CONFIDENTIAL

CS/JAN 2013/ASC569

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE

ACTUARIAL PRACTICE

COURSE CODE

ASC569

EXAMINATION

JANUARY 2013

TIME

3 HOURS

INSTRUCTIONS TO CANDIDATES
1.

This question paper consists of five (5) Questions.

2.

Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3.

Do not bring any material into the examination room unless permission is given by the
invigilator.
Please check to make sure that this examination pack consists of:
i)
ii)
iii)

the Question Paper

a two - page Appendix
an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 5 printed pages
Hak Cipta Universiti Teknologi MARA

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CS/JAN 2013/ASC569

QUESTION 1
You have been assigned to conduct statutory valuation of liabilities for SAK Life Insurance
Company based on the minimum valuation basis of Bank Negara Malaysia Insurance Act
1996.
a)

What is the meaning of minimum valuation basis and state the basis used to determine
i)
ii)

b)

The mortality rate for male insured lives and female insured lives.
The interest rate for annual premium and single premium life insurance policies.
(5 marks)

An inforce policy was issued to a male life aged 25 with its 10th policy anniversary falling
on 1 April 2011. The policy provides for a lifetime death benefit payable at the end of
year of death with sum assured, RM100,000 and level premiums are paid for a limited
period of 20 years only.
Calculate the 10th terminal reserves on the policy using statutory basis.

i)

(8 marks)
ii)

The company's financial year runs from 1 January 2011 to 31 December 2011. Use
a suitable approximation to value the company's liability on the policy as at the
2011 valuation date. You should explain briefly the model used in the
approximation.
(8 marks)

QUESTION 2
You are a member of the product development team of a Life Office and are at the stage of
gathering ideas to design a new product.
a)

Based on the feedback from your field organization, the following product ideas were
proposed to you. In each case, assess the feasibility of developing a product to cover
the risk below:
i)
ii)

b)

Insuring the risk of having children to cover the expensive cost of raising a child,
Insuring the loss of dependents' financial support due to incidence of divorce.
(4 marks)

Your product development team has decided to enhance the existing products of the
company instead of introducing a totally new product to cut cost and to remain
competitive. Based on your market research, the following benefits would be
incorporated as riders in the existing basic policies:
i)

Long-term care benefit.

(7marks)

ii)

Critical Illness benefit.

(6 marks)

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CS/JAN 2013/ASC569

Explain the benefit and premium structure of each of the above riders. In each case,
explain whether a "waiting period" is required or not in the design of the product.

QUESTION 3
XYZ Life Insurance Company is developing a special twenty-year endowment policy with the
following benefit structure and expense allocation:
Benefit structure:
Death benefits:
Full sum assured is payable at the instant of death if death occurs during the
term of the policy.
Survival Benefits:
Equal percentage of sum assured is payable at the end of every five year period
if the insured survives to the end of each period.
Expense allocation:
Agent's commission:
50% of first year premium, 20% of premiums collected thereafter.
Administrative and underwriting expense:
RM50 in the first year and RM20 in each subsequent year.
Cost of claim settlement:
RM10 per RM1.000 sum assured at the time of death benefit payment.
RM5 per RM1,000 sum assured at the time of survival benefit payment.
a)

Using equivalence principle, write down the equation for the actuarial present value of
gross premiums per 1000 sum assured and determine the gross premium formula in
terms of commutation functions.
(10 marks)

b)

Calculate the gross premium in part(a) above for a policy issued to (30) and mortality
follows the DGI 1996 Table at 4% interest. Assume uniform distribution of deaths over
the year of death.
(7 marks)

c)

Explain what modification is necessary to the equation in part(a) above if on average,

death payment is made at the end of the third quarter of the year of death? Interpret
your result.
(5 marks)

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CS/JAN 2013/ASC569

QUESTION 4
You are responsible to carry out product pricing for a newly proposed participating life
insurance product where there is minimum guarantee on the returns on investment.
a)

The chief actuary has advised you to compute gross premiums based on realistic
assumption instead of conservative assumption.
i) Explain the difference between realistic and conservative assumptions, illustrating
your answer with reference to interest and mortality basis. Indicate the impact each
type of assumption has on price, profitability and marketability of the product.
(7 marks)
ii) Based on your explanation in part (b)(i) above, what would be your recommendation
to the chief actuary for the final set of pricing basis?
(3 marks)

b)

You wish to employ the asset share technique to determine the price for the product.
i)

Explain the meaning of the term "asset share" and state the difference between
"historical" asset shares and "projected" asset shares?
(5 marks)

ii)

Name FOUR (4) factors that you are likely to take into account as cash outflow in
your asset share calculation.
(4 marks)

QUESTION 5
You are asked to conduct premium rating for a private motor-vehicle damage-only portfolio
of a general insurance company.
a)

Give TWO (2) examples of rating factors that are likely to be used with respect to each
of the following:
i) Factors associated with the individual proposer,
ii) Factors related to the risk unit.
To each answer, you should briefly justify why the factor is chosen in the premium
rating.
(4 marks)

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b)

CS/JAN 2013/ASC569

The number of policies in force for the portfolio is subdivided by No Claim Discount
(NCD) category. You have collected data on the inforce policies at the beginning of
each quarter during 2011 and at the beginning of the first quarter of 2012 as follows:

NO OF POLICIES INFORCE
DATE

FULL PREMIUM

35% NCD

55% NCD

1/1/2011

6245

5990

7608

1/4/2011

6278

6167

8165

1/7/2011

6381

6175

8374

1/10/2011

6423

6233

8549

1/1/2012

6459

6274

8611

The number of claims in respect of incidents during 2011 (including Incurred but not
reported claims) total 2874 of which 957 are from policyholders paying full premiums,
865 from those on a 35% NCD, and the rest from those on a 55% NCD.
i)

Estimate the claim frequency rates for the three categories using the census
method. Comment on your result. You should state any assumption used.
(11 marks)

ii)

You discovered that for the 35% NCD category, only censuses on 1 January 2011
and 1 October 2011 are reliable. Revise your result for the 35% NCD claim
frequency rate based on the two censuses only. You should state your revised
assumption and comment on the accuracy of your result compared to your answer
in part (b)(i) above.
(6 marks)

END OF QUESTION PAPER

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APPENDIX 1

CS/JAN 2013/ASC569

Commutation functions based on DG11996 Mortality Table at 4% interest per annum

X

qx
10 0.00157
11 0.00156
12 0.00149
13 0.00145
14 0.00144
15 0.00144
16 0.00148
17 0.00154
18 0.00163
19 0.00176
20 0.00190
21 0.00207
22 0.00219
23 0.00218
24 0.00211
25 0.00204
26 0.00198
27 0.00192
28 0.00187
29 0.00182
30 0.00178
31 0.00177
32 0.00179
33 0.00185
34 0.00193
35 0.00202
36 0.00214
37 0.00226
38 0.00239
39 0.00254
40 0.00272
41 0.00293
42 0.00319
43 0.00349
44 0.00383
45 0.00419
46 0.00460
47 0.00505
48 0.00552
49 0.00603
50 0.00660
51 0.00721
52 0.00790
53 0.00866
54 0.00946

Dx
6,755,641.7
6,485,610.9
6,226,435.9
5,978,037.0
5,739,777.8
5,511,069.7
5,291,474.8
5,080,426.3
4,877,502.4
4,682,261.6
4,494,250.8
4,313,184.3
4,138,707.7
3,970,811.5
3,809,764.5
3,655,505.7
3,507,738.9
3,366,147.7
3,230,466.1
3,100,408.7
2,975,736.5
2,856,192.0
2,741,477.5
2,631,317.5
2,525,432.3
2,423,613.7
2,325,690.4
2,231,455.2
2,140,780.8
2,053,523.4
1,969,526.4
1,888,624.4
1,810,664.1
1,735,469.3
1,662,896.7
1,592,815.2
1,525,135.8
1,459,731.0
1,396,499.4
1,335,375.7
1,276,272.4
1,219,085.6
1,163,746.2
1,110,146.7
1,058,204.6

Nx
155,874,750.0
149,119,108.3
142,633,497.4
136,407,061.5
130,429,024.5
124,689,246.7
119,178,177.0
113,886,702.3
108,806,275.9
103,928,773.5
99,246,512.0
94,752,261.2
90,439,076.8
86,300,369.1
82,329,557.6
78,519,793.1
74,864,287.4
71,356,548.4
67,990,400.7
64,759,934.7
61,659,525.9
58,683,789.4
55,827,597.4
53,086,119.9
50,454,802.4
47,929,370.1
45,505,756.4
43,180,066.1
40,948,610.9
38,807,830.1
36,754,306.6
34,784,780.2
32,896,155.8
31,085,491.7
29,350,022.4
27,687,125.7
26,094,310.5
24,569,174.7
23,109,443.7
21,712,944.4
20,377,568.7
19,101,296.3
17,882,210.6
16,718,464.5
15,608,317.8

Hak Cipta Universiti Teknologi MARA

Sx

Cx

3,130,429,877.0 10,198.42
9,728.42
2,974,555,127.0
2,825,436,018.7
8,920.57
8,334.76
2,682,802,521.2
2,546,395,459.7
7,947.38
7,630.71
2,415,966,435.2
2,291,277,188.4
7,530.18
7,522.94
2,172,099,011.4
7,644.55
2,058,212,309.2
7,923.83
1,949,406,033.2
1,845,477,259.7
8,210.65
1,746,230,747.7
8,584.90
8,715.16
1,651,478,486.6
8,323.43
1,561,039,409.7
7,729.43
1,474,739,040.6
7,170.42
1,392,409,483.0
6,678.20
1,313,889,689.9
6,214.43
1,239,025,402.6
1,167,668,854.1
5,808.63
5,425.72
1,099,678,453.4
5,093.09
1,034,918,518.7
4,861.02
973,258,992.8
4,718.50
914,575,203.4
4,680.71
858,747,606.0
4,686.62
805,661,486.1
4,707.40
755,206,683.7
4,785.56
707,277,313.6
4,849.12
661,771,557.2
618,591,491.1
4,919.68
5,015.34
577,642,880.2
5,151.07
538,835,050.1
5,320.84
502,080,743.5
5,553.86
467,295,963.4
5,823.83
434,399,807.5
6,123.94
403,314,315.8
6,417.21
373,964,293.5
6,745.79
346,277,167.8
7,088.12
320,182,857.2
7,412.19
295,613,682.5
7,742.61
272,504,238.8
8,099.42
250,791,294.4
8,451.55
230,413,725.7
8,839.99
211,312,429.5
9,244.11
193,430,218.8
9,625.59
176,711,754.3

Rx

759,934.67
749,736.25
740,007.84
731,087.27
722,752.51
714,805.12
707,174.41
699,644.23
692,121.29
684,476.75
676,552.92
668,342.27
659,757.37
651,042.21
642,718.78
634,989.35
627,818.94
621,140.74
614,926.32
609,117.69
603,691.97
598,598.89
593,737.87
589,019.36
584,338.65
579,652.03
574,944.63
570,159.08
565,309.95
560,390.27
555,374.94
550,223.87
544,903.03
539,349.17
533,525.33
527,401.40
520,984.19
514,238.40
507,150.28
499,738.09
491,995.48
483,896.06
475,444.51
466,604.52
457,360.41

35,426,411.94
34,666,477.27
33,916,741.02
33,176,733.18
32,445,645.91
31,722,893.41
31,008,088.28
30,300,913.88
29,601,269.64
28,909,148.35
28,224,671.60
27,548,118.68
26,879,776.41
26,220,019.03
25,568,976.82
24,926,258.04
24,291,268.69
23,663,449.75
23,042,309.01
22,427,382.69
21,818,265.00
21,214,573.03
20,615,974.14
20,022,236.27
19,433,216.91
18,848,878.26
18,269,226.22
17,694,281.59
17,124,122.51
16,558,812.56
15,998,422.29
15,443,047.35
14,892,823.48
14,347,920.45
13,808,571.28
13,275,045.95
12,747,644.55
12,226,660.36
11,712,421.97
11,205,271.69
10,705,533.60
10,213,538.12
9,729,642.06
9,254,197.54
8,787,593.03

CONFIDENTIAL

CONFIDENTIAL

APPENDIX 2

CS/JAN 2013/ASC569

Commutation functions based on DG11996 Mortality Table at 4% interest per annum

Dx
qx
55 0.01033 1,007,878.9
56 0.01122
959,103.4
57 0.01210
911,867.5
58 0.01295
866,186.5
59 0.01381
822,085.9
60 0.01479
779,550.9
61 0.01597
738,482.0
62 0.01741
698,738.9
63 0.01903
660,167.2
64 0.02084
622,696.3
65 0.02286
586,268.6
66 0.02506
550,833.2
67 0.02755
516,374.3
68 0.03019
482,834.8
69 0.03303
450,248.1
70 0.03615
418,631.2
71 0.03961
387,978.5
72 0.04345
358,279.5
73 0.04756
329,531.0
74 0.05200
301,787.0
75 0.05684
275,090.5
76 0.06215
249,475.3
77 0.06799
224,971.6
78 0.07425
201,611.3
79 0.08098
179,463.1
80 0.08824
158,586.8
81 0.09609
139,031.8
82 0.10458
120,838.7
83 0.11367
104,039.8
84 0.12338
88,666.9
85 0.13370
74,737.7
86 0.14466
62,255.0
87 0.15630
51,201.2
88 0.16890
41,537.0
89 0.18230
33,193.6
90 0.19655
26,098.5
91 0.21187
20,162.3
92 0.22867
15,279.4
93 0.24732
11,332.1
94 0.26847
8,201.4
95 0.29242
5,768.8
96 0.31947
3,924.9
97 0.35017
2,568.3
98 0.38527
1,604.8
99 0.42513
948.6
X

Nx
14,550,113.1
13,542,234.2
12,583,130.9
11,671,263.4
10,805,076.9
9,982,991.0
9,203,440.1
8,464,958.1
7,766,219.2
7,106,052.0
6,483,355.7
5,897,087.1
5,346,253.9
4,829,879.5
4,347,044.7
3,896,796.6
3,478,165.4
3,090,186.9
2,731,907.4
2,402,376.4
2,100,589.3
1,825,498.8
1,576,023.5
1,351,051.9
1,149,440.6
969,977.5
811,390.7
672,358.9
551,520.2
447,480.5
358,813.6
284,075.9
221,820.9
170,619.7
129,082.7
95,889.1
69,790.6
49,628.3
34,348.9
23,016.8
14,815.4
9,046.5
5,121.6
2,553.3
948.6

Hak Cipta Universiti Teknologi MARA

sx
161,103,436.6
146,553,323.5
133,011,089.2
120,427,958.3
108,756,694.9
97,951,618.0
87,968,627.0
78,765,186.9
70,300,228.8
62,534,009.6
55,427,957.5
48,944,601.9
43,047,514.8
37,701,260.9
32,871,381.4
28,524,336.7
24,627,540.0
21,149,374.6
18,059,187.7
15,327,280.3
12,924,903.9
10,824,314.5
8,998,815.7
7,422,792.2
6,071,740.3
4,922,299.6
3,952,322.2
3,140,931.5
2,468,572.6
1,917,052.3
1,469,571.8
1,110,758.3
826,682.4
604,861.5
434,241.8
305,159.1
209,270.0
139,479.3
89,851.1
55,502.1
32,485.3
17,670.0
8,623.5
3,501.9
948.6

cx
10,010.95
10,347.25
10,609.23
10,785.69
10,916.35
11,086.11
11,339.96
11,697.16
12,079.79
12,477.88
12,886.64
13,272.96
13,678.95
14,016.14
14,299.71
14,551.46
14,776.76
14,968.50
15,069.71
15,089.35
15,034.75
14,908.55
14,707.52
14,393.88
13,973.97
13,455.48
12,845.73
12,151.26
11,371.35
10,518.96
9,608.10
8,659.44
7,694.95
6,745.76
5,818.46
4,932.36
4,107.49
3,359.55
2,694.87
2,117.15
1,622.04
1,205.67
864.75
594.49
387.75

M.
447,734.82
437,723.87
427,376.62
416,767.39
405,981.70
395,065.35
383,979.24
372,639.28
360,942.12
348,862.33
336,384.45
323,497.82
310,224.86
296,545.90
282,529.77
268,230.06
253,678.60
238,901.84
223,933.34
208,863.63
193,774.28
178,739.52
163,830.97
149,123.46
134,729.57
120,755.61
107,300.13
94,454.39
82,303.14
70,931.79
60,412.83
50,804.72
42,145.29
34,450.34
27,704.58
21,886.12
16,953.76
12,846.26
9,486.71
6,791.84
4,674.69
3,052.65
1,846.98
982.24
387.75

Rx
8,330,232.61
7,882,497.79
7,444,773.93
7,017,397.31
6,600,629.91
6,194,648.21
5,799,582.86
5,415,603.62
5,042,964.34
4,682,022.22
4,333,159.89
3,996,775.43
3,673,277.61
3,363,052.75
3,066,506.85
2,783,977.08
2,515,747.02
2,262,068.42
2,023,166.58
1,799,233.24
1,590,369.61
1,396,595.33
1,217,855.81
1,054,024.84
904,901.38
770,171.81
649,416.20
542,116.07
447,661.68
365,358.54
294,426.75
234,013.93
183,209.21
141,063.92
106,613.58
78,909.00
57,022.88
40,069.13
27,222.86
17,736.15
10,944.31
6,269.62
3,216.97
1,369.98
387.75

CONFIDENTIAL