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INSTITUTE AND FACULTY OF ACTUARIES

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EXAMINATION

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13 April 2016 (am)

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Subject CT5 Contingencies

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Time allowed: Three hours

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INSTRUCTIONS TO THE CANDIDATE

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1.

Enter all the candidate and examination details as requested on the front of your answer
booklet.

2.

You must not start writing your answers in the booklet until instructed to do so by the
supervisor.

3.

Mark allocations are shown in brackets.

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4.

Attempt all 13 questions, beginning your answer to each question on a new page.

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5.

Candidates should show calculations where this is appropriate.

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Graph paper is NOT required for this paper.

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AT THE END OF THE EXAMINATION

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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.

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CT5 A2016

Institute and Faculty of Actuaries

Calculate 0.5 p90.25 using the method of Uniform Distribution of Deaths. Show all
your workings.
Basis:
Mortality

ELT15 (Males)
[3]

(i)

State the two conditions under which the net premium prospective reserve will
equal the net premium retrospective reserve.
[2]

(ii)

Describe two reasons why these conditions are unlikely to hold in practice.
[2]
[Total 4]

Calculate:
(a)

25

p30

(b)

(4)
[40]:15

(c)

1
A50:20

Basis:
Mortality
Rate of interest

AM92
4% per annum
[4]

Describe with examples how selection applies to decrements experienced by

CT5 A20162

[6]

The table below shows an extract from a study of mortality for a small country:

Age

Population

Number of
deaths

60
61
62

9,950
8,020
6,997

52
68
73

(i)

Show that the standardised mortality ratio using ELT15 (Males) as the
standard population is 0.5. It can be assumed that the age definition of the
country matches that of ELT15 (Males).
[4]

(ii)

Explain what the result in part (i) indicates.

(i)

Prove that Ax:n 1 ax:n for the following basis.

[2]
[Total 6]

[3]

Basis:
Force of mortality
Force of interest

x is constant for all x

An endowment assurance pays a sum assured of 10,000 immediately on death or on

Calculate, showing all your workings, the premium payable continuously for a
life aged 40 exact for an endowment assurance with a term of 20 years.
[4]
Basis:
Mortality
Rate of interest

x = .01 for all x

CT5 A20163

PLEASE TURN OVER

A five year unit-linked policy issued by an insurance company to a life aged 60 exact
has the following profit vector:
(751.25, 321.06, 267.57, 192.05, 201.75)

(i)

Define the meaning of zeroisation in the context of this unit linked policy. [1]

(ii)

Explain why an insurance company might choose to zeroise the above profit
vector.
[1]

(iii)

Calculate, showing all your workings, the net present value of the profits of
this policy after zeroisation.

Basis:
Mortality
Rate of interest on non-unit fund cash flows
Risk discount rate

AM92 Ultimate
3.5% per annum
6.0% per annum
[5]
[Total 7]

A company provides its employees with a benefit on disability before age 65. The
benefit is a life annuity of 50% of salary at the date of disability.

(i)

Draw and label a transition state diagram for this benefit.

[4]

(ii)

Derive a formula for the expected present value of this benefit for a life aged x
with a current annual salary of 20,000.
[3]
[Total 7]

A company provides a cash benefit of five times salary on disability before retirement
where normal retirement age is 65.
Determine the expected present value of this benefit for a life aged 63 exact with
current annual salary of 50,000 stating all your assumptions.
Basis:
Independent force of mortality
Independent force of disability
Discount rate
Salary increase

ELT15 (Males)
0.03
5% per annum
3% at age 64
[8]

CT5 A20164

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A life insurance policy for a male life aged 55 exact provides the following benefits:

50,000 payable immediately on his death, if this occurs before the age of 65 exact.

On survival to age 65 exact, a refund of 25% of total premiums paid without

On death of the male at any time, a pension of 5,000 per annum is payable
monthly in advance to his widow (who is 5 years younger than him) for the
remainder of her life, should she survive him. (This benefit is available
throughout the lifetime of the male.)

The policy is funded by premiums payable annually in advance for five years, or until
the death of the male life, if earlier.
Basis:
Male mortality
Female mortality
Rate of interest
Expenses

PMA92C20
PFA92C20
4 % per annum
Nil

Calculate, showing all your workings, the premium for this policy.

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[9]

On 1 January 2012, a life insurance company issued joint life whole life assurance
policies. Each policy was issued to a male life aged 65 exact and a female life aged
60 exact. A sum assured of 75,000 is payable immediately on the death of the second
of the lives to die.

Premiums of 1,395.11 are payable annually in advance for each policy while at least
one of the lives is alive.
At the beginning of 2014, there were 5997 policies in force. For all of these policies,
both lives were still alive. During 2014, the following experience was observed:

for 2 policies, both lives died

Calculate, showing all your workings, the mortality profit or loss for the group of policies
for the calendar year 2014.
Basis:
Mortality
Rate of interest
Expenses

CT5 A20165

PMA92C20 for the male

[10]

PLEASE TURN OVER

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On 1 March 1997, a life insurance company issued a whole life with profit policy to a
life then aged 45 exact. The basic sum assured was 150,000. The sum assured
(together with any bonuses attaching) is payable immediately on death. Level
premiums are payable monthly in advance to age 85 or until earlier death. Compound
reversionary bonuses vest at the beginning of each policy year (i.e. the death benefit
includes any bonus relating to the policy year of death).
The company calculates the premium on the following basis:
Mortality

AM92 Select

Rate of interest

6% per annum

Initial expenses

70% of the first years premium, incurred at the outset

Renewal expenses

5% of the second and each subsequent years premium,

Bonuses:

1.92308% per annum compound

(i)

Show that the monthly premium is approximately 276.

[7]

On 28 February 2015, the company alters the policy at the request of the policyholder
to a paid-up policy with no future premiums payable. The sum assured under the
policy is reduced, with no further bonuses payable.
The company calculates the reduced sum assured after alteration by equating
prospective gross premium policy reserves immediately before and after alteration,
allowing for an expense of alteration of 175.
The company calculates prospective gross premium policy reserves for the purpose of
the alteration using the following basis:

Mortality
Rate of interest
Expenses
Future bonuses

AM92 Ultimate
6% per annum
ignore
ignore

Bonuses have vested at a rate of 2% per annum compound at the beginning of each
policy year from the date of issue of the policy.

(ii)

CT5 A20166

Calculate, showing all your workings, the sum assured for the policy after
alteration.
[6]
[Total 13]

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On 1 January 2015, a life insurance company issued four year increasing term
assurance policies with level premiums payable annually in advance for the term of
the policy, but ceasing on earlier death. The initial sum assured is 140,000, increasing
by 20,000 at each policy anniversary (the first increase taking place at the beginning
of the second policy year). The death benefit is payable at the end of the year of
death. If the policyholder survives to the end of the term of the contract, 50% of the
total premiums paid (accrued with no interest) is payable.
The company calculates the premium on the following basis:

Mortality

AM92 Select

Rate of interest

6% per annum

Initial expense

275

Initial commission

30% of the first years premium, incurred at the outset

Renewal expense

55 per annum, incurred at the time of payment of the second

Renewal commission 2.5% of the second and subsequent years premiums

Set out, in stochastic form, the gross future loss random variable at the outset
of this policy using where applicable, Tx, Kx and elements of the premium
basis that are relevant.
[3]

(ii)

Calculate, showing all your workings, the office premium using annuity and
assurance functions and setting the expected present value of the gross future
loss random variable equal to zero.
[4]

(iii)

Calculate, showing all your workings, the office premium using a discounted
cash flow projection, assuming no surrenders, ignoring reserves and using the
same profit criterion as in part (ii) above. The discount rate is assumed to be
6% per annum.
[6]

(iv)

Explain, without further calculations, the effect of:

allowing for the setting up of reserves for the calculation in (iii).

(b)

having set up reserves in (iv) (a), increasing the discount rate to 8% per
annum.
[3]
[Total 16]

END OF PAPER

CT5 A20167