ACTL3002 Life Insurance and Superannuation Models

Model Solutions to Tutorial 6 - held in Week 7

See Dickson, et al. Solutions Manual for assigned problems.
In class exercises and presentations.
1. The only work required here is writing out the APV of future expenses which is given by
APVFE = e0 + (e1 + e2 Px ) a
x + e 3 Ax .
By the principle of equivalence, we have
APVFP = APVFB + APVFE
Ga
x = Ax + e0 + (e1 + e2 Px ) a
x + e 3 Ax
=

e0 + (e1 + e2 Px ) a
x + (1 + e3 ) Ax

which implies the expense-loaded premium is

e0 + (e1 + e2 Px ) a
x + (1 + e3 ) Ax
a
x
= e0 (Px + d) + (e1 + e2 Px ) + (1 + e3 ) Px

G =

(1 + e0 + e2 + e3 ) Px + (e1 + de0 )

so that clearly, a = (1 + e0 + e2 + e3 ) and c = (e1 + de0 ).

2. It is not stated in the problem whether this is fully-discrete, fully continuous, or otherwise. So, we
make the assumption that this is a fully-discrete 10-year endowment policy. Note that for issue age
x = 40, we have under De Moivres law, that
k p40

60 k
`40+k
.
=
`40
60

(a) Let G be the expense-loaded (or gross) annual premium. Thus, we have, by equating APVFP
with APVFB+APVFE,
Ga
40:10 = 1000A40:10 + 50
where
a
40:10

9
X

v k k p40 =

k=0

= a
10

1 X k
v (60 k)
60
k=0

1
(Ia)9 = 7.848055
60

and
A40:10 = 1 d
a40:10 = 0.6981517
so that
G=

1000A40:10 + 50
1000 (0.6981517) + 50
=
= 95.329576.
a
40:10
7.848055

For year k = 1, 2, ..., 9, the gross premium reserve is given by

kV

40+k:10k
1000A40+k:10k G a

=
=

1000A40+k:10k 95.329576 a
40+k:10k


1000 1 d
a40+k:10k 95.329576 a
40+k:10k

1000 (1000(0.04/1.04) + 95.329576) a

40+k:10k

1000 133.791114
a40+k:10k

9k
X

1000 133.791114

!
v s s p40+k

s=0

9k
X

1000 133.791114


v 1
s

s=0


=

1000 133.791114 a
10k

s
60 k

!

1
(Ia)9k
60 k


.

The values are summarized below:

k

1
30.99

kV

2
116.40

3
206.52

4
301.67

5
402.20

6
508.50

7
620.96

8
740.04

9
866.21

(b) If we let a be the acquisition expense, in general, the gross annual premium will be
Ga =

1000A40:10 + a
1000 (0.6981517) + a
a
=
= 88.9585702 +
a
40:10
7.848055
a
40:10

and the gross premium reserve will be

kV

1000A40+k:10k Ga a
40+k:10k


a
40+k:10k
= 1000A40+k:10k 88.9585702 a
40+k:10k a
a
40:10




a
40+k:10k
= 1000 1 d
a40+k:10k 88.9585702 a
40+k:10k a
a

 40:10

a
40+k:10k
= 1000 (1000(0.04/1.04) + 88.9585702) a
40+k:10k a
a
40:10


a
40+k:10k
= 1000 127.420109
a40+k:10k a
.
a
40:10


Reserves will be negative if it ever hits negative at the end of the first year. This is because reserve
is increasing obviously (because of the nature of the endowment insurance - not all reserves do
increase over time) with time and if it ever hits negative, it must be in the first year. Therefore,
we must have


a
41:9
1000 127.420109
a41:9 a
>0
a
40:10
or equivalently,

1000 127.420109
a41:9
a
40:10
a <
a
41:9


1000 127.420109(6.69627266)
=
7.848055
6.69627266
= 83.5830964.


3. Denote by G the annual premium payable monthly.

(a) Unless otherwise stated, present values are at 6% interest. Assume UDD holds. The APVFP at
issue is given by







11
11
`65
(12)
[35]:30
P a
[35]:30 = P a
1 30 E[35] = P a
[35]:30
1 v 30
24
24
`[35]



11
27443
= P 14.186
1 0.17411
= 13.792P
24
33706
The APVFB at issue, on the other hand, is given by
h
i
K
APVFB0 = 1000 E v T (1 + b)
where bonuses are, by assumption, added and vested at the start of each policy year. Note that
bonus does not start until after the first policy year. Now, set the interest rate
j=

ib
6% 2.913%
=
= 3%
1+b
1.02913

i
h
i
h
 
K
K
E (v (1 + b)) v S = E (v (1 + b)) E v S

Now writing
h
i
K
E v T (1 + b)

=
=

1
d j
i j
1
=
A
A
v(1 + b) [35]
(1 + b) [35]
1
0.06
Aj = 1.000562Aj[35]
(1.02913) ln(1.06) [35]

Now injecting the expenses, we therefore have the APV of future benefits and expenses as
APV of benefits and expenses

10000 (1.000562) Aj[35] + 50 + 10000(0.02)





1
(12)
+10 a
[35] 1 + 0.025P a
[35]:30
12

where, from the A1967/70 Select table, we have

(12)

a
[35]:30 = 13.792,
Aj[35] = 0.32081,
and
a
[35] = 15.519.
Hence, finally, equating the two APVs, we derive the annual premium:


0.025
(12)
0.975
a[35]:30 +
P = 10000 (1.000562) Aj[35] + 240 + 10
a[35]
12



0.025
P
12
13.44928P

0.975 13.792 +

10000 (1.000562) 0.32081 + 250 + 155.19

3605.094

Therefore, we have P = 3605.094/13.44928 = 268.051 so that the monthly premium is P/12 =

22.34.
(b) Let P be the extra (annual) premium due to the family income benefit. The APV of the family
income benefit can be derived from basic principles. First, consider the situation where the

benefits are payable at the end of the month following death. Then we have
APV

3000

239
X

(12)
(240j)/12

v j/12 a

(j/12)|(1/12) q[35]

j=0

3000


239  j/12
X
v
v 20
i(12)

j=0

3000

(j/12)|(1/12) q[35]


239  j/12
X
v
v 20 + 1 1
i(12)

j=0

(12)

3000 a20

20 q[35]

239
X

(j/12)|(1/12) q[35]

(12)
j/12

(j/12)|(1/12) q[35]

j=0

(12)

3000 a20

239
X

(12)
j/12

(j/12)|(1/12) q[35]

(12)

+a
20 20 p[35]

j=0

(12)

(12)

3000 a20 a[35]:20

so that by assuming that deaths occur in the middle of the month following monthly anniversary,
we have (with a half-month adjustment) the APV of the family income benefits equal to


(12)
(12)
1/24
APV FIB = (1 + i)
3000 a20 a[35]:20
where we have
1/24

(1 + i)
(12)

a20 =

= 1.002431,

i
a = 1.027211(11.4699) = 11.78201,
i(12) 20

and
(12)

a[35]:20

`55
(12)
(12)
= a[35] a55 v 20
`[35]

 

1
1
`55
(12)
(12)
=
a
[35]
a
55
v 20
12
12
`[35]


 


11
1
11
1
`55

a
[35]

a
55

v 20
24
12
24
12
`[35]

 

13
13
31685.203
=
15.519
12.004
0.31180
24
24
33706.352
= 11.61768.

Therefore, we have




0.025
(12)
(12)
(12)
0.975
a[35]:20 +
P = 3000 (1 + i)1/24 a20 a[35]:20
12
which implies that
P

=
=

3000 1.002431 (11.78201 11.61768)

0.975 11.6766 + 0.025
12
494.1672
= 43.40
11.38677

or a monthly (extra) premium of P /12 = 3.62.

4. Recall that the Zillmerized reserve has the form of the net premium reserve reduced by the amortization of the Zillmer adjustment (usually equivalent to the first year expense).
4

(a) The policy reserve as at 31 Dec 1999 is given by

10 V

= 100000

a
50:10

a
[40]:20

0.02 100000

a
50:10
a
[40]:20

where
a
[40]:20 = 13.929 and a
50:10 = 8.313.
Therefore, we have
10 V

=
=



8.313
8.313
100000 1
2000
13.929
13.929
39125.13

(b) Using a Zillmer adjustment has the effect of reducing the policy reserve because this is a reduction
to the net premium reserve, assuming of course the same mortality and interest basis. Changing
the Zillmer adjustment from 2% of the sum insured to 1% of the sum insured therefore has the
effect of reducing the amount of the Zillmer adjustment, and hence, increasing the policy reserve
as at 31 Dec 1999.
5. On 1 January 2000, a life insurance company issued an endowment assurance policy to a life aged
exactly 50 for a term of 10 years.
(a) Denote by G the gross premium so that we have
0.95G
a50:10 = 300 + 100000A50:10 .
From the table, we have a
50:10 = 8.314 and A50:10 = 0.68024 so that the gross premium is
G = 8, 650.47.
The (3rd year) gross premium reserve is therefore
GP reserve = 100000A53:7 0.95G
a53:7 .
Noting that a
53:7 = 6.166 and A53:7 = 0.76286, we have
GP reserve = 25, 614.14.
(b) The net premium reserve with the Zillmer adjustment can be computed as
!
a
53:7
a

= 25, 835.94 222.49

300 53:7
100000 1
a
50:10
a
50:10
=

25, 613.45.

Thus, 222.49 refers to the Zillmer adjustment. Indeed this is the difference between the gross
premium reserves and the net premium reserves.
(c) The net premium reserve with Zillmer adjustment equals the gross premium reserve calculated in
part (a) (subject to rounding errors). If the insurance company actuary is satisfied that there are
sufficient margins in the gross premium reserve then the net premium reserve with the Zillmer
adjustment would be adequate. In addition, the use of the net premium reserve with Zillmer
adjustment compared with the use of the reserve without adjustment would reduce the companys
funding requirements.
6. We denote the quarterly premiums by P .

(a) To find the premium, we equate the APVFP to APVFB at issue. We have
APVFP

(4)

4P a
[40]:25



3
D65
4P a
[40]:25
1
8
D[40]



689.23
3
1
= 4P 15.887
8
2052.54
= 62.55169055P,
=

for the APV of benefits and claims expenses, we have

APVFB

D65
D[40]
689.23
= 100, 500 0.38896 400
2052.54
= 38, 956.16,
100, 500A[40]:25 400

and for the APV of other expenses, we have

APVFE

0.03 61.39268(?)P 0.03P + 0.6 4P + 250

4.21178P + 250.

Thus, we have the quarterly premium equal to

P =

39206.16
= 672.03.
58.3399

(b) The cash surrender value is computed retrospectively.

i. Thus, we have cash surrender value at the end of 20 years,
CSV20

1
1
+ 0.03P
0.6 4P
20 E[40]
20 E[40]
1
100, 500A1[40]:20
20 E[40]

(4)

4P 0.97 a
[40]:20
250

1
20 E[40]

1
20 E[40]

where everything is computed at 3%. We can re-write this as

CSV20 =

i
h
1
(4)
2734.08
a[40]:20 1920.04 100, 500A1[40]:20 .
20 E[40]

Unfortunately, the Formulae book does not provide the needed insurance/annuity values at
3% from the AM92 select tables.
ii. Retrospectively: the lower interest rate values accumulated premium less benefits as if they
had earned only 3% instead of the required 4%.
Prospectively: the lower interest rate indicates a lower rate to be earned in the future. This
implies that more reserves is required now in order to meet future liabilities.
So the prospective reserve at 3% > the prospective reserve at 4% = the retrospective reserve
at 4%> the retrospective reserve at 3%

- End of Tutorial 6 model solutions -