‘his question paper must be returtod. Candidates are ot ‘SEAT NUMBER: Room: ermitted to remove any part fit trom the examination room, FAMILY NAME: OTHER NAMES: ‘STUDENT NUMBER: MACQUARIE UNIVERSITY ‘SESSION 2 EXAMINATIONS — November 2013 Unit Code/Name: ACST403/832/832X ACTUARIAL CONTROL CYCLE 2 ‘Thiee (3) hours plus ten (10) minutesteading time Seven (7) in total ‘Total Marks for this Paper: 100 Instructions You should answer ‘question is shown in parentheses tthe start ofthe question, questions. The number of marks for each You have been supplied with seven (7) answer booktets, Label them 1, 02, 03, OF, Q5, 06 and Q7 respectively, then answer each ‘question inthe corresponding separate booklet Write your name and student ID atthe top ofthis question paper, as well a8 on each of your answer bootlets. Hand in this question paper and your seven answer booklets a the end ofthe exam, Materials Not Permitted: No dictionaries are permite Nomprogrammable calculators that do NOT have a text retieval eapaciy are permited‘This examination is being held in a number of locations internationally and it is inevitable that ‘there willbe differences in timing of up to several hours. You are absolutely prohibited from ddoing anything that may lead to other students gaining information about this exam paper before siting for the examination. Any breaches (citer disclosing information or receiving informatio) willbe viewed as professional misconduct as well asan infringement of University ‘rules and will be deat with accordingly.‘Question 4 [13 marks] ‘My Bank MB") provides a range of financial services products to its mainly retail customers. MB has been very successful in seling credit cards to its existing customers and to new customers through a partnership with a major retail chain and an aitine. The credit cards, branded "My Money’, are an important product for MB, The credit cards provide customers with an average of 21 days free credit from the date of their purchases # they pay off the full balance on their card al the due date. For customers, ‘who choose to pay their card balances in instalments interest is charged on the outstanding balance at the rate of 1.6% per month, Inrecent years while the number of cards on issue has been steadily increasing, the proftabilty ofthe creditcard product has been declining andis now below the profit ‘objectives of MB. The My Money product manager believes this is because more ‘customers are paying off their cards on time and fewer customers are incurring interest charges on their cards, ‘The product manager has asked for your help in analysing the experience of the portfolio, land suggesting possible responses to restore profiabliy to acceptable levels, Provide the product manager with your initial thoughts on the following: (a) A list ofthe variables that will materially affect the future proftabilty ofthe creditcard Product [3 marks} (6) An outline of the steps you wil take to investigate the conclusion reached by the product manager, [4 mans] (©) Your suggestions for four (4) actions My Bank might tke to restore the profitability of the credit card portfolio and your view on the major disadvantage of each action, [Smars)Question 2 [15 marks} ‘You work for large general insurance company with a wide range of domestic and business insurance products, Your role isto assist the Appointed Actuary in calculating the liabilities forthe annual nancial statements. ‘Your fiend Sam s an analyst wih a stockbroking firm. Sam has been assessing the value Cf the general insurance companies listed on the secures exchange and has noted that the claims and premium lablities are large numbers. ‘You recently met for lunch and Sam asked: “The outstanding claims labilties of general insurance companies are critical in determining the profit of these companies but there are so many uncertainties in the amounts of future claims that there must be huge risks tat the labilies prove fo be wrong. How can | have any confidence in the published financial statements?” ‘Write down the main points you would make in answering Saris question. Your answer should include a ist ofthe main steps an actuary lakes when estimating @ general insurance company's lables. For each step, describe the measures which should be taken to ensure thatthe published lables are a5 reliable 2s possible and/or to minimise the risk of mis-estimation, Explain how the Actuarial Control Cycle can be used to Improve the reliabilty of the valuation of fabiites.‘Question 3 [14 marks} You are the actuary for the UpUpAndAway Superannuation Fund (‘USF superannuation fund for the employees of an airline company, 2 defined benefit ‘The Fund has a lability to pay future disability income benefits to ten members (‘the Claimants’) who were receiving benefits totaling $500,000 per year at 30 June 2011. The Fund set up alibilty ints balance sheet to provide forthe expected future payments. The claim payments increase with inflation, and are paid unti the claimants die, return to work, Cr attain the age of 85, whichever occurs first. So the Fund has an ongoing lability to make these payments for potentially many years into the future ‘You calculated the liability for future payments at 1 July 2011 as $5,200,000, based on the foloweg seeurtons: Interest earnings of 7% pa. ‘+ Annual inflation increases of 4% p.a ‘+ Claim payments will be made at 30 June each year; the frst payments are due at 30 June 2012 ‘+ Each case willbe reviewed on 30 June every year, immediately after the annual ‘benefit payment is made. You assume that 1 claim willbe terminated on 30 June 2012 and 1 claim willbe terminated on 30 June 2013 es a resut of the review. You will have to hold reserves at 30 June 2013 to cover the labilties for expected future claims after that date, Using the same assumptions given above, you have calculated that the required reserve at 30 June 2013 willbe $11.34976 per St of annual claim payment for claimants stil in force at that date, (@) Show thatthe actual experience had matched the valuation assumptions, your initial iabilty at 1 July 2011 would have been almost exactly sufficient to meet the expected benef payments during the fist two years and to set up the appropriate lability at 30 June 2013, [mas] ‘This question continues onthe nest page.“The actual experience in the two years ending 30 June 2013 was: + Interest earnings 8% pa. ‘© Annual inflation increases of 3% pa, + Two claims were terminated at 30 June 2012 and two claims were terminated at 30 June 2013, ‘= At30 June 2013, the liability o pay future claims for the six remaining claimants is ‘estimated to be $3,800,000, The liability was calculated using the same assumption ‘as previously, ie. the liabilty is $11.84976 per $1 of annual claim payment for claimants stil in force at 30 June 2013, (©) Calculate the actual surplus at 30 June 2013, (2 marks} (6) Analyse the surplus calculated in (b) ito the components of interest, inflation and claim terminations, in that order. [10 marks}Question 4 [22 marks) (na particular county, the superannuation eystem has traditionally provided lump sum benefits payable at retirement. Retirees would take the lump sum and invest it themselves in order to meet retirement income needs. ‘Over the last few years, afew lfe insurance companies have started to sell ifetime annuities. Retirees pay a lump sum to the insurer, which then provides a guaranteed ‘income payable for life, indexed in line with inflation ‘This product has been heavily promoted and is popular with retirees. “The prudential regulator has just announced new capital standards for annuity products, which willbe phased in over the next three years, @) 0 w ‘The Seoutty Guaranteed Insurance Company (SGIC) has recently launched a new lifetime annuity product, and new business is increasing more rapidly than expected However SGIC wil have difficulty in meeting the propcsed new capital standards, 'SGIC is considering issuing a hybrid debt security to raise addtional capital. The interest payable on the notes willbe atthe bank billrate plus a margin which reflects SGIC's credit rating from time to time. At any time within the next ten years, if SGIC’s management believes that the company no longer needs any addtional capital, it can redeem the notes. At the end af ten years, ifthe notes have not been redeemed, SGIC intends to converte notes into cumulative preference shares. The notes are subordinated to golicyholders' lables in the ‘event of winding up, but rank before SGIC's shareholders. SGIC has approached the prudential regulator to see whether the regulator would be wilng to treat these securities 2s capital for sohency purposes. How do you think the regulator would assess this request? Recommend any changes to the terms and conditions ofthe hybrids which might be desirable to the regulator (6 marks} State four other possible approaches SGIC might take, in order to sove its capital problem. Briefly describe any factors you would take into account before ‘choosing which altemative to recommend, [8 marks} Question 4 continues onthe next age.(0) At present, SGIC's lifetime annuities cannot be surrendered, ie. the customer cannot ‘cancel the annuity and ask for a refund. However the marketing manager has, pointed out that customers would prefer to have a more flexible product, She suggests that customers should be allowed to surrender their polices at any time, ‘Comment on this proposal, with recommendations for managing any risks which may arise if this proposalis adopted [8 marks}‘Question 5 [13 marks) Alt Liabilty Insurance Company ALI") is a substantial general insurance company specialising in ong tal classes of business. You are a member of the actuarial team at ALI and you have been asked to value the outstanding claime labiltios at 31 December 2013. ‘To prepare for that project you are now reviewing the assumgtions to be adopted, AL's outstanding claims liabilties ae calculated by projecting future claims payments and «discounting these payments to give a present value. An allowance for claims handling ‘expenses is included, ‘An important assumption is the future inflation rate Inflation is measured by the Ministry of Finance and the recent experience for the country has been 28 follows: [Yearended ‘Consumer pice ination | Average wage inflation 30 June 2010 3.0% 82% [0dune 2071 4.236 44% '30 June 2012 12% 41% | 30 June 2013 [24% SSS~«* (@) Give two (2) examples of long tal general insurance products and describe a typical claim for each product [2 marks) (©) Explain the relevance ofthe inflation data in the table in helping you to set your inflation assumptions fo the valuation at 30 June 2013 [S marks} () What other information will you obtain before setting your inflation assumption and ‘where will you obtain this information? (4 marks} (@)A senior executive of ALI has noted the reducing trendin national inflation measures ‘and asked you whether this wil result in lower lablites and increased profit at the ‘end of the year. Write down the main points you wil make in respending to the executive, (4marks}‘Question 6 [12 marks) (a) Briefly describe three (3) tests actuaries might use to determine whether diferent stakeholders in a fe insurance company have been treated equitably and give a practical example of each test [6 marks] (if you are the Judicial Manager of a life insurance company that used to write term life insurance polices and superannuation savings poles, outine three (3) issues you expect fo deal with which require an equitable treatment of different groups of customers, Suggest in each case an approach you might adopt to achiave an, equitable outcome, [6 marks} Question 7 [11 marks] ‘You are the Appointed Actuary to health insurer. The Chie Executive Officer has told you thathe wants to hold ares down a unproftabe levels to grow tho business rapidly, and thatif he company gets into nancial ificultes, the worst thal wil happen s the regulator vill organise a merger with another heat insurer and no-one wil be worse off. Soon aervards, at @ meeting of the crectors, you are abked about his strategy and you Tecemmend agaist. You are then ackised thatthe poston of Appointed Actuary is being advertised, and you are invited to apply for the position. (@) Explain the professional considerations involved in ths situation and the options, available to you to deal with [8 marks} ‘You decide to apply forthe position. Soon afterwards you learn that another actuary has ‘been appointed in your place (©) Describe what adattional professional obligations you have inthis situation, and how you would exercise them. [5 marks} END OF EXAMINATION 10