from each of the two types of policies written. (i) Assuming each type of policy was sold to a distinct set of lives (i.e. no life buys more than one type of policy). (a) (b) Calculate the death strain at risk for each type of policy at the end of the second policy year of the policies. During the second policy year, there were ten deaths from each of the two types of policy written. Calculate the total mortality profit or loss to the company during the second policy year. 4% per annum AM92 Ultimate for term assurance and pure endowment Nil [11] (ii) The company now discovers that 5,000 lives had bought one of each type of policy. (a) (b) State whether the mortality profit or loss calculated would now be higher, lower or unchanged to that calculated in (i)(b). State whether the variance of the benefits paid out by the company in future years would be higher, lower or unchanged to that in (i). Explain your answer by general reasoning. [3] [Total 14]
Basis: Interest Mortality Expenses
CT5 A20086
13
A life insurance company issues a 4-year unit-linked endowment policy to a life aged 50 exact under which level premiums of 750 are payable yearly in advance throughout the term of the policy or until earlier death. In the first policy year, 25% of the premium is allocated to units and 102.5% in the second and subsequent years. The units are subject to a bid-offer spread of 5% and an annual management charge of 1% of the bid value of units is deducted at the end of each policy year. Management charges are deducted from the unit fund before death, surrender and maturity benefits are paid. If the policyholder dies during the term of the policy, the death benefit of 3,000 or the bid value of the units, whichever is higher, is payable at the end of the policy year of death. The policyholder may surrender the policy only at the end of each policy year. On surrender, the bid value of the units is payable at the end of the policy year of exit. On maturity, 110% of the bid value of the units is payable. The company uses the following assumptions in carrying out profit tests of this contract: Rate of growth on assets in the unit fund Rate of interest on non-unit fund cash flows Mortality Initial expenses Renewal expenses Initial commission Renewal commission Risk discount rate 6.5% per annum 5.5% per annum AM92 Select 150 65 per annum on the second and subsequent premium dates 10% of first premium 2.5% of the second and subsequent years premiums 8.5% per annum
In addition assume that at the end of each of the first 3 years, 10% of all policies still in force then surrender. (i) (ii) Calculate the profit margin for the policy on the assumption that the company does not zeroise future expected negative cash flows. [13] Suppose the company sets up reserves in order to zeroise future expected negative cash flows. (a) (b) Calculate the expected reserve that must be set up at the end of each policy year, per policy in force at the start of each policy year. Calculate the profit margin allowing for the cost of setting up these reserves. [5] [Total 18]
END OF PAPER
CT5 A20087

April 2008
Introduction The attached subject report has been written by the Principal Examiner with the aim of helping candidates. The questions and comments are based around Core Reading as the interpretation of the syllabus to which the examiners are working. They have however given credit for any alternative approach or interpretation which they consider to be reasonable. M A Stocker Chairman of the Board of Examiners June 2008
Subject CT5 Contingencies Core Technical April 2008 Examiners Report
The probability that an ultimate life age 40 dies between 45 and 55 (all exact)
5|10 q40
(l45 l55 ) (9801.3123 9557.8179) = = 0.024704 l40 9856.2863
The following are three types of guaranteed reversionary bonuses. The bonuses are usually allocated annually in arrears, following a valuation. Simple the rate of bonus each year is a percentage of the initial (basic) sum assured under the policy. The effect is that the sum assured increases linearly over the term of the policy. Compound the rate of bonus each year is a percentage of the initial (basic) sum assured and the bonuses previously added. The effect is that the sum assured increases exponentially over the term of the policy. Super compound two compound bonus rates are declared each year. The first rate (usually the lower) is applied to the initial (basic) sum assured. The second rate is applied to bonuses previously added. The effect is that the sum assured increases exponentially over the term of the policy. The sum assured usually increases more slowly than under a compound allocation in the earlier years and faster in the later years. (Note: credit given if special reversionary bonus mentioned)
The expected cost of paying benefits usually increases as the life ages and the probability of a claim by death increases. In the final year the probability of payment is large, since the payment will be made if the life survives the term, and for most contracts the probability of survival is large. Level premiums received in the early years of a contract are more than enough to pay the benefits that fall due in those early years, but in the later years, and in particular in the last year of an endowment assurance policy, the premiums are too small to pay for the benefits. It is therefore prudent for the premiums that are not required in the early years of the contract to be set aside, or reserved, to fund the shortfall in the later years of the contract. If premiums received that were not required to pay benefits were spent by the company, perhaps by distributing to shareholders, then later in the contract the company may not be able to find the money to pay for the excess of the cost of benefits over the premiums received. (Credit given for other valid points)
Page 2
Value =
hh 50, 000 vt . t p40 ( 40+t + 40+t )dt 0 hh 0.008dt = 50, 000 e ln(1.05)t . t p40 0 40+t hh t p40 20 20
hh t p40 40+t
= exp(
40
( s + s )ds )
= exp( =e
40 0.008t
0.008ds )
Therefore, value = 50, 000*0.008 e ln(1.05)t .e 0.008t dt = 400

0 20 0.05679t e dt 0 .05679t 20
= 400*[e
20 / .05679]0
= 400*(5.65531 + 17.60873) = 4781.4
(a)
Define random variables Tx and Ty for the complete duration of life for the lives aged x and y. Define a random variable Z for the value of the reversionary annuity, which has the following definition:
Z = aTy | aTx | if Ty > Tx = 0 otherwise
Z = aTy | aTxy | where Txy is a random variable for the duration to the first
death (1 v ) (1 v Z= (b)
Ty Txy
(v
Txy
v y)
E[ Z ] =
( E[v
Txy
] E[v y ]) ( A xy A y ) =
Page 3
The probability that the life age 25 survives 10 years = 9894.4299 / 9953.6144 = 0.994054 The probability that the life age 30 survives 10 years = 9856.2863 / 9925.2094 = 0.993056 There are four possible outcomes: Outcome Both survive Only 25 survives Only 30 survives Neither survive Expression for value V100.9940540.99305615000/3 V100.994054(1-0.993056)15000/2 V10(1-0.994054)0.99305615000/2 V10(1-0.994054)(1-0.993056)15000 value 3672.67 38.52 32.95 0.46
Total value is 3744.60
Value of future service benefits

1 ( R 40 + R 40 ) 1 (2884260 + 887117) .S . = .S . = 2.5S s 60 60 25059 D40
z ra z ia
Value of contributions of k% of future salary

k N 40 k (363573) .S . s = .S . = k /100*14.5S 100 25059 D40 100
s
Equating these values give k = 17.3
Page 4
(i)
The uniform distribution of deaths is consistent with an assumption that

sqx
= s.qx
t s qx+ s
= (1 t s px + s ) = (1 = (1 = (1 = px ) s px
t
(1 t qx ) ) (1 s qx ) (1 tqx ) ) (1 sq x )
(t s ).qx (1 s.qx ) = 0.5q62/(1-0.25q62) = 0.50.00355/(1-0.25*0.00355) = 0.001777
(ii)
(a)
0.5q62.25
(b)
The assumption of a constant force of mortality requires to be derived from the expression p = e-. p62=0.99645 => 62=0.003556
t s
p x + s = e (t s ) = e 0.5 x 0.003556 = 0.998224 = 0.001776
t s qx+ s
(i)
Occupation as some occupations have a regional distribution Housing as quality of housing will be impacted by occupationally influenced income levels Climate different locations having different climates Using location is a spurious form of class selection as it disguises the underlying causes
Page 5
Subject CT5 Contingencies Core Technical April 2008 Examiners Report (ii) Actual deaths (location A) = 9 Actual deaths (location B) = 11 The calculation of the expected deaths is Location A Number Initial of deaths Exposed to risk 100 1.4 175 2.7 190 3.3 210 4.1 11.5 Location B Number Initial Exposed of deaths to risk 200 2.8 150 2.3 170 3.0 100 2.0 10.1
Age 60 61 62 63 Total
Standard Mortality Rate 0.01392 0.01560 0.01749 0.01965
The SMRs are therefore Location A = 9/11.5 = 0.78 Location B = 11/10.1 = 1.09
10
(a)
wife
(12) (12) value = 5000(a55 a60:55 ) = 5000(18.210 14.756) = 17, 270 Note no effect of monthly payments
(b)
grandson value =
(12) (12) 2000(a8| a60:55:8| ) (12) a8|
(1 v8 ) i (12)
= 6.7327 x 0.04
0.039285
= 6.855
(12) (12) (12) = a60:55 v8 8 p60 . 8 p55 a68:63 a60:55:8|
= a60:55 + 11/ 24 v8 8 p60 .8 p55 (a68:63 + 11/ 24) = (14.756 1) + 11/ 24 v8 9440.717 9775.888 (11.372 1 + 11/ 24) 9826.131 9917.623
= 6.721 Therefore value = 2000(6.855-6.721) = 268
Total value = 17270 + 268 = 17,538
Page 6
11
(i)
Let P be the annual premium. Then:
EPV of premiums:
[50]:10 = 7.698 P Pa
EPV of benefits:
75, 000 (1.06)1/ 2{q[50] (1 + b)v +1 q[50] (1 + b) 2 v 2 (1 + b) +.... + 9 q[50] (1 + b)10 v10 } + 75, 00010 p[50] (1 + b)10 v10
where b = 0.0192308 = = 75, 000 1 1 @ i ' + 75, 000 10 p[50] (1.06)1/ 2 A[50]:10 (1 + b) (1 + i ' )10 75, 000 (1.06)1/ 2 (.68007 .64641) + 75, 000 .64641 = 2,550.091 + 48, 480.75 1.0192308
= 51, 030.84 where i ' =
1.06 1 = 0.04 1+ b
EPV of other expenses:

[50]:10 1) = 0.8349 P + 350 .5 P + 350 + 0.05 P (a
Equation of value gives 7.698P = 51,030.84+ 0.8349P + 350 and P = 7,486.54 (ii) Gross premium prospective reserve (calculated at 6%) is given by:
EPV of benefits and expenses less EPV of premiums EPV of benefits and expenses: = = 82, 494.3 1 1 55:5 (1.06)1/ 2 A55:5 + 0.05 Pa @ i ' + 82, 494.3 5 p55 (1 + b) (1 + i ' )5
82, 494.3 (1.06)1/ 2 (.82365 .79866) @ i ' + 82, 494.3 0.79866 + 0.05 7486.54 4.423 1.0192308 = 2, 082.43 + 65,884.90 + 1, 655.65 = 69, 622.98
Page 7
Subject CT5 Contingencies Core Technical April 2008 Examiners Report EPV of premiums:
55:5 = 4.423P = 33,112.97 Pa
=> Gross premium prospective reserve = 36,510.00
12
(i)
(a)
Annual premium for pure endowment with 50,000 sum assured given by: P PE = 50, 000 50, 000 10 p50 v10 = 0.64601 = 3885.10 50:10 a 8.314
Annual premium for term assurance with 50,000 sum assured given by:
PTA = P EA P PE = = 50, 000 A50:10 50:10 a P PE
50, 000 0.68024 3885.10 = 205.83 8.314
Reserves at the end of the second year: for pure endowment with 50,000 sum assured given by:
2V PE
52:8 = 50, 000 8 p52 v8 P PE a
= 50, 000 0.70246 3885.10 6.910 = 35123.0 26846.04 = 8276.96
for term assurance with 50,000 sum assured given by:

2V TA
= 2V EA 2V PE
52:8 8276.96 = 50, 000 A52:8 (3885.1 + 205.83)a = 50, 000 0.73424 4090.93 6.91 8276.96 = 166.71
Sums at risk: Pure endowment: DSAR = 0 8,276.96 = 8,276.96 Term assurance: DSAR = 50,000 166.71 = 49,833.29
Page 8
Subject CT5 Contingencies Core Technical April 2008 Examiners Report (b) Mortality profit = EDS ADS For term assurance
EDS = 4995 q51 49,833.29 = 4995 .002809 49,833.29 = 699, 208.65 ADS = 10 49,833.29 = 498,332.90
mortality profit = 200,875.75 For pure endowment

EDS = 4995 q51 8, 276.96 = 4995 .002809 8, 276.96 = 116,133.65 ADS = 10 8, 276.96 = 82, 769.60
mortality profit = 33,364.05 Hence, total mortality profit = 167,511.70 (ii) (a) (b) The actual mortality profit would remain as that calculated in (i) (b). The variance of the benefits would be lower than that calculated in (i). In this case, the company would not pay out benefits under both the PE and the TA but will definitely pay out one of the benefits. Under the scenario in (i), the company could pay out all the benefits (if all the TA policyholders die and the PE policyholders survive). Alternatively, they could pay out no benefits at all (if all the TA policyholders survive and the PE policyholders immediately die).
Page 9
13
Annual premium Risk discount rate Interest on investments Interest on sterling provisions Minimum death benefit 750.00 8.5% 6.5% 5.5% 3000.00 Initial expense Renewal expense (i) 150 65 % prm 10.0% 2.5% Total 225 83.75 Allocation % (1st yr) Allocation % (2nd yr +) Man charge B/O spread 25.0% 102.50% 1.0% 5.0%
Multiple decrement table x 50 51 52 53 x 50 51 52 53

d qx s qx
0.001971 0.002732 0.003152 0.003539 (aq) d x 0.001971 0.002732 0.003152 0.003539
0.1 0.1 0.1 0.0 (aq) s x 0.09980 0.09973 0.09968 0.00000
(ap)
0.898226 0.897541 0.897163 0.996461
t 1 ( ap )
1.000000 0.898226 0.806195 0.723288
Page 10
Subject CT5 Contingencies Core Technical April 2008 Examiners Report Unit fund (per policy at start of year) yr 1 value of units at start of year alloc B/O interest management charge value of units at year end 0.000 187.500 9.375 11.578 1.897 187.806 yr 2 187.806 768.750 38.4375 59.678 9.778 968.018 yr 3 968.018 768.750 38.4375 110.392 18.087 1790.635 yr 4 1790.635 768.750 38.4375 163.862 26.848 2657.961
Cash flows (per policy at start of year) yr 1 unallocated premium B/O spread expenses interest man charge extra death benefit Extra maturity benefit end of year cashflow 0.000 362.307 0.000 63.359 0.000 53.311 264.855 306.804 562.500 9.375 225.000 19.078 1.897 5.543 yr 2 18.750 38.4375 83.750 3.523 9.778 5.551 yr 3 18.750 38.4375 83.750 3.523 18.087 3.812 yr 4 18.750 38.4375 83.750 3.523 26.848 1.210
Page 11
probability in force discount factor expected p.v. of profit premium signature expected p.v. of premiums profit margin (ii) (a)
1 0.921659 91.809
0.898226 0.849455
0.806195 0.782908
0.723288 0.721574
750.000 2309.215 3.98%
620.894
513.620
424.701
To calculate the expected provisions at the end of each year we have (utilising the end of year cashflow figures and decrement tables in (i) above):
3V
306.804 = 290.809 1.055 2V 1.055 ( ap )52 3V = 53.311 2V = 297.833 = 1.055 (ap )51 2V = 63.359 1V = 313.437
V 1
These need to be adjusted as the question asks for the values in respect of the beginning of the year. Thus we have: Year 3 290.809(ap)52 = 260.903 Year 2 297.833(ap)51 = 267.318 Year 1 313.437(ap)50 = 281.538 (b) Based on the expected provisions calculated in (a) above, the cash flow for years 2, 3 and 4 will be zeroised whilst year 1 will become: 362.307 281.538 = 80.769
Page 12
Subject CT5 Contingencies Core Technical April 2008 Examiners Report Hence the table below can now be completed for the revised profit margin. revised end of year cash flow probability in force discount factor expected p.v. of profit profit margin 80.769 1 0.921659 74.442 3.22% 0 0.898226 0.849455 0 0.806195 0.782908 0 0.723288 0.721574
Page 13
EXAMINATION
22 September 2008 (am)

2.
3. 4. 5.
CT5 S2008
Calculate (to the nearest integer) the lower quartile of the complete future lifetime of a person aged 25 exact who is subject to mortality according to ELT15 (Females). [3]
The profit signature of a 3-year assurance contract issued to a life aged 57 exact, with a premium payable at the start of each year of 500 is (250, 150, 200). Calculate the profit margin of the contract. Basis: Mortality AM92 Ultimate Lapses None Risk discount rate 12% per annum
[3]
In order to value the benefits in a final salary pension scheme as at 1 January 2008, a s salary scale, s x , has been defined so that x +t is the ratio of a members total sx earnings between ages x + t and x + t + 1 to the members total earnings between ages x and x + 1. Salary increases take place on 1 July every year. One member, whose date of birth is 1 April 1961, has an annual salary rate of 75,000 on the valuation date.
Write down an expression for the members expected earnings during 2008.
[3]
Write down an alternative expression for each of the following statements. Use notation as set out in the International Actuarial Notation section of the Formulae and Tables for Examinations where appropriate and express your answer as concisely as possible. (i) (ii) (iii) (iv)
Probability[maximum{Tx, Ty} n]
[1] [1] [1]
E[ g ( K x )] where g ( K x ) = v K x +1 for K x < n and 0 for K x n

Probability{n < Tx m} Limit dt 0
1 Probability[minimum{Tx , Ty } t + dt | Tx > t , Ty > t ] dt

x)
[1]
[1] [Total 5]
(v)
E[aminimum( n1, K
+ 1]
CT5 S20082
(i) (ii)
x : n Explain what is meant by s 50:20 . Calculate s

Basis: Mortality: Interest:
[2] [3]
AM92 Ultimate 4% per annum [Total 5]
A select life aged 62 exact purchases a 3-year endowment assurance with sum assured 100,000. Premiums of 30,000 are payable annually in advance throughout the term of the policy or until earlier death. The death benefit is payable at the end of the policy year of death. Calculate the expected value of the present value of the profit or loss to the office on the contract, using the following basis:
Interest Expenses Mortality
7.5% per annum Ignore 1 q[ x t ]+t = qx for all x and for t = 0, 1 or 2. 4t q62 = 0.018, q63 = 0.02 and q64 = 0.022
[6]
A certain population is subject to three modes of decrement: , and . (i) Write down an expression for (aq) x in terms of the single decrement table
, assuming each of the three modes of decrement probabilities qx , qx , and qx is uniformly distributed over the year of age x to x + 1 in the corresponding single decrement table. [2]
(ii)
= 1 t 2 qx (0 t 1), Suppose now that in the single decrement table , t px while decrements and remain uniformly distributed. Derive a revised expression for (aq ) x in terms of the single decrement table probabilities qx . , qx , and qx
[4] [Total 6]
CT5 S20083
PLEASE TURN OVER
A life insurance company sells 1,000 whole life annuities on 1 January 2007 to policyholders aged 65 exact. Each annuity is for 25,000 payable annually in arrear. 5 annuitants die during 2007.
The office holds reserves using the following basis:
Mortality Interest (i) (ii)
PFA92C20 4% per annum
Calculate the profit or loss from mortality for this group for the year ending 31 December 2007. [4] Explain why the mortality profit or loss has arisen. [2] [Total 6]
A new member aged 35 exact, expecting to earn 40,000 in the next 12 months, has just joined a pension scheme. The scheme provides a pension on retirement for any reason of 1/60th of final pensionable salary for each year of service, with fractions counting proportionately. Final pensionable salary is defined as the average salary over the three years prior to retirement. Members contribute a percentage of salary, the rate depending on age. Those under age 50 contribute 4% and those age 50 exact and over contribute 5%. The employer contributes a constant multiple of members contributions to meet exactly the expected cost of pension benefits.
Calculate the multiple needed to meet this new members benefits.
All elements of the valuation basis are contained in the Example Pension Scheme Table in the Formulae and Tables for Examinations. [6]
10
Calculate the variance of the present value of benefits under an annuity payable to a life aged 35 exact. The annuity has payments of 1 per annum payable continuously for life.
Basis: Mortality Interest
= 0.02 throughout = 0.05
[7]
11
A life insurance company has reviewed its mortality experience. For each age, it has pooled all the deaths and corresponding exposures from its entire portfolio over the previous ten years, and derived a single mortality table.
List three types of selection which might be likely to produce heterogeneity in this particular investigation. In each case, explain the nature of the heterogeneity and how it could be caused, and state how the heterogeneity could be reduced. [9]
CT5 S20084
12
A life insurance company is considering selling with-profit endowment policies with a term of twenty years and initial sum assured of 100,000. Death benefits are payable at the end of the policy year of death. Bonuses will vest at the end of each policy year.
The company is considering three different bonus structures:
(1) (2) (3)
Simple reversionary bonuses of 4.5% per annum. Compound reversionary bonuses of 3.84615% per annum. Super compound bonuses where the original sum assured receives a bonus of 3% each year and all previous bonuses receive an additional bonus of 6% each year. [4]
(i)
Calculate the amount payable at maturity under the three structures.
(ii)
Calculate the expected value of benefits under structure (2) for an individual aged 45 exact at the start, using the following basis:
Interest Mortality Expenses
8% per annum AM92 Select ignore [4]
(iii)
Calculate the expected value of benefits, using the same policy and basis as in (ii) but reflecting the following changes: (a) (b) (c) Bonuses vest at the start of each policy year (the death benefit is payable at the end of the policy year of death). The death benefit is payable immediately on death (bonuses vest at the end of each policy year). The death benefit is payable immediately on death, and bonuses vest continuously. [3] [Total 11]
CT5 S20085
PLEASE TURN OVER
13
Two lives, a female aged 60 exact and a male aged 65 exact, purchase a policy with the following benefits: (i) (ii) an annuity deferred ten years, with 20,000 payable annually in advance for as long as either of them is alive a lump sum of 100,000 payable at the end of the policy year of the first death, should this occur during the deferred period
Level premiums are payable monthly in advance throughout the deferred period or until earlier payment of the death benefit. Calculate the monthly premium. Basis:
Mortality
Interest Expenses
Female Male 4% per annum Initial Renewal
PFA92C20 PMA92C20
350 2.5% of each monthly premium excluding the first. [14]
14
A life insurance company issues a decreasing term assurance policy to a life aged 55 exact. The death benefit, which is payable immediately on death, is 100,000 in the first policy year, 90,000 in the second year thereafter reducing by 10,000 each year until the benefit is 10,000 in the 10th year, with cover ceasing at age 65.
The policy is paid for by level annual premiums payable in advance for 10 years, ceasing on earlier death. The life office uses the following basis for calculating premiums and reserves:
Basis:
Mortality Interest Expenses
AM92 Select 4% per annum Initial Renewal 300 plus 25% of the first premium 5% of all premiums excluding the first and 50*(1.04)t on each policy anniversary where t is the exact duration of the policy on the anniversary 200*(1.04)u where u is the exact duration of the policy at death, measured in years with fractions counting
Claim
CT5 S20086
(i) (ii) (iii)
Write down the gross premium future loss random variable at the start of the policy. Use P for the annual premium. [4] Calculate the premium, using the equivalence principle. Calculate the gross premium prospective reserve after 9 years. [10] [2] [Total 16]
END OF PAPER
CT5 S20087

September 2008
R D Muckart Chairman of the Board of Examiners November 2008
Let t equal future lifetime. Lower quartile means that 25% of people have future lifetime less than t.
t q25
= 0.25
l25+t = 0.75 l25
l25+t = 0.75 l25+t = 74, 098 98, 797
l73 = 74, 287 l74 = 72, 048, So 7325 = 48 is lower quartile future lifetime to nearest integer.
Profit margin = (EPV profit / EPV premiums) EPV profit = -250v + 150v2 + 200v3 = 38.72 EPV premiums = 500(1 + 1p57v + 2p57v2) = 500(1 + 0.8878125 + 0.7876546) = 1,337.73 Profit margin = 38.72/1,337.37 = 2.89%
75,000 represents earnings from 1/7/2007 to 1/7/2008 i.e. from age 46.25 to 47.25 2008 is the period from age 46.75 to 47.75 2008 expected earnings = 75, 000
s46.75 s46.25
(s46 + 3s47) is a satisfactory alternative to the numerator above and (3s46 + s47) a satisfactory alternative for the denominator. Alternative: 75, 000{0.5 + 0.5( s47.25 )} s46.25
Page 2
(i) (ii) (iii) (iv) (v)
n q xy
A1 x:n
n|m n q x
x +t: y +t or x +t + y +t
x:n a
It is the accumulation of an n-year annuity due i.e. the expected fund per survivor after n years, from a group of people, initially aged x, who each put 1 at the start of each of the n years, if they are still alive, into a fund earning interest at rate i per annum.
50:20 = s
=
50:20 a v 20 20 p50 1
v
20 20 p50
50 v 20 20 p50 a 70 ) (a
1 (17.444) 10.375 = 35.715 (0.45639)(0.82928)
6
x q[x] q[x-1]+1 q[x-2]+2 q[x-3]+3 qx
62 63 64
0.006 0.0045 0.005 0.006667 0.0055 0.007333
0.009 0.01 0.011
0.018 0.02 0.022
0.018 0.02 0.022
EPV premiums = 30,000{1 + v*p[62] + v2* p[62]*p[62]+1} = 30,000{1 + v*(1 - 0.0045) + v2*(1 - 0.0045)*(1 - 0.006667)} = (30,000)(2.781742) = 83,452.27 EPV benefits = 100,000{v*q[62] + v2*p[62]*q[62]+1 + v3*p[62]*p[62]+1*(q[62]+2 + p[62]+2)} = 80,592.50 EPV profit
= 83,452.27 - 80,592.50 = 2,859.77
Page 3
Cash flow approach:

Year 1 2 3 Premium 30,000.00 30,000.00 30,000.00 Interest 2,250.00 2,250.00 2,250.00 Death Cost 450.00 666.67 1,100.00 Maturity Cost Profit Vector 31,800.00 31,583.33 -67,750.00 Profit Signature 31,800.00 31,441.21 66,995.49 NPV 29,581.40 27,207.10 53,928.73 2,859.77
98,900.00
(i)
1 1 (aq ) x = q x {1 2 ( q x + q x ) + 3 ( q x q x )}
(ii)
(aq) x
t
= t px t p x t p x x +t dt
px = 1 t 2 qx t px x +t =
d t p x = 2tq x dt
With and uniformly distributed, then (aq) x =

0 1 1 t px t
p xt
px x +t dt
= 2tqx (1 tq x )(1 tq x )dt 0
2 3 = qx {2t 2t (qx + qx ) + 2t (qx qx )}1dt 0
2 2 = qx {1 (q x + q x ) + (q x q x )} 3 4
(i)
The Death Strain at risk per policy is 66 [0 (payment due 31.12 + reserve @ 31.12] = - 25, 000a Expected DS = 66 = (0.004681)(25, 000, 000)(14.494) = 1, 696,160 q65 *1, 000* 25, 000a
66 = 1,811, 750 Actual DS = 5* 25, 000a
Profit = EDS ADS = -1,696,160 + 1,811,750 = 115,590 profit (ii) We expected 4.681 deaths and had more than this with 5. There is no death benefit, just a release of reserves on death, so more deaths than expected leads to profit.
Page 4
40, 000 R35 + R35 40, 000 3,524,390 + 1,187, 407 = = 98, 730 EPV of benefits: s 60 60 31,816 D35
ra
ia
PV of contribution:
(0.04) N 35 + (0.01) N 50
s s s
40, 000
D35
= 40, 000
(0.04)502,836 + (0.01)163, 638 = 27,345 31,816
Employers proportion = (98,730-27345)/27,345 = 2.61 times employees contribution.
10
Variance of aT =
x
Ax ( Ax )2 2
0 t t
Ax = e
0
t p x x +t dt = e
dt = et (+ ) dt =
0
(e t ) = (0 1) 0 + +
0.02 = = + 0.07 Similarly, A x = e 2t t px x +t dt = et et dt =

2 0 0
0.02 = + 2 0.12
Variance of aT
Alternatively
0.02 0.02 2 ) ( = 0.12 0.07 = 34.01 0.052
Variance of X = E[ X 2 ] {E[ X ]}2 Here X=
Tx |
1 e Tx
E[ X ] =
1 e t 1 et t 1 p dt = e dt = (et ) (e (+ )t )dt t x x +t
0
1 1 = {(e )( )(e )} = {(0 (1)) ( )(0 (1))} 0 0 + + 1 1 + 1 1 )} = { }= = {1 ( = = 14.2857 + + + 0.07

t ( + )t
Page 5
1 e t 2 1 2et + e2t t E[ X ] = ( ) t px x +t dt = ( )e dt 2
2 0 0
= =
1
2
(e
) (2e(+)t ) + (e (2+ )t )dt
)(e(+ )t ) + ( )(e (2+ )t )} 0 0 0 2 + + 1 )(0 (1)) + ( )(0 (1))} = 2 {(0 (1)) 2( 2 + + 1 2 1 0.04 0.02 )+( )} = {1 } = 238.0952 = 2 {1 ( + 2 + 0.07 0.12 + 0.052
{(e t ) (2)(
Variance = 238.0952-(14.2857)2 = 34.01
11
Class selection
People with same age definition will have different underlying mortality due to particular permanent attributes, e.g. sex. The existence of such classes would be certainly found in these data: e.g. male / female smoker / non-smoker, people having different occupational and/or social backgrounds, etc. Solution would be to subdivide the data according to the nature of the attribute.
Time selection
Where mortality is changing over calendar time, people of the same age could experience different levels of mortality at different times. This might well be a problem here, as data from as much as ten years apart are being combined. Solution would be to subdivide the data into shorter time periods.
Temporary initial selection
Mortality changes with policy duration and the combination of subgroups of policyholders with different durations into a single sample will cause heterogeneity. Lives accepted for insurance have passed a medical screening process. The longer that has elapsed since screening (i.e. since entry) the greater the proportion of lives who may have developed impairments since the screening date and hence the higher the mortality. Mortality rates would then be expected to rise with policy duration, and hence result in heterogeneous data. The solution would be to perform a select mortality investigation, that is one in which the data are subdivided by policy duration as well as by age.
Page 6
Self selection
By purchasing a particular product type, policyholders are putting themselves in a particular group. People expecting lighter than normal mortality might purchase annuities and experience better mortality rates than, for example, term assurance buyers. The solution would be to subdivide the data by product type.
12
(i)
(a) (b) (c)
100,000{1 + (20)(0.045)) = 190,000 100,000(1.0384615)20 = 212,720

6% } = 210,357 100,000{1 + 0.03 s20
(ii)
EPV maturity benefits:
100, 000 A
1 [45]:20
= 100, 000v 20 20 p[45] @
1.08 1 = 4% 1.0384615
= 100,000*(0.45639)(8,821.2612/9,798.0837) = 0.41089*100,000 = 41,089 EPV death benefits: 100, 000 1 100, 000 1 A[45]:20 @ 4% = ( A[45]:20 A[45]:20 ) 1.0384615 1.0384615 = 100, 000 (0.46982 0.41089) 1.0384615
= (100,000)(0.05893 / 1.0384615) = 0.05675*100,000 = 5,675 EPV total benefits = 41,089 + 5,675 = 46,764 (iii) Making appropriate adjustments to (ii) (a) (b) (c) 1.0384615*5,675+41,089 = 46,982 (1.08)0.5*5,675+41,089 = 46,987 = (1.04)0.5*1.0384615*5,675 + 41,089 = 47,099
Page 7
Alternatively, just starting a fresh for each condition: (a) (c) A[45]:20| at 4%
1 1 1 A[45]:20| at 4% = A[45]:20| + A[45]:20| = {(1.04)0.5 A[45]:20| } + A[45]:20| 1
13
Let P be the monthly premium

(12) 12 Pa (12) = 350 + 0.025P(12a
1 1) + 100, 000 A
65:60:10
65:60:10
65:60:10
65:60 : + 20, 00010| a
65:60:10 = a 65:60 v10 10 p65 10 p60 a 75:70 a = 12.682 (0.67556)(0.87120)(0.95372)(8.357) = 12.682 (0.56131)8.357 = 7.991
(12) a 11 (1 v10 10 p65 10 p60 ) 24 = 7.991 (0.458)(1 0.56131) 65:60:10 =a = 7.991 0.201 = 7.790
1 A
65:60:10
65:60:10
65:60:10 v10 10 p65 10 p60 = A65:60:10 v10 10 p65 10 p60 = 1 da = 1 0.04 (7.991) 0.56131 = 0.13134 1.04
1 10| 65:60 v10 10 p65 10 p60 (1 da 75:70 ) A = A65:60 v10 10 p65 10 p60 A75:70 = 1 da
65:60
or
0.04 0.04 (12.682) (0.67556)(0.87120)(0.95372)(1 8.357 1.04 1.04 = 0.51223 0.38089 = 0.13134 = 1 65:60 10| a 75:70 + v10 10 p65 (1 10 p60 )a 75 + v10 (1 10 p65 ) 10 p60 a 70 = v10 10 p65 10 p60 a 75 + a 70 a 75:70 ) + v10 10 p65 (1 10 p60 )a 75 + v10 (1 10 p65 ) 10 p60 a 70 = v10 10 p65 10 p60 (a = (0.67556)(0.87120)(0.95372)(9.456 + 12.934 8.357) +(0.67556)(0.87120)(1 0.95372)(9.456) +(0.67556)(1 0.87120)(0.95372)(12.934) = 7.877 + 0.258 + 1.073 = 9.208
Page 8
or 65:60 10| a 65:60 a 65:60:10| = (a 65 + a 60 a 65:60 ) (a 65:10| + a 60:10| a 65:60:10| ) =a 65 + a 60 a 65:60 ) (a 65 v10 10 p65a 75 + a 60 v10 10 p60 a 70 a 65:60 v10 10 p65:60 a 75:70 = (a = 13.666 + 16.652 12.682 {13.666 (0.67556)(0.87120)(9.456)} {16.652 (0.67556)(0.95372)(12.934)} +{12.682 (0.67556)(0.87120)(0.95372)(8.357) = 17.636 8.101 8.319 + 7.991 = 17.636 8.429 = 9.207
12 P(7.790) = 350 + 0.025 P(12*7.790 1) + 100, 000(0.13134) + 20, 000*9.208 P(93.480 2.312) = 350 + 13,134 + 184,160 P(91.168) = 197, 644 P = 2,168 per month
14
(i)
GFLRV= 4% 300 + 0.25 P + 0.05 P * amin( K

+ (if K[55] < 10 only ) v
T[55]
[55] ,9)
0% + 50* amin( K
[55] ,9)
4% min( P*a K
[55] +1,10)
(100, 000 10, 000* K[55] ) + 200
(ii)
4% 4% 0% [55]:10 [55]:10 [55]:10 P*a = 250 + 0.20 P + 0.05 P * a + 50a
+110, 000 A
1 [55]:10
10, 000( I A)1 + 200* 10 q[55] [55]:10
4% [55]:10 a = 8.228 0% [55]:10 a = (1 + e[55] ) 10 p[55] (1 + e65 )
8,821.2612 = 26.037 17.645 9,545.9929 = 26.037 (0.92408)17.645 = 9.732 A

1 [55]:10
= (1.04)0.5 ( A[55]10 v10 10 p[55] )

= (1.04)0.5 (0.68354 0.67556*0.92408) = 0.06044
Page 9
( I A)1 = (1.04)0.5[( IA)[55] v10 10 p[55] (10 A65 + ( IA)65 ] [55]:10 = (1.04)0.5 [8.58908 0.67556*0.92408(10*0.52786 + 7.89442)] = 0.37278
P *8.228 = 250 + 0.20 P + 0.05 P *8.228 + 50*9.732 + 110, 000*0.06044 10, 000*0.37278 + 200*(1 0.92408) P *7.6166 = 250 + 486.60 + 6, 648.40 3, 727.80 + 15.18 P = 3, 672.38 / 7.6166 = 482.15 (iii)
9V
= q64v 0.5[10, 000 + 200*(1.04)9.5 ] [0.95 P 50*(1.04)9 ]
= (0.012716)(0.980581)[10, 000 + 290.30] [0.95* 482.15 71.17] 128.31 386.87 = 258.56
Page 10
EXAMINATION
24 April 2009 (am)

2.
3. 4. 5.
CT5 A2009
Define and calculate 5|10q[40]+1. Basis: AM92 Select [4]
Calculate the following functions: (i) (ii)
A40:20 A40:20
[3] [1]
Basis: lx = 110 x (for x 110). Interest 4% per annum.
[Total 4]
Employee contributions to a pension fund are paid continuously at the rate of 4% of salary per annum after a fixed deduction from salary of 5,000 per annum paid continuously. Determine an expression using commutation functions for the present value of the future contributions by a member aged x with salary S in the previous 12 months. [4]
Explain, in the context of the lapse rates of life insurance policies, what is meant by: (a) (b) (c) class selection temporary initial selection time selection [5]
Give an example in each case.
1 1 A population is subject to two modes of decrement and where q x = + qx . 3 4 Derive from first principles (aq) x . State clearly any assumptions you make. [5]
The random variable Txy represents the time to failure of the joint-life status (x y). (x) is subject to a constant force of mortality of 0.02 and (y) is subject to a constant force of mortality of 0.03. (x) and (y) are independent with respect to mortality. Calculate the value of E[Txy]. [5]
CT5 A20092
A life insurance company issues a special annuity contract to a male life aged 70 exact and a female life aged 60 exact. Annuity payments are due on the first day of the month. Under the contract an annuity of 50,000 per annum is payable monthly to the female life, provided that she survives at least 5 years longer than the male life. The annuity commences on the monthly policy anniversary next following the fifth anniversary of the death of the male life and is payable for the balance of the female's lifetime. Calculate the single premium required for the contract. Basis: Mortality: PMA92C20 for males, PFA92C20 for females Interest: 4% per annum Expenses: Nil
[5]
(i) (ii)
Describe three distinct methods of averaging salary that might be defined in the scheme rules of a pension fund. [3] Define sx and zx in the context of a pension fund. [2] [Total 5]
A life insurance company sells a policy with a 10 year term to a healthy life aged 55 exact. The policy provides the following benefits: 25,000 payable immediately on death 1,000 per annum payable continuously during illness
The company prices the policy using the following multiple state model: Able (a) x Dead (d) Give a formula for the expected present value of the benefits under the policy. [5] x x x Ill (i)
CT5 A20093
PLEASE TURN OVER
10
A life insurance company issues a term assurance policy for a term of 10 years to two lives whose ages are x and y, in return for the payment of a single premium. The following benefits are payable under the contract:
In the event of either of the lives dying within 10 years, a sum assured of 100,000 is payable immediately on the first death if it is the life aged x or 50,000 if the life aged y. In the event of the second death within the remainder of the 10 year term, a further sum assured of twice the original claim previously paid is payable immediately on the second death.
Calculate the single premium. Basis: Mortality: x = 0.02 constant throughout life and y = 0.03 constant throughout life Interest: = 4% per annum Expenses: Nil [8]
11
A life insurance company issues the following policies: 20-year endowment assurance with a sum assured of 75,000 payable at maturity or at the end of the policy year of death if earlier. Level premiums for this contract are paid annually in advance. 20-year single premium temporary immediate annuity with an annual benefit payable in advance of 18,000.
On 1 January 2001, the company sold 5,000 endowment assurance policies and 2,500 temporary immediate annuity policies, all to lives aged 45 exact. (i) Calculate the death strain at risk for each type of policy during 2008. Basis: Mortality: AM92 Select Interest: 4% per annum Expenses: Nil [4] During the first seven policy years, there were 65 deaths from the endowment assurance policies and 30 deaths from the temporary immediate annuity policies. During 2008, there were 10 deaths from the endowment assurance policies and 5 deaths from the temporary immediate annuity policies. (ii) Calculate the total mortality profit or loss to the company during 2008 using the basis in (i) above. [5] [Total 9]
CT5 A20094
12
(i) (ii)
Explain the terms unit fund and non-unit fund in the context of a unitlinked life assurance contract. [4] Explain why a life insurance company might need to set up reserves in order to zeroise future expected negative cashflows in respect of a unit-linked life assurance contract. [2] A life insurance company issues 4-year unit-linked contracts to a male lives aged 50 exact. The following non-unit fund cash flows, NUCFt, (t = 1, 2, 3, 4) are obtained at the end of each year t per contract in force at the start of the year t: Year t NUCFt 1 375.4 2 152.0 3 136.2 4 118.0
(iii)
The rate of interest earned on non-unit reserves is 5.5% per annum and mortality follows the AM92 Select table. Calculate the reserves required at times t = 1, 2 and 3 in order to zeroise future negative cash flows. [4] [Total 10]
13
A life insurance company issues a 3-year savings contract to unmarried male lives that offers the following benefits: On death during the 3 years, a sum of 15,000 payable immediately on death. On surrender during the 3 years, a return of premiums paid, payable immediately on surrender. On marriage during the 3 years, a return of premiums paid accumulated with compound interest at 4% per annum, payable immediately on marriage. On survival to the end of the 3 years, a sum of 5,000.
The contract ceases on payment of any benefit. Calculate the level premium payable annually in advance for this contract for a life aged 40 exact. Basis: Independent rate of mortality Independent rate of surrender Independent rate of marriage Interest Expenses AM92 Ultimate 10% per annum 5% per annum 5% per annum 0.5% of each premium [12]
CT5 A20095
PLEASE TURN OVER
14
A life insurance company issues a 5-year with profits endowment assurance policy to a life aged 60 exact. The policy has a basic sum assured of 10,000. Simple reversionary bonuses are added at the start of each year, including the first. The sum assured (together with any bonuses attaching) is payable at maturity or at the end of year of death, if earlier. Level premiums are payable annually in advance throughout the term of the policy. (i) Show that the annual premium is approximately 2,476. Basis: Mortality: Interest: Initial expenses: Renewal expenses: Bonus Rates: AM92 Select 6% per annum 60% of the first premium 5% of the second and subsequent premiums A simple reversionary bonus will declared each year at a rate of 4% per annum [5]
The office holds net premium reserves using a rate of interest of 4% per annum and AM92 Ultimate mortality. In order to profit test this policy, the company assumes that it will earn interest at 7% per annum on its funds, mortality follows the AM92 Ultimate table and expenses and bonuses will follow the premium basis. (ii) Calculate the expected profit margin on this policy using a risk discount rate of 9% per annum. [14] [Total 19]
END OF PAPER
CT5 A20096

April 2009
Introduction The attached subject report has been written by the Principal Examiner with the aim of helping candidates. The questions and comments are based around Core Reading as the interpretation of the syllabus to which the examiners are working. They have however given credit for any alternative approach or interpretation which they consider to be reasonable. R D Muckart Chairman of the Board of Examiners June 2009
Comments Where relevant, comments for individual questions are given after each of the solutions that follow.
Subject CT5 (Contingencies Core Technical) April 2009 Examiners Report)
5 10
q[40]+1 is the probability that a life now aged 41 exact and at the beginning of the
second year of selection will die between the ages of 46 and 56 both exact. Value is:
(l46 l56 ) / l[40]+1 = (9786.9534 9515.104) / 9846.5384 = 0.02761
lx = 110 x dx = lx lx + 1 = (110 x) (110 x 1) = 1 for all x (i)

A1 19 = vt +1 * d 40 + t / l 40 0 19 = vt +1 / l 40 0 = a20 / l 40 = 13.5903 / (110 40) = 0.19415
40:20
(ii)
A40:20 = A 1
40:20
+ v 20 * l60 / l40
= 0.19415 + 0.45639*(110 60) / (110 40) = 0.52014
Assuming contributions are payable continuously we make the approximation that they are payable on average half-way through the year. The present value of contributions in the year t to t + 1 is:
s v x +t +0.5 l x +t +0.5 (0.04). S x +t 5000 . . lx vx s x 1
Page 2
Subject CT5 (Contingencies Core Technical) April 2009 Examiners Report) Define the following parameters and commutation functions:
s x +t represents the ratio of a members earnings in the year of age x+ t to x+t+1 to sx their earnings in the year x to x+1. Dx +t = v x +t l x +t D x +t = v x +t +0.5l x +t +0.5
s s
Dx = s x 1v xl x D x +t = s x +t v x +t +0.5lx +t +0.5
t = NRA x 1 t =0 t = NRA x 1
Nx =
s
D x +t
s
Nx =
t =0
D x +t
Then the present value of all future contributions is:
sN Nx x 5000 (0.04). S s Dx Dx
(a)
Different groups or classes of policyholders may have higher or lower lapse rates for all major risk factors (age, duration, gender etc.) than other classes. An example would be where a class of policyholders is defined as those who purchased their policies through a particular sales outlet (e.g. broker versus newspaper advertising). Lapse rates may vary by policy duration as well as age for shorter durations. At shorter durations lapse rates may be the result of misguided purchase by policyholder whereas at longer durations the policy has become more stable. Lapse rates vary with calendar time for all major risk factors, e.g. economic prosperity varies over time and this results in a similar variation in lapse rates.
(b)
(c)
Other valid comments were credited. Many students ignored lapses altogether attempting to answer the question from a mortality standpoint only. No credit was given for this.
Page 3
Assumptions
Equal forces in the multiple and single decrement tables Uniform distribution of all decrements across year of age
Then (aq) x =
1 t t ( ap ) x . x +t . t 0
p x p x
t .dt = ( t p x x +t ). 0
(ap) x
t
p x
.dt
Our assumptions give us:

t p x x +t = q x = t px = 1 t.qx
t ( ap ) x t px
Therefore:
(aq) x = q x .(1 t.q x ).dt
0 1
q x
t2 1 t q x = q x 1 q x 2 2 0
1 1 1 1 1 1 = + qx 1 qx = + qx qx 8 3 4 2 3 12
( )
Alternatively the solution can be expressed in terms of q x :
1 1 = qx 1 2 * 4* qx 3 5 = qx 2qx 3
This question was essentially course bookwork plus a substitution. To gain good credit it was necessary to work though the solution as above.
Page 4
E[Txy ] = t.tpx.tpy (x + t + y + t )dt

0 0
= t.e.02t e.03t (0.02 + 0.03)dt = 0.05 t.e.05t dt

0
Integrating by parts:
= 0.05([t.e .05t / .05]0 + 1/ .05* e .05t dt ) 0
= 0.05(0 20 / .05[e .05t ] 0) = 20
Alternatively:
E[Txy ] =
0 0 0 tpx.tpydt
= e .02t e .03t dt = e .05t dt

= [1/ .05* e .05t ]0
= 20 The alternative solution above in essence belongs to the Course CT4 but students who used this were given full credit. The first solution is that which applies to the CT5 Course.
Consider the continuous version This would be

f m 50000 vt +5 (1 t p70 ) t +5 p60 dt 0 f f t m = 50000v5 5 p60 v (1 t p70 ) t p65dt 0 f f m f = 50000v5 5 p60 (a65 a70: 65)
Page 5
The monthly annuity equivalent SP is:

m f f (12) f 65 (12)70:65 = 50000v5 5 p60 (a a ) m f f f 65 70:65 = 50000v5 5 p60 (a a ) (note the monthly adjustment cancels out)
= 50000*0.82193*9703.708 / 9848.431*(14.871 10.494) = 177236
Other methods were credited. Students who developed the formulae without recourse to continuous functions were given full credit.
(i)
Final salary rate of salary at retirement Final average salary salary averaged over a fixed period (usually 3 to 5 years) before retirement Career average salary salary averaged over total service . s x +t represents the ratio of a members earnings in the year of age x+ t to sx x+t+1 to their earnings in the year x to x+1.
zx = s x 1 + s x 2 + ..... + s x y y
(ii)
is defined as a y-year final average salary scale.
Other versions credited. Strictly speaking Final Salary is not an average but this caused no confusion and was fully credited
10 0
aa ai 25000 et ( t p55 55+t + t p55 55+t )dt aa ai + e t (0. t p55 + 1000 t p55 )dt 0 10
where: = the force of interest aa t p 55 = the probability that an able life age 55 is able at age 55 + t
t ai p55 = the probability that an able life age 55 is ill at age 55 + t
Page 6
10
This is the same as: If y dies in 10 years, then 50000 is paid if x is alive, 200000 if x is dead, If x dies in 10 years, then 100000 is paid So the expected present value =
10 0
t p y y+t (50000 t px + 200000 t qx ).e

10 0
dt
+100000 t p x . x +t .et dt
t px = e 0.02 dr
0 t t
= e .02t = e .03t
py = e
0.03dr
0
Therefore value =
10 0
.03t
0.03(50000e .02t + 200000(1 e .02t )).e .04t dt

10 0
+100000 e .02t 0.02.e 0.4t dt = 6000 e

0 10 .07t
dt + 2000 e
0
10
.06t
dt 4500 e .09t dt
0
10
6000 0.7 2000 0.6 4500 0.9 1 + 1 1 e e e 0.06 0.09 0.07 = 28,518 =
Page 7
11
(i)
Annual premium for endowment with 75,000 sum assured given by: P = 75, 000 A[45]:20
[45]:20 a
75, 000 0.46982 = 2556.15 13.785
Reserves at the end of the eighth year: for endowment with 75,000 sum assured is given by:
8V
53:12 = 75, 000 A53:12 2556.15a
= 75, 000 0.63460 2556.15 9.5 = 23,311.58 for temporary annuity paying an annual benefit of 18,000 is given by:
8V
53:12 = 18, 000 9.5 = 171, 000.00 = 18, 000a
Death strain at risk: Endowment: Immediate annuity (ii) DSAR = 75,000 23,311.58 = 51,688.42 DSAR = 171,000.00
Mortality profit = EDS ADS For endowment assurance
EDS = (5000 65) q52 51, 688.42 = 4935 0.003152 51, 688.42 = 804, 019.58 ADS = 10 51, 688.42 = 516,884.20
mortality profit = 287,135.38 For immediate annuity
EDS = (2500 30) q52 171, 000.00 = 2470 0.003152 171, 000.00 = 1,331,310.24 ADS = 5 171, 000.00 = 855, 000.00 mortality profit = 476,310.24 Hence, total mortality profit = 287,135.38 476,310.24 = 189,174.86 (i.e. a mortality loss)
Page 8
12
(i)
For a unit-linked life assurance contract, we have: the unit fund that belongs to the policyholder. This fund keeps track of the premiums allocated to units and benefits payable from this fund to policyholders are denominated in these units. This fund is normally subject to unit fund charges. the non-unit fund that belongs to the company. This fund keeps track of the premiums paid by the policyholder which are not allocated to units together with unit fund charges from the unit-fund. Company expenses will be charged to this fund together with any non-unit benefits payable to policyholders.
(ii)
It is a principle of prudent financial management that once sold and funded at outset, a product should be self-supporting. However, some products can give profit signatures which have more than one financing phase. In such cases, reserves are required at earlier durations to eliminate future negative cash flows, so that the office does not expect to have to input further money in the future.
(iii) Year t 1 2 3 4 q[50]+t1 0.001971 0.002732 0.003152 0.003539 p[50]+t1 0.998029 0.997268 0.996848 0.996461
3V
118.0 = 111.85 1.055
2V
1.055 p52 3V = 136.2 2V = 234.78

1.055 p[50]+1 2V = 152.0 1V = 366.01
V 1
Page 9
13
d s m s m 1 1 Multiple decrement table constructed using (aq ) d x = q x 1 2 ( q x + q x ) + 3 q x q x etc. which assumes that the decrements in each single decrement table are uniformly distributed over each year of age
x 40 41 42
d s qx qx 0.0009370 0.10 0.0010140 0.10 0.0011040 0.10
m qx 0.05 0.05 0.05
(aq) d (aq) s (aq ) m x x x 0.0008683 0.0974547 0.0474781 0.0009396 0.0974510 0.0474763 0.0010230 0.0974466 0.0474742
Using an arbitrary radix of 1,000,000, we can construct the following multiple decrement table X 40 41 42 43 (al ) x 1,000,000 854,198.9 729,599.6 623,119.0 (ad ) d x 868.3 802.6 746.4 (ad ) s x 97,454.7 83,242.5 71,097.0 (ad ) m x 47,478.1 40,554.2 34,637.2
Let P be the annual premium for the contract. Then equation of value gives: PV of premiums = PV of death benefits + PV of surrender benefits + PV of survival benefits + PV of expenses PV of premiums
729,599.6 2 854,198.9 = P 1 + v0.05 + v0.05 1, 000, 000 1, 000, 000 = P (1 + 0.813523 + 0.661768 ) = 2.475291P
PV of expenses = 0.005 2.475291P = 0.0123765P PV of death benefits

1 802.6 746.4 868.3 2 3 = 15, 000 (1.05) 2 v0.05 + v0.05 + v0.05 1, 000, 000 1, 000, 000 1, 000, 000 = 15,370.4262 ( 0.00082695 + 0.00072798 + 0.00064477 ) = 33.8103
PV of withdrawal benefits =
1 83, 242.5 2 71, 097.0 3 97, 454.7 v0.05 + 2 v0.05 + 3 v0.05 1.05 2 = P 1 1, 000, 000 1, 000, 000 1, 000, 000 = P ( 0.092814 + 0.1510068 + 0.1842488 ) 1.024695 = 0.4386408 P
Page 10
Subject CT5 (Contingencies Core Technical) April 2009 Examiners Report) PV of marriage benefits = 40,554.2 34, 637.2 47, 478.1 0.04 0.04 2 0.04 3 1.05 1 v0.05 + = P s s2 v0.05 + s3 v0.05 1.04 1, 000, 000 1, 000, 000 1, 000, 000 = P ( 0.0470259 + 0.0780406 + 0.0971372 ) 1.0047962 = 0.2232694 P PV of survival benefits = 5000 623,119.0 3 v0.05 = 2691.3681 1, 000, 000
1 2
Equation of value becomes 2.475291P = 33.8103 + 0.4386408P + 0.2232694P + 2,691.3681 + 0.0123765P => P = 2725.1784/1.801004 = 1513.14
14
(i)
Let P be the annual premium payable. Then equation of value gives: PV of premiums = PV of benefits + PV of expenses i.e.
[60]:5 = 10, 000 A[60]:5 + 400( IA)60:5 + 0.05 Pa [60]:5 + 0.55 P at Pa

where ( IA)[60]:5 = ( IA)[60]
6%
l65 l 5 5 v0.06 ( 5 A65 + ( IA)65 ) + 5 65 v0.06 l[60] l[60]
= 5.4772 0.7116116(5 0.40177 + 5.50985) + 5 0.7116116 = 3.684864 l65 8821.2612 = l[60] 9263.1422
and
[60]:5 0.55) = 10, 000 A[60]:5 + 400( IA)60:5 P(0.95a

P(0.95 4.398 0.55) = 10, 000 0.75104 + 400 3.684864 P= 8984.3456 = 2476.32 3.6281
Page 11
Subject CT5 (Contingencies Core Technical) April 2009 Examiners Report) (ii) Reserves required on the policy at 4% interest are: V60:5 1
61:4 = 10, 400 A61:4 NPa
a 3.722 = 10, 000 1 61:4 + 400 A61:4 = 10, 000 1 + 400 0.85685 = 2162.52 a 4.550 60:5 a 2.857 1 62:3 + 800 A62:3 = 10, 000 1 2V60:5 = 10, 000 + 800 0.89013 = 4432.98 a 4.550 60:5 a 1.951 1 63:2 + 1200 A63:2 = 10, 000 1 3V60:5 = 10, 000 + 1200 0.92498 = 6822.06 a 4.550 60:5 a 64:1 1.000 10, 000 1 V = + 1600 A64:1 = 10, 000 1 4 60:5 + 1600 0.96154 = 9340.66 a 4.550 60:5
Year t 1 2 3 4 5 Prem 2476.32 2476.32 2476.32 2476.32 2476.32 Expense 1485.79 123.82 123.82 123.82 123.82
t 1 p
Opening reserve 0 2162.52 4432.98 6822.06 9340.66
Interest 69.34 316.05 474.98 642.22 818.52
Death Claim 83.43 97.30 113.25 131.59 152.59
Mat Claim 0 0 0 0 11847.41
Closing reserve 2145.17 4393.04 6753.08 9234.20 0
Profit vector 1168.73 340.73 394.13 450.99 511.68
Year t 1 2 3 4 5
Profit signature 1168.73 338.00 387.45 438.85 492.27
1.0 0.991978 0.983041 0.973101 0.962062
Discount factor .91743 .84168 .77218 .70843 .64993
NPV of profit signature 1072.23 284.49 299.18 310.89 319.94
NPV of profit signature = 142.28 Year t 1 2 3 4 5 Premium 2476.32 2476.32 2476.32 2476.32 2476.32
t 1 p
1.0 0.991978 0.983041 0.973101 0.962062
Discount factor 1 .91743 .84168 .77218 .70843
NPV of premium 2476.32 2253.63 2048.92 1860.73 1687.74
NPV of premiums = 10,327.34 Profit margin = 142.28 = 0.0138 i.e. 1.38% 10,327.34

Page 12
EXAMINATION
5 October 2009 (am)

2.
3. 4. 5.
CT5 S2009
Evaluate
2 20 q[45]:[45]
Basis: AM92 Select for both lives.
[3]
Give an expression for the expected present value of a benefit of 1 under a critical illness assurance contract for a healthy life aged x for term of n years. [3]
Calculate 0.5q72.25 using the assumption of a constant force of mortality. Basis: PMA92Base [3]
Using the following data: Age 40 41 42 (i) (ii) Population 121,376 134,292 133,277 Number of deaths 104 127 132 [1]
Calculate the crude mortality rate for the total population.
Calculate the standardised mortality ratio for this population using AM92 Ultimate. [3] [Total 4]
Derive an expression for the variance of the present value of a temporary annuitydue in terms of assurance functions for a life aged x with a term of n years. [4]
A life insurance company sells annual premium whole life assurance policies with benefits payable at the end of the year of death. Renewal expenses are incurred at the start of each year, and claim expenses are nil. (a) Write down a recursive relationship between the gross premium reserves at successive durations, calculated on the premium basis. Define all symbols used. Explain the meaning of this formula in words.
[4]
(b)
CT5 S20092
(a)
State what is meant by direct expenses incurred by a life insurance company in respect of a life insurance contract. Describe three different categories of direct expenses and give an example of each. [5]
(b)
(i)
Identify three classes of pensioner in receipt of a benefit from a pension fund. [3] Give two examples of selection that might be exhibited by these pensioners.[2] [Total 5]
(ii)
(i)
Describe how insurance companies use responses to questions from prospective policyholders to ensure the probability of a profit is set at an acceptable level.
[5]
(ii)
Explain why an insurance company might not use questions requesting genetic information from prospective policyholders? [3] [Total 8]
10
A pension fund provides a pension from normal retirement age of 1,000 per annum for each complete year of service. The pension is payable monthly in advance for 5 years certain and for the whole of life thereafter and is only paid if the life remains in service to normal retirement age of 65. Calculate the expected present value of the pension for a new entrant aged 62 exact. Basis: Interest: 4% per annum Mortality after retirement: PMA92C20 Independent decrement rates before retirement Age x 62 63 64
d qx w qx
0.005650 0.006352 0.007140
0.015672 0.078441 0.055654 [8]
CT5 S20093
PLEASE TURN OVER
11
A life insurance company offers special endowment contracts that mature at age 65. Premiums are payable annually in advance on 1 January each year. The sum assured payable at the end of year of death during the term is one half of the sum assured that will be paid if the policyholder survives until maturity. Details of these contracts in force on 31 December 2007 are: Exact age Total sums assured payable on maturity () 12,250,000 Total annual premiums ()
60
440,000
The claims in 2008 were on policies with the following total sums assured and annual premiums: Total sums assured payable on maturity () 200,000 Total annual premiums ()
7,000
Calculate the mortality profit or loss in 2008 given that the company calculates reserves for these contracts using the gross prospective method. Basis: Mortality: AM92 Ultimate Interest: 4% per annum Expenses: Nil [9]
12
(i) (ii)
Define in words 1000 A x: y . Calculate: (a) (b) 1000 A30:40

2
[3]
The annual premium payable continuously until the 2nd death for the above assurance in (a) with a sum assured of 1,000.
Basis: = .02 for a life aged 30 exact at entry level throughout their life = .03 for a life aged 40 exact at entry level throughout their life = .05 throughout Expenses: Nil [7] (iii) Outline the main deficiency of the above premium paying scheme and suggest an alternative. [3] [Total 13]
CT5 S20094
13
A life insurance company issues a 35-year non profit endowment assurance policy to a life aged 30 exact. Level premiums are payable monthly in advance throughout the term of the policy. The sum assured of 75,000 is payable at maturity or at the end of year of death of the life insured, if earlier. (i) Show that the monthly premium is approximately 74. Basis: Mortality: Interest: Initial expenses: Renewal expenses: AM92 Select 6% per annum 250 plus 50% of the gross annual premium 75 per annum, inflating at 1.92308% per annum, at the start of the second and subsequent policy years and 2.5% of the second and subsequent monthly premiums 300 inflating at 1.92308% per annum For renewal and claim expenses, the amounts quoted are at outset, and the increases due to inflation start immediately. [7]
Claims expense: Inflation:
(ii)
The insurance company calculates a surrender values equal to the gross retrospective policy value, assuming the same basis as in (i) above. Calculate the surrender value at the end of the 30th policy year immediately before the premium then due. [7] [Total 14]
CT5 S20095
PLEASE TURN OVER
14
A life insurance company issues a special term assurance policy for a 3-year term. Under the policy, a sum assured of 10,000 is paid at the end of the year of death. In addition on survival to the end of the term 50% of total premiums paid are returned. Basis: Initial expenses: Renewal expenses: Reserves: 20% of the first years premium 5% of 2nd and 3rd years premiums Net Premium using AM92 Ultimate at 4% interest (allowing for return of 50% of net premiums paid on survival) 80% AM92 Select 20% in year 1, 10% in year 2 (with all withdrawals assumed to occur at end of year) Nil 6% per annum 10% per annum
Mortality experience: Withdrawals: Surrender Value: Interest earned: Risk discount rate: (i)
On the basis of the above information, calculate the level annual premium payable in advance for a life aged 57 exact to achieve the required rate of return. [12] Discuss the effect of increased withdrawal rates on the rate of return to the company from this policy. [2]
(ii)
Following comments from the marketing department, it has been decided to allow a surrender value at the end of years 1 and 2 equal to 25% of total premiums paid. (iii) Calculate the revised annual premium using the basis above. [3] [Total 17]
END OF PAPER
CT5 S20096
Subject CT5 Contingencies. Core Technical September 2009 Examinations EXAMINERS REPORT
Introduction The attached subject report has been written by the Principal Examiner with the aim of helping candidates. The questions and comments are based around Core Reading as the interpretation of the syllabus to which the examiners are working. They have however given credit for any alternative approach or interpretation which they consider to be reasonable. R D Muckart Chairman of the Board of Examiners December 2009
Comments for individual questions are given with the solutions that follow.
Subject CT5 Contingencies Core Technical - September 2009 Examiners Report
1
2 20 q[45]:[45]
1 / 2 * 20 q[45]:[45] 1 / 2 * (1 1 / 2 * (1
20 p[45] ) 2
l65
l[45]
)2
1 / 2 * (1 8821.2612 / 9798.0837) 2 .00497
In general well this question was well done.
2
Define
k (ap) x =
the probability that a life aged x is alive and not diagnosed as critically ill at
time k
(aq)tx k = the probability that a life aged x + k is diagnosed as critically ill in the following year
Then the value is

n 1 k 0
vk
t k ( ap ) x .( aq ) x k
Where the benefit is payable at the end of the year of diagnosis
Students often failed to define symbols adequately. The continuous alternative was also fully acceptable
3
For contant force of mortality at age 72:
p72
(1 q72 ) .969268 e
0.75 .031214 dt 0.25
1 0
dt
Hence
0.5 p72.25
ln(.969268) .031214 e e
.015607
0.5 q72.25
.984514 1 .984504 .015486
Page 2
Generally well done. The alternative very quick answer of 1 ( p 72)1/2 was fully acceptable
4
(i) Crude rate = (104+127+132)/(121376+134292+133277)=0.000933 (ii) Age Population Expected Number of deaths 0.000937 114 0.001014 136 0.001104 147 qx
40 41 42
121,376 134,292 133,277
SMR = actual deaths / expected deaths = (104+127+132) / (114+136+147) = 0.914
Generally well done.
5
min( K x var a
1,n )
var
1 v min( K x d
1,n )
1 var v min( K x 1,n ) 2 d 1 2 Ax:n ( Ax:n )2 where 2 Ax:n is at rate (1 i )2 1 2 d
Straightforward bookwork where considerable information was given in Handbook. The Examiners were looking to see students knew how to derive the relationship. Generally well done.
6
a. ( tV ' GP-et )(1 i )
qx t S px t ( t 1V ' )
Page 3
where
tV
'
gross premium reserve at time t office premium renewal expenses incurred at time t interest rate in premium/valuation basis Sum Assured probability life aged x t dies within one year on premium/valuation basis probability life aged x t survives one year on premium/valuation basis
GP et i S qx t px
t
b. Income (opening reserve and excess of premium over renewal expenses) plus interest equals outgo (death claims and closing reserve for survivors) if assumptions are borne out. Generally well done.
7
Direct expenses are those that vary with the amount of business written. Direct expenses are divided into: Initial expenses Renewal expenses Termination expenses Examples of each: Initial expenses those arising when the policy is issued e.g. initial commission Renewal expenses those arising regularly during the policy term e.g. renewal commission Termination expenses those arising when the policy terminates as a result of an insured contingency (e.g. death claim for a temporary life insurance policy) Generally well done and other valid comments and examples were credited.
8
(i) Pensioners retiring at normal retirement age Pensioners retiring before normal retirement age Pensioners retiring before normal retirement age on the grounds of ill-health (ii) Class selection ill-health pensioners will have different mortality to other retirements. Temporary initial selection the difference between these classes will diminish with duration since retirement
Page 4
Anti-Selection and Time Selection were credited provided they were properly justified. Generally well done.
9
(i) To set premium rates to ensure the probability of a profit is set at an acceptable level then the insurer takes advantage of the Central Limit Theorem while pooling risks which are independent and homogeneous. Independence of risk usually follows naturally. Homogeneity is ensured by careful underwriting. Risk groups are separated by the use of risk factors, such as age and sex. The life assurance company uses responses to questions to allocate prospective customers to the appropriate risk group. Enough questions should be asked to ensure that the variation between categories is smaller than the random variation that remains but in practice there will be limits on the number and type of questions that can be asked. (ii) Equity insurance is about pooling of risks and the use of genetic information reduces that pooling. Ethics use of genetic information could create an underclass of lives who are not able to obtain insurance products at an affordable price, given the results of their genetic tests. In some countries legislation may prohibit genetic testing or there might be political or social reasons why it is avoided. Generally part (i) was done poorly with students failing to appreciate the key points. Part (ii) was done better but in this case also most students failed to obtain all the main valid points.
10
Pension at retirement = 3 Annuity at retirement
(12) (12) v5 . 5 p 65 70 5
1000 = 3000
a5 .
i d
(12)
(12) v5 . 5 p 65 70
4.4518 1.021537 0.82193*
9238.134 . 11.562 11 24 9647.797
13.28659
Multiple decrement table Use the formula
Page 5
(aq) x
qx
qx
qx .qx
To derive the following (aq)62= 0.021233, (aq)63= 0.084295, (aq)64= 0.062397 And 3(ap)62 = (1 0.021233).(1 0.084295).(1 0.062397)= 0.840338
3
So value = 3000 13.28659 0.840338 (1.04)
= 29778
A large proportion of students whilst understanding how to approach this question failed to calculate some or all of it correctly. In some cases certain parts were omitted or calculated wrongly. Credit was given where parts of the solution were correct.
11
Let EDS and ADS denote the expected and actual death strain in 2008. Then
EDS
i
q60 Si
Si ( A61:4
l65 4 v ) Pa i 61:4 l61
where S i is the death benefit per policy and the summation is over all policies in force at start of the year i.e. (where figures are in 000s)
EDS
q60
Si
Si ( A61:4
l65 4 v ) l61
61:4 Pi a 440 3.722
0.008022 0.008022
6125 6125 0.85685 6125 8623.75
8821.2612 0.854804 9212.7143
20.045
The actual death strain is obtained by summation of the death strains at risk over the policies that become claims. Therefore
l65 4 v ) Pa i 61:4 l61 l65 4 v ) l61 41.479 61:4 Pi a
claims
ADS
claims
Si Si
Si ( A61:4 Si ( A61:4
claims
claims
100
167.5333 26.054
Therefore, mortality profit = -20.045 + 41.479 = 21.434 (i.e. a profit of 21,434).
Page 6
This question was very poorly done. Students failed to properly identify the data and the subtleties of a Pure Endowment contract.
12
(i) The expected present value of a continuous assurance for a sum assured of 1000 calculated at a force of interest on 2 lives aged x and y whereby the sum is paid on the death of x only if life aged x dies after life aged y. (ii) For both parts (a) and (b):
for the life aged 30

tp 30
t 0
rdr
t 0.02 dr 0
0.02t
Similarly for the life 40

tp 40
0.03t
_ 2 t (a) 1000 A 30 : 40 1000 0 v tp30(1 tp 40)
t dt .03t
1000 0 e
.05t
*e
.02t
*(1 e e
.1t
) *.02dt
1000 0 .02*(e
.07t
)dt
.1t
1000[ .02 / .07 * e
.07t
.02 / .1* e
]0
1000(.02 / .07 .02 / .1) 85.714

____ (b) To calculate premium we need a30:40
____ a30:40
0 0 0
vt *(1 (1 tp30)(1 tp 40))dt e (e

.05t
(e
.02t
.03t
e )dt
.05t
)dt
.07t
.08t
e
.08t
1.t
[ e
.07t
/ .07 e
/ .08 e
.1t
/ .1]0
(1/ .07 1/ .08 1/ .1) 16.786

So the required premium = 85.714 /16.786 5.11
(iii)If the life age 30 dies first the policy ceases without benefit yet the premium is expected to be maintained by the life aged 40 so long as they survive. There is no incentive to continue. The sensible option would be to establish the premium paying period as ceasing on the death of the life aged 30. Page 7
A single premium is possible as an alternative if affordable. In general terms this question was reasonably well done although a large number of students failed to obtain all of the required numerical solutions (the main error being failure to calculate the joint life last survivor annuity). In part (iii) a student who suggested a joint life first death approach was given credit although this is an expensive option.
13
(i) Let P be the monthly premium for the contract. Then: EPV of premiums valued at rate i where i = 0.06 is:
(12) 12 Pa
[30]:35
[30]:35 12 P(a l65 l[30] 0.13011
l 11 (1 v35 65 )) 24 l[30] 8821.2612 9923.7497 0.11566
where v35
12 P(15.152
11 (1 .11566)) 12 P 14.74668 176.9601P 24
EPV of benefits valued at rate i where i = 0.06 is:

75, 000 A[30]:35 75, 000 0.14234 10, 675.5
EPV of expenses not subject to inflation and therefore valued at rate i where i = 0.06 is:
(12) 0.025 12 Pa
[30]:35
0.025 P 250 0.5 12 P
250 10.399 P
EPV of expenses subject to inflation and therefore valued at rate j where 1.06 1 j 1.04 is: 1.0192308 [30]:35 1) 300 A[30]:35 75 18.072 300 0.26647 1435.341 75(a Equating EPV of premiums and EPV of benefits and expenses gives: 176.9601P = 10,675.5 + 250 + 10.399P + 1,435.341 => P = 12,360.841/166.5611 = 74.21 (ii) Gross retrospective policy value is given by:
V retrospective
Page 8
(1 i )
1 (12) @ i % 0.025 P 12 0.5 P 250 75, 000 A[30]:30 12 P 0.975a @ i% l [30]:30 [30] 30
l60
@ j % 75(a
[30]:30
1 1) 300 A[30]:30 @ j%
where,
l[30] l60 9923.7497 1.06854 9287.2164
and at rate i = 0.06
(12) a
[30]:30
[30]:30 a A[30]:30
l 11 1 v30 60 24 l[30] v30 l60 l[30]
14.437
11 (1 0.16294) 14.0533 24
1 A[30]:30
(0.18283 0.16294) 0.0198
and at rate j = 0.04

[30]:30 a
1 A[30]:30
17.759
A[30]:30
v30
l60 l[30]
0.31697 0.30832 0.93586 0.02843
V retrospective 6.13715 12, 201.876 1.8553 445.26 250 1, 491.75 1, 256.925 8.529
53,707.84
Generally part (i) was done well. Students did however often struggle to reproduce part (ii) which is often the case with retrospective reserves. In this case because the reserve basis matched the premium basis the retrospective reserve equalled the prospective reserve. If the student realised this, fully stated the fact and then calculated the prospective reserve full credit was given. Minimal credit was however given if just a prospective reserve method was attempted without proper explanation.
14
(i) First calculate net premium NP and reserve tV 57:3 for t = 1 and 2
Page 9
57:3 NPa
10000( A57:3
v3
l60 l ) 0.5 3 NP v3 60 l57 l57
NP 2.870 8896.3 1.5 NP 175.394 NP 112.29 V57:3 (112.29 1
10000 0.889 9287.2164 / 9467.2906 0.889 9287.2164 / 9467.2906 NP 1.308 (1.04) 10000 q 57) /(1 q 57)
2V57:3
(116.782 56.50) / 0.99435 60.62 ((112.29 60.62) (1.04) 10000 q 58) /(1 q 58) (179.826 63.520) / 0.993648 117.05
The end 3rd year reserve needs to be 1.5 times the office premium to be calculated so as to meet the return guarantee. We can complete the following table (denoting the office premium by P). Note as withdrawals are assumed at the end of the year the decrements of mortality and withdrawal are not dependent. Year 1 Age 57 80% AM92 q select Withdrawal In force factor begin year Premium Expenses Death Claims Opening Reserve Closing Reserve Interest Profit vector Profit signature P 0.2P 33.368 0 48.334 .048P .848P 81.702 .848P 81.702 0.0033368 .19933264 1 Year 2 Age 58 .004944 .0995056 .79733056 Year 3 Age 59 .005712 0 .7140497
P 0.05P 49.440 60.62 104.824 .057P+3.6372 1.007P 90.007 .8029P 71.7653
P 0.05P 57.120 117.05 1.4914P .057P+7.023 0.4844P+66.953 0.3459P+47.808
Alternatively the Closing Reserve at End Year 3 can be taken as zero and an additional item termed Maturity Value can be shown in Year 3 only equal to 1.4914P. To obtain 10% return the equation is: P [.848/(1.1) + 0.8029/(1.1)2 0.3459/(1.1)3] [81.702/(1/1) + 71.7653/(1.1)2 47.808/(1.1)3] = 0
Page 10
1.1746 (ii)
97.6659 = 0
P = 83.15 say 83
The impact of increasing withdrawal rates depends primarily on the relationship between expenses, reserves and any surrender value. In this case there is no surrender value, a substantial reserve for a maturity benefit and low expenses. In that scenario, increasing the lapse rates actually improves the return to the company as it retains a substantial premium and reserve with low expected death costs and returns nothing to the policyholder. This return comes earlier also and benefits from the high risk discount rate.
(iii)
A revised office premium is now required say P. In this case a life who surrenders obtains 0.25P at the end of year1 and 0.5P at the end of year 2. On the same parameters the present value of these 2 cash flow items are: P [0.25 0.19933264/(1.1)+0.5 0.0995056 0.79733056/(1.1)2] = 0.07809P Hence from above with adjustment: 1.1746 P 97.6659 0.07809P = 0 P = 89.07 say 89
Most students found this a very daunting question and overall performance was lower than expected. Certain comments are appropriate: Because of the stated fact that withdrawals happened at the end of the year calculating dependent decrements was not necessary. Many students wasted much time attempting to perform this. Many students did not know how to calculate a net premium for this contract. The reserve process was very straightforward if done on a recursive basis (see question 6) Once these facts were realised the question was then a relatively simple manipulation of cash flows. Credit was given to students who gave some reasonable verbal explanation of what needed to be done even if calculations were incomplete.
Page 11

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Faculty of Actuaries

Subject CT5 Contingencies Core Technical

Graph paper is not required for this paper.

Faculty of Actuaries Institute of Actuaries

Explain the difference between a profit vector and a profit signature.

A three-state transition model is shown in the following diagram:

PLEASE TURN OVER

Renewal expenses Claim expense

Expenses: None [6] [Total 11]

PLEASE TURN OVER

Initial commission Renewal commission

Risk discount rate (i)

Subject CT5 Contingencies Core Technical EXAMINERS REPORT

M Flaherty Chairman of the Board of Examiners 15 June 2005

Faculty of Actuaries Institute of Actuaries

Subject CT5 (Contingencies Core Technical)

8054.0544 (1 0.60097) 9712.0728

( tV ' OP et )(1 i ) where

gross premium provision at time t

OP = office premium et expenses incurred at time t

Subject CT5 (Contingencies Core Technical) (b)

The value of a pension of 1 p.a. is (12)

where first term is an annuity certain

(12) 10 | 60 10 p60 (12) 70

(12) v10 10 p60 70

70 11/ 24 9.140 11/ 24 8.682

So value of a pension of 1 p.a. is 7.59720 + v10 0.867219 8.682 = 11.801

So annuity purchased by 200,000 is 200000/11.801 = 16,948

Subject CT5 (Contingencies Core Technical)

The present value is

2000 18, 653

e t (.05 ln(1.04)) (.05 ln(1.04))

p45 .14 p46

Assume deaths uniformly distributed so t p x . Then

(1 .001332) 0.91023 0.909018

Assume that force of mortality is constant across year of age 45 to 46

ln(1 0.00266) 0.002664 0.998669

0.998669 0.91023 0.909018

Subject CT5 (Contingencies Core Technical)

Subject CT5 (Contingencies Core Technical) Future Service

125000 200000 100000 90000

0.00356 0.00689 0.00989 0.01233

100000 250000 200000 150000

0.00125 0.00265 0.00465 0.00685

445 1378 989 1109.7 3921.7

125 662.5 930 1027.5 2745

570 2040.5 1919 2137.2 6666.7

225000 450000 300000 240000 1215000

Subject CT5 (Contingencies Core Technical)

Let P be the monthly premium. Then: EPV of premiums: 12 Pa (12) a (12)

q[40] (1 b)25 v 25 } 100, 000 25 p[40] (1 b) 25 v 25

EPV of claim expense: .025 38949.9 =973.748

Subject CT5 (Contingencies Core Technical)

Equation of value gives 155.124P = 38949.9 + 14.086P + 973.85 + 973.75

Assuming a uniform distribution of deaths, then s p x

Subject CT5 (Contingencies Core Technical)

v30 . 30 p 40 . A70 8054.0544 0.60097 0.078970 9854.3036

8054.0544 0.38975 0.037469 9854.3036

(0.037469 (0.078970)2 ) 0.032486

0.04 0.078970 0.080539 ln(1.04)

Subject CT5 (Contingencies Core Technical) (i) Multiple decrement table x 40 41 42 43 x 40 41 42 43

0.000788 0.000962 0.001104 0.001208 (aq ) d x 0.000749 0.000938 0.001076 0.001178

0.10 0.05 0.05 0.05 (aq ) s x 0.09996 0.04998 0.04997 0.04997

1 q45 (1 q46 ) (1 0.25q47 ) 1 0.5q45

1 0.001465 (1 0.001622) (1 0.250.001802) 1 0.50.001465