TOM MBOYA UNIVERSITY
UNIVERSITY EXAMINATIONS
EXAMINATIONS FOR THE DEGREE OF BACHELOR OF ACTUARIAL
SCIENCE WITH INFORMATION TECHNOLOGY
MAC 403: ACTUARIAL MATHEMATICS II
INSTRUCTIONS
Answer Question ONE (COMPULSORY) and any other TWO questions.
Question ONE carries 30 marks, the rest 20 marks each.
QUESTION ONE [30 marks]
a. Define the following terms [12 marks]
i. Reserves
ii. Premiums
iii. Life Assurances
iv. Insurance
v. Mortality profit
vi. Unit-linked assurances
b. Calculate the annual premium for a term assurance with a term of 10
years to a male aged 30, with a sum assured of £500,000, assuming
AM92 Ultimate mortality and interest of 4% pa. Assume that the death
benefit is paid at the end of the year of death. [8 marks]
c. Consider tVx , the reserve at duration t years for a whole life assurance to
a life age x , assuming death benefits payable at the end of the year of
death and ultimate mortality, show that the net prospective reserves and
retrospective reserves are equal. [10 marks]
QUESTION TWO [20 marks]
a. A 10-year term assurance with a sum assured of £500,000 payable at
the end of the year of death is issued to a male aged 30 for a level annual
premium of £330.05. Calculate the prospective and retrospective
reserves at the end of the fifth policy year, ie just before the sixth
premium has been paid, assuming AM92 Ultimate mortality and 4% pa
interest. Ignore expenses. [15 marks]
b. A life insurance company has a portfolio of 10,000 single premium one-
year term assurances. For each policy, there is a sum assured of $50,000
payable at the end of the year if the policyholder dies during the year.
The company assumes that mortality will be 1% pa.
(i) Calculate the expected death strain for this policy.[2 marks]
(ii) (ii) Given that 89 people die during the year, calculate the actual
death strain and hence the mortality profit or loss for this policy
[3 marks]
QUESTION THREE [20 marks]
a. Consider the following group of whole life assurance policies:
Year of issue: 2011
Number in force at the policy anniversary in 2016: 1,900
Number in force at the policy anniversary in 2017: 1,867
Exact age at the policy anniversary in 2016: 70
Sum assured: 60,000 per policy, payable immediately on death
Calculate the mortality profit for this group of policies for the policy year
commencing at the policy anniversary in 2016, assuming death is the
only cause of policy termination, and that the insurer holds net premium
reserves for these contracts calculated assuming AM92 Ultimate
mortality and 4% pa interest. [6 marks]
b. level premiums are payable annually in advance for the whole of life A life
aged exactly 50 buys a 15-year endowment assurance policy with a sum
assured of Ksh50,000 payable on maturity or at the end of the year of
earlier death. Level premiums are payable monthly in advance. Calculate
the monthly premium assuming
AM92 Ultimate mortality and 4% pa interest. Ignore expenses.
[10 marks]
c. Differentiate between prospective reserves and retrospective reserves
[4 marks]
QUESTION FOUR [20 marks]
A life office is planning to issue a new series of three-year unit linked
endowment policies. Two designs of policy are under consideration, both
having level annual premiums of Ksh1,000.
Type A: 85% of the first year’s premium and 101% of each subsequent
premium is invested in units. On surrender the bid value of the units allocated
is paid.
Type B: 95% of each premium is invested in units. On surrender the bid value
of the units allocated is paid less a penalty of 10% of the total premiums
outstanding under the policy.
There is a bid/offer spread in unit values, the bid price being 95% of the offer
price. A fund management charge of 1% of the value of the policyholder’s fund
is deducted at the end of each policy year.
The death benefit, which is payable at the end of the year of death, and the
maturity value are equal to the bid value of the units allocated. Surrenders are
assumed to take place at the end of the year.
The office’s expenses in respect of the policy are Ksh100 at the start of the first
year and Ksh30 at the start of the second and third years.
The office holds unit reserves equal to the bid value of the units and zero non-
unit reserves.
The dependent probability of mortality at each age is assumed to be 1% and
the dependent probability of surrender at each duration is 5%.
The non-unit fund is assumed to grow at the rate of 7½% pa.
i. Calculate the unit fund values at the end of each year assuming that the
growth in unit value is 7½% pa and hence calculate the estimated
maturity proceeds for each policy type. [8 marks]
ii. Calculate the net present value of the profit that is expected to arise
under each policy type, using a discount rate of 10% pa.[12 marks]
QUESTION FIVE [20 marks]
A life insurance company sells a 3-year regular-premium endowment
assurance policy to a 55-year-old male. The sum insured is £10,000 (payable
at the end of year of death). Initial expenses are 50% of annual premium,
renewal expenses are 5% of subsequent premiums. Premiums are payable
annually in advance. There is a surrender benefit payable equal to return of
premiums paid, with no interest. This is paid at the end of the year of
withdrawal.
The company is required to hold net premium reserves, calculated ignoring
surrenders. Calculate the projected yearly cashflows per policy in force at the
start of each year, using the following bases.
For pricing: AM92 Ultimate mortality, 4% pa interest, expenses as above and
ignoring surrenders.
For valuation: Interest and mortality as per pricing.
For future cashflow projection: Interest and expenses as per pricing, dependent
surrender and mortality probabilities as in the table
below.
Age x ( ) ( )
55 0.005 0.1
56 0.006 0.05
57 0.007 0.05
58 0.008 0.01
59 0.009 0
