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Tutorial Week 5 Questions

This document discusses fundamentals of risk and risk management in life insurance. It provides sample exam questions related to distinguishing between term and cash value life insurance policies, estimating mortality rates and interest rates for pricing policies, and calculating different types of retirement income streams using an annuity. Specifically, it asks students to 1) define key elements of life insurance ratemaking and policy pricing, 2) estimate mortality rates and interest rates to price policies for a hypothetical population, and 3) calculate annual retirement incomes using a spreadsheet for fixed-term, life, and escalating annuities.

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89 views2 pages

Tutorial Week 5 Questions

This document discusses fundamentals of risk and risk management in life insurance. It provides sample exam questions related to distinguishing between term and cash value life insurance policies, estimating mortality rates and interest rates for pricing policies, and calculating different types of retirement income streams using an annuity. Specifically, it asks students to 1) define key elements of life insurance ratemaking and policy pricing, 2) estimate mortality rates and interest rates to price policies for a hypothetical population, and 3) calculate annual retirement incomes using a spreadsheet for fixed-term, life, and escalating annuities.

Uploaded by

adri kusno
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Fundamentals of Risk and Risk Management

Term 1, 2020
Tutorial Program

Tutorial Week 5

Actuarial Basis of Life Insurance

Question 1

a) Distinguish between term insurance policies and cash value policies. Explain what is
meant by the statement that term insurance is pure protection.

b) An individual purchases a $100,000 whole life policy on which he pays the first year
premium of $1,020 and dies during the year. He could have purchased the same amount
of term life insurance for $250. What happens to the $770 "overpayment" in this case?

Question 2

a) What are the primary elements in life insurance ratemaking? Which are used in computing
net premiums? The gross premium?

b) The insurer must estimate in advance the mortality and the interest that will be earned on
policyholders’ premiums. How do insurers attempt to guard against deviations from these
estimates?

c) The net single premium for a five-year term policy at age 35 is $4.87 (2001 CSO table,
female lives, 4 percent interest assumption). Why can we not compute the annual premium
for a five-year term policy by dividing $4.87 by 5?

d) You have been called on as a consulting actuary by a tribe of natives in an underdeveloped


country. Owing to warfare with the neighbouring tribes, the mortality rate in the country is
high. At the same time, the interest rate is high (10% p.a.). On the basis of the mortality
table given here, compute the following (Assumptions: $1,000 cover per person; all
premiums are collected at the beginning of the year and all claims mature at the end of the
year):

i) The annual renewable term rate for ages 21–25


ii) The net single premium for a five-year term policy at age 21
iii) The net level premium for a five-year term policy at age 21

Mortality Table
Age Number Alive Number Dying
21 1,000 10
22 990 20
23 970 30
24 940 40
25 900 50

1
Question 3

Geoff, age 65, has just retired with a superannuation accumulation of $750,000. Assume the
risk-free rate of interest (r) is 4% pa. Calculate his annual retirement income (for each year of
his retirement, assuming he lives to age 100) for each of the following possible retirement
income streams. [Assume inflation is 3% p.a. Ignore any possible Government Pension. Refer
to the 2016-18 Life Tables available on the course website - Table 1.9 Australia]

a) He buys a fixed term annuity (without escalation) for a 15-year term.

b) He buys a life annuity (without escalation).

c) He buys a life annuity with 3% escalation.

[NOTE: IT IS RECOMMENDED THAT YOU SET UP A SPREADSHEET FOR THESE


CALCULATIONS.]

References:

Textbook Chs. 12-13 (selected pages)

Annuities https://moneysmart.gov.au/retirement-income/annuities

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