INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION
19 April 2013 (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 from the approved list.

CT5 A2013

Institute and Faculty of Actuaries

Calculate: (a) (b) (c) Basis: Mortality Interest AM92 4% per annum
10|5 q40

a65
15 p[46]

[3]

Calculate (aq ) x. Basis:

Mortality: x = 0.1 and x = 0.2 for all x , are independent decrements

[3]

3 4 5

Describe how climate and geography affect mortality and morbidity.

[3]

Describe the use of terminal bonus within the reversionary bonus system.

[3]

A pension scheme provides a pension on retirement of one-sixtieth of final pensionable salary for each year of service. Final pensionable salary is average salary received in the three years before retirement. Normal retirement age is 65 exact. The same level of pension is payable on retirement on the grounds of ill-health or otherwise prior to age 65. Calculate the expected present value of past and future benefits for a life currently aged 30 exact with 10 years of past service and salary in the previous year of 40,000. Basis: PEN Tables in Formulae and Tables for Actuarial Examination. [4]

CT5 A20132

A life insurance company issues a 20-year increasing endowment assurance policy which provides a sum assured given by the formula: [50,000 + 1,500t] t = 1, 2, ..., 20 where t denotes the policy year. The sum assured is payable on maturity at age 50 exact or at the end of year of death if earlier. Premiums on the policy are payable annually in advance. Write down an expression for: (a) (b) the net premium for the policy. the net premium prospective policy reserve for the policy immediately before the tenth premium is paid. [4]

Explain why it is necessary to have different mortality tables for different classes of lives. [6]

(i)

Define the measures of crude mortality rate and directly standardised mortality rate. You should include a definition of all symbols used. [5]

The data in the table below is for a sub-population for the year 2012.

Age 65 66 67 (ii)

Number of lives 125,000 130,000 140,000

Number of deaths 2,937 3,301 3,756

Calculate the standardised mortality ratio for this sub-population using ELT15 (Males) as the standard population. [2] [Total 7]

CT5 A20133

PLEASE TURN OVER

A male life currently aged 65 exact purchases a special joint life annuity of 10,000 per annum payable monthly in advance together with additional benefits detailed below. On the death of the male life, the annuity reduces to 5,000 per annum payable monthly in advance to a female life until her death, assuming she survives him. The female life is currently aged 62 exact. The policy additionally provides benefits of: An annuity certain (extra to the above and not dependent on the survival status of each life) of 10,000 per annum payable monthly in advance and paid only for ten years, and 10,000 payable immediately on the death of each life. Calculate the expected present value of the total benefits. Basis: Mortality Male life Female life PMA92C20 PFA92C20

Interest Expenses

4% per annum Nil [7]

10

A special whole life assurance policy issued to a life aged 40 exact provides a benefit of 1,000 on death within 20 years of inception, 2,000 on death between 20 and 40 years from inception and 3,000 on death thereafter. Benefits are payable at the end of the year of death. Calculate the expected present value and variance of the present value of this policy. Basis: Mortality AM92 Ultimate Interest 4% per annum [8]

CT5 A20134

11

Two lives are both aged 45 exact. Calculate: (i) (ii) The probability of both lives surviving to age 65 exact. [1]

The present value of an annuity of 1,000 per annum increasing by 3% each year payable annually in advance so long as both lives survive. [3] The present value of a 20-year term assurance with a benefit of 100,000 payable immediately on the second death.

(iii)

[5]

Basis: Mortality x = 0.05 for all x for both lives Interest 4% per annum [Total 9]

12

A life insurance company issues whole life assurance policies to lives aged 50 exact for a sum assured of 75,000 payable at the end of the year of death. Premiums are payable annually in advance. (i) (ii) Calculate the annual gross premium for each policy using the basis below. [4] Calculate the minimum annual gross premium that the company should charge in order that the probability of making a loss on any one policy would be 10% or less. [6]

Basis: Mortality Interest Initial commission Initial expenses AM92 Select 6% per annum 100% of the annual gross premium 325

Renewal commission 2.5% of each annual gross premium excluding the first Renewal expenses 75 per annum at the start of the second and subsequent policy years [Total 10]

CT5 A20135

PLEASE TURN OVER

13

A life insurance company issues 5,000 four-year decreasing term assurance policies on 1 January 2012 to a group of male lives aged 56 exact at that date. Premiums are payable annually in advance on each policy. The initial annual gross premium P reduces to .75P, .5P and .25P at the beginning of the second, third and fourth policy year respectively. The sum assured on each policy is payable at the end of year of death and is given by the formula:

100,000 [1 0.25t] t = 0, 1, 2, 3

where t denotes the curtate duration in years since the inception of the policy. (i) Calculate the initial annual gross premium P for each policy using the basis below. [7] Determine the prospective gross premium reserve for each policy in force at the end of the first policy year using the same basis. [5] Calculate the mortality profit or loss for this portfolio of business for the calendar year 2012 given that 27 policyholders died during that year.

(ii)

(iii)

[2]

Actual expenses incurred and interest earned by the company on this portfolio of business during 2012 was the same as that assumed in the premium basis. (iv) Derive the mortality profit or loss for the calendar year 2012 using the recursive relationship between the opening and closing prospective reserves in the first policy year. [2]

Basis: Mortality Interest Initial commission Initial expenses AM92 Ultimate 6% per annum 25% of the first annual premium 125

Renewal commission 3% of each annual premium excluding the first Renewal expenses 35 per annum at the start of the second and subsequent policy years. The renewal expense is assumed to increase by 1.92308% compound per annum from inception of the policy. [Total 16]

CT5 A20136

14

A life insurance company issues a three-year unit-linked endowment assurance policy to a life aged 67 exact. Level premiums are payable yearly in advance throughout the term of the policy or until earlier death. In the first year, 50% of the premium is allocated to units and 110% 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 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 immediately before a premium is paid. 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 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 Surrenders

4% per annum 3% per annum 90% AM92 Ultimate 8% at end of first year, 4% at end of second year based on policies in force at that time. 235 45 per annum on the second and third premium dates 12.5% of first premium 2.5% of the second and third years premiums 75 on deaths and surrenders only

Initial expenses Renewal expenses

Initial commission Renewal commission

Claim expense

The company sets premiums so that the net present value of the profit for the policy is 10% of the annual premium, using a risk discount rate of 6% per annum. (i) Calculate the premium for the policy on the assumption that the company does not zeroise future expected negative cash flows. [12] Calculate the net present value of the profit on the policy on the assumption that the company does set up reserves in order to zeroise future expected negative cash flows. [5] [Total 17]

(ii)

END OF PAPER
CT5 A20137

INSTITUTE AND FACULTY OF ACTUARIES

EXAMINERS REPORT
April 2013 examinations

Subject CT5 Contingencies Core Technical

Introduction The Examiners Report is written by the Principal Examiner with the aim of helping candidates, both those who are sitting the examination for the first time and using past papers as a revision aid and also those who have previously failed the subject. The Examiners are charged by Council with examining the published syllabus. The Examiners have access to the Core Reading, which is designed to interpret the syllabus, and will generally base questions around it but are not required to examine the content of Core Reading specifically or exclusively. For numerical questions the Examiners preferred approach to the solution is reproduced in this report; other valid approaches are given appropriate credit. For essay-style questions, particularly the open-ended questions in the later subjects, the report may contain more points than the Examiners will expect from a solution that scores full marks. The report is written based on the legislative and regulatory context pertaining to the date that the examination was set. Candidates should take into account the possibility that circumstances may have changed if using these reports for revision. D C Bowie Chairman of the Board of Examiners July 2013

Institute and Faculty of Actuaries

Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

General comments on Subject CT5 CT5 introduces the fundamental building blocks that stand behind all life insurance and pensions actuarial work. Credit is given to students who produce alternative viable numerical solutions. In the case of descriptive answers credit is also given where appropriate to different valid points made which do not appear in the solutions below. In questions where definitions of symbols and then formulae are requested, a different notation system produced by a student to that used by examiners is acceptable provided it is used consistently, is relevant and is properly defined and used in the answer. Comments on the April 2013 paper The general performance was similar this session to previous ones although it was felt that this paper was a little easier than some previous ones. Questions that were done less well were 9, 10 (variance), 11, 12(b) and 14(ii). The examiners hope that the detailed solutions given below will assist students with further revision. However most of the short questions were very straightforward where an answer could be produced quickly and this is where many successful candidates scored particularly well. Students should note that for long questions some credit is given if they can describe the right procedures although to score well reasonably accurate numerical calculation is necessary.

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

(a)

10|5 q40

= (l50 l55 ) / l40 = (9712.0728 9557.8179) / 9856.2863

= 0.01565
(b) (c) 65 1/ 2 = 11.776 a65 = a
15 p[46]

= l61 / l[46] = 9212.7143 / 9783.3371 = 0.94167

Generally question done well.

The constant force of decrement is consistent with the Kolmogorov equations where the transition intensities are constant. Thus: (aq) x = = ( + ) (1 e ) ( + ) 0.1 (1 e 0.3 ) = 0.086394 0.3

Generally question done well. Other approaches given credit.

Climate and geographical location are closely linked. Levels and patterns of rainfall and temperature lead to an environment which is amicable to certain kinds of diseases e.g. those associated with tropical regions. Effects can also be observed within these broad categories e.g. the differences between rural and urban areas in a geographical region. Some effects may be accentuated or mitigated depending upon the development of an area e.g. industry leading to better roads and communications. Natural disasters (such as tidal waves and famines) will also affect mortality and morbidity rates, and may be correlated to particular climates and geographical locations.

Generally question done well. Other valid points given credit.

Terminal bonuses are allocated when a policy matures or becomes a claim as a result of the death of the life assured. Terminal bonuses are usually allocated as a percentage of the basic sum assured and the bonuses allocated prior to a claim.

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

The terminal bonus percentage rate will vary with the term of the policy at the date of payment. Because the policy is being terminated, the terminal bonus rate is usually chosen so as to distribute all the surplus available to the policy based on asset share. Distributing available surplus as a terminal bonus delays the distribution of surplus and may allow the insurer to choose investments that are more volatile in the short term but are expected to be more profitable in the long term.

Generally question done well. Other valid points given credit. In particular comments about effects on lapse rates were an important extra point.

Past Service: Value is

ra ia ( z M 30 + z M 30 ) 1 10 128026 + 64061 * 40000* = * 40000* = 32585.5 60 s29 D30 6 4.991*7874 ra ia ( z R30 ) 1 + z R30 1 4164521 + 1502811 * 40000* = * 40000* = 96140.1 60 60 4.991*7874 s29 D30

Future Service: Value is

Total Value is 32585.5+96140.1 = 128,726 rounded Generally question done well. It was not necessary to give the total in the last line for full credit.

The death benefit in policy year 10 is 65,000 which increases by 1,500 each year and the maturity value is 80,000. Therefore: (a) Net premium P for the policy is given by 1 1 20 l50 50, 000 A30:20 + 1,500( IA)30:20 + 80, 000 v l30 P= 30:20 a (b) Net premium prospective policy reserve at duration t = 9 is given by:
9V Pr o 1 1 = 63,500 A39:11 + 1,500( IA)39:11 + 80, 000 v11

l50 39:11 Pa l39

Well prepared students scored good marks but many made elementary mistakes the most common of which was 48500 as the 1st factor in the numerator of the first formula above. The alternative solution for the numerator in (a) is:
50000 A30:20 + 1500( IA)30:20

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

And for (b) overall:

9

39:11 V = 63500 A39:11 + 1500( IA)39:11 Pa

When a life table is constructed it is assumed to reflect the mortality experience of a homogeneous group of lives i.e. all the lives to whom the table applies follow the same stochastic model of mortality represented by the rates in the table. This means that the table can be used to model the mortality experience of a homogeneous group of lives which is suspected to have a similar experience. If a life table is constructed for a heterogeneous group then the mortality experience will depend on the exact mixture of lives with different experiences that has been used to construct the table. Such a table could only be used to model mortality in a group with the same mixture. It would have very restricted uses. For this reason separate mortality tables are usually constructed for groups which are expected to be heterogeneous. This can manifest itself as class selection e.g. separate tables for males and females, whole life and term assurance policyholders, annuitants and pensioners, or as time selection e.g. separate tables for males in England and Wales in 198082 (ELT14) and 199092 (ELT15). Sometimes only parts of the mortality experience are heterogeneous e.g. the experience during the initial select period for life assurance policyholders, and the remainder are homogeneous e.g. the experience after the end of the select period for life assurance policyholders. In such cases the tables are separate (different) during the select period, but combined after the end of the select period. In fact there are separate (homogeneous) mortality tables for each age at selection, but they are tabulated in an efficient (space saving) way.

Generally question done well. Other valid points given credit.

(i)

The crude mortality rate is defined as

Exc,t mx,t
x

c Ex ,t

actual deaths total exposed to risk

c It is a weighted average of mx,t using E x ,t as weights where: c Ex ,t

Central exposed to risk in population being studied between ages x and x + t.

mx,t

Central rate of mortality either observed or from a life table in population being studied for ages x to x + t.

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

The directly standardised mortality rate is defined as

s Exc,t mx,t
x

s Exc,t
x

c It is a weighted average of mx,t using s Ex ,t as weights where

s c Ex,t

Central exposed to risk for a standard population between x and x + t.

(ii) Age Lives Deaths ELT15 M rate 0.02447 0.02711 0.02997 Expected Deaths 3058.8 3524.3 4195.8 10778.9

65 66 67

125000 130000 140000

2937 3301 3756 9994

Standardised mortality ratio is 9994/10778.9 = 0.927 Generally question done well. It was not necessary to make the weighted average remarks in line 3 and 7 above to obtain full marks.

(12) (12) + 5000*(a (12) + a 65 PV=10000a ) + 10000*( A65 + A62 ) 65:62 10

where 65 relates to the male life and 62 the female.

(12) = 10000*(i / d (12) ) * a10 = 1021537 *8.1109 = 82855.85 10000a
10

11 11 11 11 (12) = + a a a a = 13.666 + 15.963 12.427 65:62 65 24 62 24 65:62 24 24 = 16.744 11 11 (12) 65 65 a = a = 13.208 = 13.666 24 24 10000 A65 = 10000*(1 ln(1.04) *(13.666 .5)) = 4836.20 10000 A62 = 10000*(1 ln(1.04) *(15.963 .5)) = 3935.30

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

Total Value = 82855.85 + 5000*(16.744 + 13.208) + 4836.20 + 3935.30 = 241387 rounded

Well prepared students completed this question satisfactory but others had problems with the joint life portion. A very few students concluded that the question wording could be taken to mean that for the joint part the annuity ceases altogether on the female life death and examiners agreed that this was a potential ambiguity and the alternative approach was allowable.Thisalternative approach gave an answer of 228,994.

10

The expected value is:

1000(A40 + v 20 l60 l A60 + v 40 80 A80 ) l40 l40 9287.2164 5266.4604 *0.45640) + (0.20829* *0.73775)) 9856.2863 9856.2863

= 1000*(0.23056 + (0.45639*

= 1000*(0.23056 + 0.19627 + 0.08211) = 509 to nearer

To get the variance we calculate the second moment by defining the benefit as three temporary assurances, two of which are deferred, thus: Benefit from age 4060 (1000) 2 *[ 2 A40 v 20 l60 2 A60 ] (v at 8.16%) l40 9287.2164 *0.23723) 9856.2863

= (1000) 2 *(0.06792 0.20829* = 1, 000, 000*.021361 = 21,361 Benefit from age 6080 (2000) 2 *v 20

l60 2 l *[ A60 v 20 80 2 A80 ] (v at 8.16%) l40 l60 9287.2164 5266.4604 (0.23723 0.20829* *0.56432) 9856.2863 9287.2164

= (2000) 2 *0.20829*

= 4, 000, 000*.033478 = 133,911

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

Benefit from age 80 (3000)2 *v 40 l80 2 * A80 (v at 8.16%) l40 5266.4604 *0.56432 9856.2863

= (3000)2 *0.04338*

= 9, 000, 000*.013082 = 117, 735 Second moment: = 21,361 + 133,911 + 117,735 = 273,007 Variance = 273,007 (509)2 = 13,926 = (118)2 The calculation for the mean was generally well done but the calculation for the variance was poorly done overall.

11

(i) (ii)

The probability is (e( 20*.05) ) 2 = e2 = 0.13534

The value is

1000*(1+(1.03/1.04)(e.05 )2 + (1.03 /1.04)2 (e.1 )2 + (1.03 /1.04)3 (e.15 )2 + ..........) = 1000*(1/ (1 (1.03 /1.04)e.1 )) = 1000 / 0.10386 = 9628
(iii) The value is

20

(100000*(1.04)t *(2e .05t (1 e .05t ) *.05)dt

20 0

= 10000 = 10000

(e t (ln(1.04)+.05) e t (ln(1.04)+.1) )dt e .089221t e .139221t )dt = 10000 + .089221 .139221 0

20

20 0

(e

.089221t

.139221t

e 1.78442 e 2.78442 1 1 = 10000* + + .089221 .139221 .089221 .139221

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

= 10000 * ( 1.88180 + 0.44365 + 11.20812 7.18282)

= 25872
Parts (ii) and (iii) were poorly done. In (ii) many students failed to realise that the expression needed was a geometric series rather than an integral.

12

(a)

Let P be the annual premium for the policy. Then (functions at 6%): EPV of premiums:
[50] = 14.051P Pa

EPV of benefits:
75, 000 A[50]

EPV of expenses:

P + 325 + ( 75 + 0.025 P ) a[50]

Equation of value gives: [50] = 75, 000 A[50] + 325 + P + ( 0.025 P + 75 ) a[50] Pa P 14.051 = 75, 000 0.20463 + 325 + P + ( 0.025 P + 75 ) 13.051 P= (b) 16, 651.075 = 1,308.56 12.724725

The insurers loss random variable for this policy is given by (where K and T denote the curtate and complete future lifetime of a policyholder): L = 75, 000v
K[50] +1

+ 325 + P + 0.025 P + 75 aK

[50]

K P a

[50] +1

We need to find a value of t such that

P ( L > 0 ) = P (T < t ) = 0.1 P (T t ) = 0.9

Using AM92 Select, we require: l[50]+t 0.9 l[50]+t 0.9l[50] = 0.9 9706.0977 = 8735.488 l[50]

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

As l65 = 8821.2612 and l66 = 8695.6199 then t lies between 15 and 16 so K[50] = 15. We therefore need the minimum premium such that
16 L = 0 = 75, 000v16 + 325 + P + 0.025 P + 75 a15 P a 0 = 75, 000 0.39365 + 325 + P + 0.025 P + 75 9.712254 10.712254 P P = 30,577.169 = 3, 229.03 9.46944765

Part (a) was done well. However very few students completed part (b).

13

(i)

If P is the initial premium payable, then EPV of premiums

l l l l = P 1 56 + 0.75 57 v + 0.5 58 v 2 + 0.25 59 v3 l56 l56 l56 l56 = P [9515.104 + 0.75 9467.2906 0.9434 + 0.5 9413.8004 .89 + 0.25 9354.004 .83962] 9515.104

= 2.350603P

EPV of benefits
= 100, 000 q56 v + 0.75 p56 q57 v 2 + 0.5 2 p56 q58 v3 + 0.25 3 p56 q59 v 4 0.005025 0.9434 + 0.75 0.994975 0.00565 0.89 = 100, 000 +0.5 0.989353 0.006352 0.83962 + 0.25 0.983069 0.00714 0.79209 = 1252.116

EPV of renewal expenses =

i/ @ = 35 a 1 = 35 2.745 = 96.075 : 56 4

where i / =

1.06 1 = 0.04 1.0192308

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

EPV of other expenses = 125 + 0.25 P + 0.03 ( EPV of premiums 1) = 125 + 0.25 P + 0.040518 P Equation of value gives: 2.350603P = 1252.116 + 96.075 + 125 + 0.25P + 0.040518P P = 715.11 (ii) Prospective gross premium policy reserve at the end of the 1st policy year given by: V 1 = EPV ( future benefits + exp enses premiums ) where:

EPV of premiums
l l l = P 0.75 57 + 0.5 58 v + 0.25 59 v 2 l57 l57 l57 715.11 = [0.75 9467.2906 + 0.5 9413.8004 .9434 + 0.25 9354.004 .89] = 1028.952 9467.2906

EPV of benefits
= 100, 000 0.75 q57 v + 0.5 p57 q58 v 2 + 0.25 2 p57 q59 v3 0.75 0.00565 0.9434 + 0.5 0.99435 0.006352 0.89 = 100, 000 +0.25 0.9880339 0.00714 0.83962 = 828.911

EPV of renewal expenses

i @ = 35 1.0192308 a = 35.673 2.870 = 102.382 57:3
/

EPV of renewal commission = 0.03 EPV of premiums = 30.867 Therefore 1V = 828.911 + 102.382 + 30.867 1028.952 = 66.79

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

(iii)

Therefore, sum at risk per policy in the 1st policy year is: DSAR = 100,000 ( 66.79) = 100,066.79 Mortality profit = EDS ADS
EDS = 5000 q56 100, 066.79 = 5000 0.005025 100, 066.79 = 2,514,178.1 ADS = 27 100, 066.79 = 2, 701,803.3

i.e. mortality profit = 187,625.2 (i.e. a loss) Mortality profit =

= 5000 (0V + P E ) (1 + i ) S actual deaths 1V number of policie s in force = 5000 (0 + 715.11 0.25 715.11 125) 1.06 100, 000 27 (66.79) 4973 = 187, 791.1
i.e. approximately the same figure as derived in (c) above Reasonably well done by well prepared students. Partial credit was given in (b) for showing understanding of the processes involved.

14

(i)

Let P be the annual premium required to meet the companys profit criteria. Multiple decrement table although deaths can be assumed to be uniformly distributed over the year, surrenders occur only at the year end. Therefore:
d w w d (aq ) d x = q x and ( aq ) x = q x (1 q x )

x 67 68 69

d qx

w qx

( aq )d x
0.016042 0.017922 0.020003

( aq )w x
0.07872 0.03928 0.0

( ap ) x

t 1 ( ap ) x

0.016042 0.017922 0.020003

0.08 0.04 0.00

0.905242 1 0.942795 0.905242 0.979997 0.853458

Unit fund cashflows (per policy at start of year) Year 1 0 0.5P 0.025P 0.019P 0.003705P 0.490295P Year 2 0.490295P 1.1P 0.055P 0.061412P 0.011975P 1.584731P Year 3 1.584731P 1.1P 0.055P 0.105189P 0.020512P 2.714408P

Value of units at start of year Allocation Bid/offer Interest Management charge Value of units at end of year

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Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report

Non-unit fund cashflows

Year 1 0.5P 0.025P 0.125P+235 0.012P7.05 0.003705P 7.10715 0.415705P249.15715 1 0.943396 0.392174P235.0539 Year 2 0.1P 0.055P 0.025P+45 0.0021P1.35 0.011975P 4.29015 0.060125P50.64015 0.905242 0.889996 0.048440P40.7987 Year 3 0.1P 0.055P 0.025P+45 0.0021P1.35 0.020512P 1.500225 0.051588P47.850225 0.853458 0.839619 0.036967P34.2886

Unallocated premium Bid/offer Expenses Interest Management charge Claim expense End of year cashflows Probability in force Discount factor Expected present value of profit

NPV of profit = .10P = 0.306767P 310.1412 => P = 1500.0 (i.e. NPV of profit = 150.0) (ii) The profit vector for the policy is (374.401, 140.827, 125.232) In order to set up reserves in order to zeroise future expected negative cash flows, we require:

125.232 = 121.584 1.03 V 1.03 (ap)68 2V = 140.827 1V = 248.016 1

2V

revised cash flow in year 1 = 374.401 (ap )67 1V = 149.887 and NPV of profit = 149.887/1.06 = 141.402 Again reasonably well done by well prepared students for part (i). Part (ii) caused more difficulties however. As before partial credit was given for showing understanding of the processes involved.

END OF EXAMINERS REPORT

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