Professional Documents
Culture Documents
EXAMINATION
21 April 2015 (pm)
Enter all the candidate and examination details as requested on the front of your answer
booklet.
2.
You have 15 minutes before the start of the examination in which to read the
questions. You are strongly encouraged to use this time for reading only, but notes
may be made. You then have three hours to complete the paper.
3.
You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4.
5.
Attempt all seven questions, beginning your answer to each question on a new page.
6.
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.
CA12 A2015
Outline reasons why an individual may purchase life insurance that is not the most
appropriate for their needs.
[5]
Following the acquisition, the pension scheme has been closed to future benefit
accrual. The multinational groups draft accounts show a materially different position
in respect of the pension scheme, compared to what was shown in the subsidiary
companys last set of accounts before the acquisition.
(ii)
A large bank is about to launch a new product designed for sophisticated investors.
The product will involve direct investment in a number of markets, together with
associated derivatives.
The bank also intends to offer an insurance policy linked to the new product so that
investors who take out insurance will receive protection against large falls in the value
of their holding in the new product.
When setting the premium rates for the insurance policy, the bank has used advanced
stochastic techniques to model a range of financial outcomes. This model is only
accessible to and understood by a small specialist team within the bank and is
therefore treated as a black box by all others in the bank.
The results of the model suggest that the bank will be able to invest the insurance
premiums in such a way that the invested premiums will be almost certain to meet any
claims. The Chairman of the bank interprets this to mean that this insurance policy
can, in effect, achieve guaranteed profits.
Discuss why it may not be appropriate for the Chairman to accept the results of the
model in this way.
[9]
CA12 A20152
(i)
(a)
(b)
(ii)
[2]
(iii)
Describe how these providers can help individuals by sharing the financial
risks associated with longevity, commenting on how effective these
mechanisms might be for transferring longevity risk over the next fifty years.
[7]
(iv)
Suggest how longevity risk for a defined benefit pension scheme might be
transferred within the alternative risk transfer market, explaining why
investors might wish to accept this risk.
[3]
[Total 14]
A bank is about to set up a new subsidiary company that will sell life insurance
products.
(i)
[6]
(ii)
Explain why the banks insurance subsidiary will need separate capital from
its parent company.
[2]
(iii)
List four ways the bank could fund the subsidiarys capital requirements.
[2]
(iv)
Describe how a regulator might set a minimum capital threshold for the
subsidiary.
[3]
Five years later the subsidiarys capital has fallen below the required threshold agreed
with the regulator.
(v)
Describe the actions that the regulator can take to address this situation.
[4]
[Total 17]
An insurance company intends to offer a contract to individuals who are currently ill.
The insurance company will pay medical and care costs relating to the current illness
in return for an initial single premium.
(i)
(ii)
Discuss how the underwriting process could be used to assess/price the risks.
[7]
(iii)
Describe other management tools that the company could use to control these
risks.
[4]
[Total 19]
CA12 A20153
[8]
List other risks which could have been covered under this insurance policy.
[3]
(ii)
Describe possible sources of data, and their limitations, for the risks of
luggage being lost or damaged.
[6]
(iii)
Outline how the insurance of luggage being lost or damaged could be priced,
assuming that detailed credible data was available.
[10]
(iv)
Discuss reasons why providing this insurance cover may not encourage
passengers to fly from the airport.
(v)
[4]
Explain how the low likelihood risk of a plane with over 300 passengers on
board crashing at the airport could be managed by the insurance company. [5]
[Total 28]
END OF PAPER
CA12 A20154
EXAMINERS REPORT
April 2015 examinations
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
Page 2
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
Generally well an answered, with better candidates coming up with a wider range of reasons.
(i)
Assumptions used
Actuarial method used
Value of liabilities accruing over the year
Increase in the past service liabilities over the year
Investment return achieved on the assets over the year
Surplus or deficit at the end of the year
Page 3
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
(ii)
Page 4
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
General differences
There may have been other significant events, such as transfers of members,
impacting the accounts, e.g. part scheme buy-out.
General experience may lead to different results, for example if asset return
had been strong over the year.
Previous results were incorrect e.g. due to model errors.
Changes in market conditions may lead to significant differences in
assumptions which may also impact on the accounts.
This question was answered well by most candidates with most scoring the majority of marks
available.
The chairman is unlikely to be a member of the specialist team responsible for the
modelling
As a result the chairman may be treating the model as a black box.
He may find it very difficult to interpret or understand the model and its output.
Or may have relied solely on the advice of others, including experts in those areas
and so he may have no way of sense checking the reasonability of the output or
challenging basic assumptions.
An independent peer review can provide assurance on the quality of the results.
These experts will have a vested interest in the use of the model (bonuses etc.) and so
may underplay the risks.
Models are generally parsimonious, so the model may contain errors due to the
simplifications taken, or not reflect basis risk.
They also may not be able to effectively communicate the risks in a way that the
chairman can understand.
Full appreciation may require a lot of output, which adds to the problems with
understanding.
Given the detail and complexity, the chairman may end up assuming that it must be
right blinded by science and presentation.
In any event, it is likely that many assumptions will have been made; together with
assumptions about correlations.
Page 5
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
Page 6
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
(i)
(a)
(b)
This risk is important: risk that the individuals savings are used up
while they are alive so unable to maintain desired standard of living.
To the individual this risk is non-diversifiable, so transfer is best way
to manage it.
(ii)
the State
Employers or groups of employers
Individuals
Financial institutions or other corporations
(iii)
Page 7
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
(iv)
Page 8
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
Part (i) was generally well answered; most candidates got the definition correct, better
candidates gave sufficient detail in (b). Part (ii) was well answered with most scoring full
marks. Part (iii) was answered reasonably well, but the better candidates managed to focus
on each of the four parties in a structured way. Part (iv) was answered reasonably well with
most mentioning longevity swaps but the better candidates went into more detail and had
considered other ideas.
(i)
Page 9
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
(ii)
In theory the subsidiary could simply draw down from the banks capital when
it needs resources.
But the bank may not be willing/able to support the subsidiary when it
becomes necessary. Therefore, usually there is a legal requirement for
subsidiary companies to have sufficient capital to trade independently. And
also there is likely to be specific legislation on insurance companies imposing
capital requirements.
Also, the banks capital requirements will be suitable for the banking industry
and may not be adequate for insurance
To allow the bank to operate independently of the bank in the case that the
bank gets into financial difficulty.
(iii)
Page 10
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
(iv)
The regulator will monitor the adequacy of the provisions that the provider
sets aside against future liabilities. It may even prescribe the basis
(methodology and assumptions) by which these amounts are calculated.
Given that the future is impossible to predict, the regulator will require that the
provisions will contain margins above those that might be assumed on best
estimate basis.
The minimum capital requirement can be a highly prescriptive, prudent
valuation basis
The minimum capital requirement could be a simple model based in industry
average ratios
The minimum capital requirement could be an absolute minimum monetary
amount, e.g. 10m
Or it can be established on a best estimate basis with substantial additional
capital as a buffer for general adverse experience
Or a combination of these two approaches
(v)
There are regular reporting requirements that enable the regulator to monitor
the financial position of the company and it is probably this reporting that has
shown the insurance company to be below the threshold.
The regulator would expect the company to establish a recovery plan to get
above the threshold; and this will be monitored closely by the regulator
The regulator could actively be involved in understanding what the insurance
company is doing on a day by day basis; e.g. investment purchasing
This could involve the insurance company needing to get some actions
(anything around strategy as an example) signed off by the regulator as well as
the normal board review
The regulator could decide to close the life insurance company to new
business; so that new policyholders are not entering a fund whose solvency
may be in doubt
If the provider was closed to new business it will still have outstanding
liabilities but in these circumstances it should be able to make significant cost
savings which would improve the position
Page 11
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
There would also be a release of capital that would have been tied up in
financing any new business strain of the business on the books
The regulator could request the bank puts in additional capital into the life
insurance company to get the company above the threshold again
The regulator could insist on the bank selling the company to another provider
who would take on the liabilities
The regulator could force the sale of part of the inforce business to raise
capital.
The regulator may be able to override contract terms to remove discretionary
benefits or reduce financially onerous guarantees.
The regulator will take the more severe actions if the insurance company was
significantly below the threshold (or even below the solvency position on a
best estimate basis), for example take over running or wind-up company.
Part (i) was generally well answered with most candidates producing a few ideas on why
capital would be required. Part (ii) was reasonably well answered. Part (iii) was
disappointingly answered with few thinking wide enough to score the required marks. Part
(iv) was not very well answered with few candidates picking up the required depth or detail
to score well. Part (v) was reasonably well with most candidates suggesting a few ideas, but
the better candidates expanded on their answers and thought how the whole process would
work from monitoring to selling i.e. considered all the possible options the regulator has.
(i)
Page 12
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
Page 13
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
The proposal form will be used for the initial collection of information on the
risk.
Underwriting can be used to manage risk in the following ways:
It can protect a provider from anti-selection
It will enable a provider to identify risks for which special terms need to be
quoted
For really sick (or substandard risk) the underwriting process will identify the
most suitable approach and level for the special terms to be offered
Adequate risk classification within the underwriting process will help to
ensure that all risks are rated fairly
It will help in ensuring that claims experience does not depart too far from that
assumed in the pricing of the contracts being sold.
For larger proposals the financial underwriting procedures will help to reduce
the risk from over insurance.
Medical and other evidence
The company will want to obtain evidence about the health of the applicant
and in particular what illness they have.
This will be considered alongside the current treatment; and a view formed of
the likely needs in the short and long term for care.
The company is looking to assess the length of time the individual will be ill,
recovery rates and the likely costs of the care/medicine.
Will consider the general health of the individual (e.g. BMI, other
conditions) that might impact on recovery from illness.
Also will want to consider the areas record in terms of recovery rate; so will
ask for doctors that are treating them along with hospital information.
If applicable consider whether the individual has had the illness before; and
previous recovery times and/ or impact on future recovery times.
Specification of terms
Applicants who only have a minor condition and the needs for care are limited
might be offered a low premium on the basis that costs are likely to be low.
If the individuals conditions mean that costs are likely to be higher, payable
over a longer term or are variable might be offered a high premium on the
basis that costs are likely to be high.
Page 14
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
If the member has had poor recovery times from previous illnesses the
premium could be adjusted to reflect this.
If the illness is unknown or the data available is severely limited then the
illness could be excluded from the contract, i.e. no insurance offered.
Certain types of care/medicine could be excluded if there was evidence that
there was no link to improving the illnesses.
The insurance company could restrict available medical and care
treatments to only those from an approved list, or from approved
providers to manage the costs.
(iii)
Diversification
The company will be looking for different geographical areas of the business
(i.e. not all exposed to territory).
The insurance company will also want to diversify by having a large
number of individuals insured with a number of different illnesses to limit
exposure to particular treatments and care needs.
If the company is planning to reinsure it might want to consider diversifying
by using more than one reinsurer.
Page 15
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
(i)
(ii)
The main source would typically be historic data from the airport
However, six months data is unlikely to provide a reliable sample size
Particularly as this data will include the initial opening of the airport
This is the period when staff will be trained / will be less familiar with
procedures and hence more issues may have occurred
Data from other comparable airports could be used
But would need to consider an appropriate peer group in terms of
Volume of luggage handled and number of different flights handled
Location of airport and any structural differences
Page 16
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
(iii)
There will be two key elements underlying the pricing of the risk
The expected number of claims
The expected value of the average claim
Will need to sort the data received into homogeneous groups
In order to assess the likely claim levels
Without distortions due to underlying heterogeneity
Expected number of claims will depend on total volume of luggage handled
And the expected rate of loss or damage
An initial assessment will be made on the likely risk of a claim per passenger
For example for a given group there may be a 1% chance of each passenger
making a claim
When pricing the risk there may need to be a margin for prudence
Page 17
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
(iv)
Page 18
Being offered a service for free will likely encourage passengers to use the
airport
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
Although the actual impact would depend on whether the service can be
effectively advertised to make passengers aware of the service
And whether this conveys additional value
Benefit may have limited perceived value for individuals who have never lost
or damaged luggage. May be more valuable for those that have
In the context of the choice to use an airport the insurance may be a relatively
minor consideration
As if the airport does not offer the flight time / destination required a
passenger will not choose that airport
The airport may have a poor reputation
Travel costs may he higher due to cost of free cover recouped through
higher ticket prices.
The convenience of access, or parking facilities, may also be more significant
factors in the choice of airport
Some passengers will already have insurance for their luggage and hence this
benefit may be of no value
As each flight involves two airports, passengers may need insurance for the
other location anyway which limits the perceived value
And they may want insurance for the other risks which arent covered
It may be difficult for passengers to purchase insurance for these other
elements in isolation
The insurance on a crash may be viewed as sufficiently unlikely to be
perceived as a valuable benefit
Some passengers may query why this insurance needs to be offered, and if the
money could be better spent improving facilities
By offering insurance there may be an implication is that crashes or
loss/damage of luggage is likely; which would be a deterrent not an incentive
to use the airport
(v)
Low probability high risk events can only be diversified in a limited way
For example by insuring a large number of these risks
Where the probability of a claim is independent
Page 19
Subject CA1 Actuarial Risk Management, Paper 2 April 2015 Examiners Report
This would be achieved if there was a very large volume of flights from the
airport
Or if the insurance company was able to provide similar cover for a number of
other airports
Or if they provide other kinds of insurance in sufficiently large quantities to
diversify, for example other travel insurance products
Reinsurance may be another way of managing this risk
In particular catastrophe insurance would be appropriate
Although this would depend on the terms available, and whether the insurance
is able to protect against the level of risk required.
The insurance company could just accept that the risk exists
And that if it occurs the payout of 30,000,000 or more will ruin the company
Other controls could be used to help reduce the risk
For example requiring greater vigilance by air traffic control
Excluding flights to airports with high crash rates
Or insisting that additional checks are made prior to take off to ensure all
planes are fully flight worthy
Tight policy wording defining an insured event, e.g. must be a scheduled
service, and only for incidents with x miles of the airport.
Part (i) was well answered with the better candidates giving more risks than weaker
candidates. Part (ii) was well answered with one more source of data being mentioned by
most candidates, better candidates described these sources in more detail along with giving
comments on their suitability. Part (iii) was less well answered with little detail being given
on some elements of the answers, those candidates who understood the pricing details of a
general insurance product gave more structured answers and scored well when tailored to
the solution. Part (iv) was well answered with most giving reasonable answers, with the
better candidates giving more than a few reasons. Part (v) was less well answered, with most
candidates mentioning reinsurance with only the better candidates going into other ideas.
Page 20
2
3
4
5
6
EXAMINATIONS
7
8
9
10
11
12
Paper Two
13
14
15
16
17
Enter all the candidate and examination details as requested on the front of your answer
booklet.
2.
You have 15 minutes before the start of the examination in which to read the
questions. You are strongly encouraged to use this time for reading only, but notes
may be made. You then have three hours to complete the paper.
3.
You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
24
4.
25
5.
Attempt all seven questions, beginning your answer to each question on a new page.
26
6.
18
19
20
21
22
23
27
28
29
30
31
32
33
34
35
CA12 S2015
An insurance company has been selling a critical illness insurance product for a
number of years.
In general, the premiums payable under this product are towards the higher end of the
range of premiums prevalent in the marketplace for this type of business. However,
over many years, the insurance company has developed a reputation for being flexible
and relatively generous when deciding on whether to pay claims.
The company now intends to introduce a new basic critical illness product.
The existing product will continue to be sold.
The premiums payable under the new basic product will be considerably lower than
those under the existing product. To compensate, under the new basic product,
tighter and more stringent medical criteria will need to be satisfied before a claim will
be paid. These criteria will be rigorously enforced.
(i)
Explain why policyholders who opt for the new basic product as opposed to
the existing product may end up feeling that they have been unfairly treated.
[4]
(ii)
Suggest with reasons two actions that the insurance company could take to
reduce the risks of policyholders feeling that they have been unfairly treated
under the new basic product.
[2]
[Total 6]
A new regulation is being introduced which will ban the payment of any commission
in connection with all insurance contracts. This will apply both to policies bought
directly from insurance companies and those bought via a third party (e.g.
independent advisors).
Instead, third parties will have to charge their customers (i.e. policyholders) explicitly.
This will be in the form of a fee for their services. That is, policyholders will pay a
premium for their policy plus a fee to any third party.
Discuss the possible implications of this new regulation for market premiums and
hence for insurance companies.
[10]
CA12 S20152
(i)
[4]
An insurance regulator is concerned that a large number of term assurance claims are
being declined. Hence, a new regulation is being introduced that only permits term
assurance claims to be declined if the relevant insurance company can prove that the
claim is fraudulent. The regulation will apply to both new and existing policies.
(ii)
[6]
(iii)
Suggest other possible actions that insurance companies may have to take in
relation to new term assurance policies.
[3]
[Total 13]
(i)
[4]
Describe the main criterion that the insurance company would use to
determine whether or not to investigate a particular claim.
[3]
(ii)
A motor insurance company has reason to believe that an organised gang of criminals
are causing accidents in order to create a large number of fraudulent claims. For
example, attempting to claim under other drivers third party liability policies.
(iii)
Discuss the features of particular claims that the insurance company could
consider when trying to identify and investigate such fraudulent claims.
[8]
[Total 15]
CA12 S20153
Three domestic investment opportunities are being advertised with the following
prospective total returns, if held for the next two years:
Investment A
A fixed guaranteed return of 3% p.a. with an estimated probability of 99% or a
total loss with an estimated probability of 1%.
Investment B
Estimated returns of: 1% p.a. with an estimated probability of 10%
2% p.a. with an estimated probability of 20%
3% p.a. with an estimated probability of 30%
4% p.a. with an estimated probability of 25%
5% p.a. with an estimated probability of 15%
Investment C
A fixed guaranteed return of 50(fifty)% p.a. with 100% certainty.
Government two year bonds are currently providing an estimated prospective total
return of 2% p.a.
(i)
Calculate the expected cash amounts at the end of the two year period if $100
is invested in each of the three investments.
[4]
(ii)
Suggest, with reasons, assets that could back each of the investments.
(iii)
Outline the type of individual for which each investment could be suitable. [3]
[Total 15]
[8]
List the assumptions the actuary will need to make when carrying out the
investigation.
Discuss the suitability of the historical data likely to be available for
determining each of the assumptions in (i).
CA12 S20154
[4]
[10]
The investigation has concluded that the costs of providing the current benefits are too
high and that changes to benefits are needed.
The organisation wishes to retain the scheme and its broad, general features. But at
the same time they would like to consider options for reducing the cost.
(iii)
CA12 S20155
A government owned postal service has, until recently, enjoyed a monopoly on the
delivery of letters and parcels within a country. Accordingly, the terms they operate
under are regulated by the government. In particular:
The price charged must be the same for every delivery irrespective of distance or
remoteness.
That is they cannot charge different prices for delivery to different addresses.
Competition is now allowed. Commercial companies have entered the market but
they are not subject to the price and delivery constraints that apply to the government
owned postal service.
That is, competitors can charge what they like for each delivery and they do not have
to deliver to every address.
(i)
Outline the main risks that all postal delivery companies would need to have
cover for under their employers liability and public liability insurance
policies.
[4]
(ii)
Describe how the different application of the price and delivery constraints
may affect the profitability of the government postal service in this
competitive environment.
[5]
(iii)
be beneficial
be detrimental
[2]
The government postal service includes a large network of post offices that offer
various retail services as well as enabling customers to post letters and parcels.
The management accounting system used by the government postal service to process
and record transactions is very old and out of date. The directors have decided to
replace the whole system with a new highly sophisticated system. This new system is
currently being used by large life insurance companies.
(iv)
(v)
List the requirements that any project should meet in order to ensure
successful project management.
[4]
Discuss possible problems that could arise from the introduction of the new
accounting system.
[8]
[Total 23]
END OF PAPER
CA12 S20156
EXAMINERS REPORT
September 2015
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.
F Layton
Chairman of the Board of Examiners
December 2015
Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
A.
B.
Page 2
Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
4. There were some questions that did test bookwork and some candidates did not seem to
have the depth of knowledge to score well on these questions and therefore demonstrate
knowledge of the whole course.
5. It is also worth noting that this exam assumes knowledge of previous courses and can
ask for relevant mathematical calculations to be made. Therefore candidates should
assume that a calculator may be required.
C.
Comparative pass rates for the past 3 years for this diet of examination
Year
September 2015
April 2015
September 2014
April 2014
September 2013
April 2013
%
43
44
50
41
49
44
Reasons for any significant change in pass rates in current diet to those in the
past:
The pass rate for this examination diet is slightly lower than the April 2015 rate, but not
materially different. Variation in the pass rate between sessions is expected as different
cohorts of students sit the examination.
Solutions
Q1
(i)
More claims will be rejected under the new product than under the existing
one.
Hence, policyholders who were expecting their claims to be met, may feel
unfairly treated if those claims are rejected.
The new product may be marketed as a cheap simple (no frills) alternative.
That is, creating the impression of being similar to the existing product in its
main features. In practice there may be material differences e.g. in terms of
illnesses covered.
Policyholders may perhaps accept a lower level of benefits as a quid pro quo
but they may not fully appreciate that the lower premiums will need to mean
fewer claims being paid.
This will be especially true for existing policyholders who are used to the
current payment regime.
Page 3
Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
It will also be relevant if, in the past, the insurance company has emphasised
its attitude to paying claims as a positive.
That is past practice and communication may have given policyholders
misapprehensions about the new product.
The new payment terms may not have been clearly stated or advertised. In
particular if an intermediary is involved.
Or they may have been set out in an overly complex or obscure way (lots of
small print) which, policyholders may not be able to understand.
If policyholders of the new product are aware of policyholders of the existing
product whose similar claims have been paid whilst theirs are rejected,
grievances will arise.
In any event, keeping the existing product, will mean two different payment
regimes which, may be hard to justify.
(ii)
They could market test the new product to assess whether the new terms are
clear enough.
Alternatively, they could put a lot of effort and resources into advertising and
communications to leave policyholders in no doubt maybe clear with the
Regulator.
They could have independent medical assessors (paid for by the insurance
company) who would judge whether particular claims should be paid.
Q2
Part (i)
This part of the question was well answered with most candidates
scoring well.
Part (ii)
Most candidates came up with one action for this part of the
question with better candidates coming up with two distinct actions.
Page 4
Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
This is because the direct sales force will now be paid as other staff are. That is via
salary and bonuses and not via commission.
Hence the expense loadings will be different as allocations will change.
This could see changes between and within classes (by type of policy) but with the
overall premium levels being similar.
Commissions are usually charged as a percentage of premiums.
Fees will be related to actual costs incurred and work done.
Hence net premium plus fee maybe more or less than the previous premium.
In particular, there will be less difference between fees on smaller and larger policies
than between commission payments fixed cost issues making smaller policies
relatively more expensive.
Hence, there is likely to be a particular problem where premiums are low and where it
is no longer financially worthwhile advisors targeting sales at this segment of the
market as the fee would be too high to be afforded by customers.
Hence there could be less cross-subsidy from large to small policies.
One of the key issues is that if commission has driven advisors to sell particular
products, then those products will be sales driven, rather than driven by the
policyholder demand.
It is likely that commission driven products sales will reduce significantly in volume
as agents/advisors will now have to justify their fees/salary.
Regular monthly premium policies will present significant issues as policyholders will
not be used to paying a substantial fee relative to the regular premium at outset.
The alternative to one large initial fee is a smaller fee with each premium (or stepped
fees).
This will be unclear, confusing and cause practical difficulties in ensuring fees are
paid (lapses).
Average premiums per policy for advisor driven sales are likely to increase as
advisors target higher net worth customers that are financially worthwhile servicing
(can afford fees).
Overall premium income is likely to reduce unless an increase in higher premium
policies offsets a reduction of low premium policies.
This may mean that overall premiums have to rise due to fixed cost issues.
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
If an insurance company targets lower net worth customers they are most likely to see
a significant new business reduction.
If they target high net worth customers then they are likely to experience greater
competition as insurance companies move to target business that is financially viable
for agents/advisors to sell.
Such competition could reduce overall profitability all chasing a smaller market.
This question was poorly answered. Few candidates understood the
difference between selling via 3rd party advisors and direct sales staff and how
this could be remunerated (e.g. commission versus salary) and therefore
gave answers that were incorrect. The question was worth 10 marks and
very few candidates made enough points to score well on this question.
Those that did had well planned out and structured answers.
Q3
(i)
(ii)
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
Not meeting the claim event definition e.g. being covered by an exclusion
such as suicide (hazardous activities).
Fraud e.g. a death hasnt actually occurred. In some cases, deaths may be
reported to have taken place overseas with weak supporting evidence.
Other crime e.g. someone being killed for the insurance proceeds.
It will be important to clarify what is meant by fraud.
Presumably deliberately lying on an application is but making a genuine
mistake isnt?
Also, it will be necessary to check whether exclusions will be allowed and if
so, to what extent.
It may be necessary to adopt clear rules to determine which claims to
challenge.
Expenses may reduce where it is no longer worthwhile challenging whether
the claim is valid.
However, if challenges do go ahead, expenses may increase as more work will
be needed to justify rejection.
For deaths that are clear-cut (probably most claims) there will be little impact
on the number of claims being paid.
It will become harder to decline claims unless it is clear that the claim
definition has not been met (exclusions etc.) or fraud is easy to prove.
This is because the onus will have moved on to the insurance company to
prove that the applicant had deliberately non-disclosed to a standard that
demonstrates fraud.
Hence more claims being paid which will cause an increase in overall claims
costs.
Where there is reinsurance then the direct insurer is likely to have to pay more
claims where the reinsurer does not pay, further increasing the cost of claims.
(iii)
The main issue will be poor (i.e. undisclosed) information that will mean more
claims being paid than would have been assumed.
Hence:
Increase the quality of underwriting at outset. That is, get as much
information as possible.
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
Good sources that are less likely to be vague e.g. doctors reports will help.
Revise policy wording so the claims criteria are significantly clearer. That is,
in line with the spirit and interpretation of the new regulation e.g. on
exclusions.
Lots of warnings about consequences of non-disclosure may encourage better
information.
Negotiate reinsurance terms so that there is full alignment between the insurer
and reinsurer so that there are fewer cases where the reinsurer rejects claims.
Increase new business premiums due to more expected claims and general
uncertainty over the impact.
In extremis, the insurance company may decide to withdraw from the market.
It may be necessary to have more premium bands or reject more applications
to counter increased risks.
Part (i)
This part of the question was answered well, with most picking up
the bookwork marks on offer.
Part (ii) This was answered satisfactorily with most candidates scoring some
marks, better candidates went into more detail in their answers.
Part (iii) This was answered reasonably well, with most picking up the easy
actions that could be taken, better candidates thought more widely
on the possible actions specific to term assurance.
Q4
(i)
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
It may help in setting terms and conditions e.g. for new developments
(technology) or types of claims risk profile changing.
It may help in providing advice to the insured on how to avoid (or reduce)
claims safety and security issues. Or indeed to manufacturers on design
issues.
(ii)
(iii)
Claims will arise from incidents that are the fault of the criminals but are made
to look like the fault of the insured drivers.
Hence, the insurance company will focus on scenarios where this possible
e.g. incidents involving more than one vehicle or pedestrians.
In particular, claims for injuries that are hard to verify or assess e.g. whiplash
and that are not too serious.
It is possible that claims for damages to vehicles could be involved e.g. if
garages are providing inflated quotes for repairs etc.
The insurance company will want look for similarities amongst claims
involving common factors.
In particular, the features of the incidents will probably be broadly alike
e.g. crashes at roundabouts, traffic lights, parking, rear shunts etc.
Locations will tend to be the same both in terms of general areas (e.g. South
Manchester) and specific sites e.g. at a few notorious accident black-spots.
Time of day could be a relevant feature e.g. in rush-hours.
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
The same vehicles could be involved (if not damage claims), with possibly the
same claimants or, more likely, registered owners or maybe addresses of
claimants/owners.
The information provided on the claim form will be a useful source.
Again it is likely that common descriptions or words and phrases will be used.
This will be particularly relevant if claims are coming via a claims
management agency and they are preparing the documentation.
Check if the same doctors are verifying injuries and their extent solicitors
may also be involved for the same purpose i.e. quantifying claims.
The behaviour of claimants (as described on claim forms) could be similar
e.g. in how they approach the insured and things that they say or do
exaggerated actions trying to emphasise injuries. Look for unusual behaviour
repeated in many claims.
Likewise, the same witnesses may be being used making the same comments.
It is likely that drivers who are very likely to be insured (or will not cause a
fuss) will be targeted e.g. company car drivers, the elderly or respectable
looking.
It likely that individual claims will not be very high i.e. trying to keep below
the radar, threshold for investigation.
It is possible that stolen cars may be used.
Hence co-operation with police databases may help.
Likewise, co-operation with other insurance companies may help if they are
experiencing similar problems.
Part (i)
This part of the question was reasonably well answered, with most
picking up relevant points. However a number of candidates did not
state the obvious (e.g. check that the claim was valid) and therefore
missed easier marks. Better candidates thought more widely and
covered setting terms and conditions.
Part (ii) This was answered reasonably well, with most candidates
identifying amount as key and then elaborated well to score
sufficiently.
Part (iii) Again this was answered reasonably well, but given the question
was worth 8 marks, many candidates did not make enough points to
score all the marks available to this part.
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
Q5
(i)
(ii)
(a)
Amount
(b)
(c)
The guaranteed return implies a fixed 2 year term (if not, unknown
price).
It also implies no income (or guaranteed reinvestment rates).
Due to unknown reinvestment rates (probably).
The relatively low return above government implies relative security.
The default risk implies a corporate issuer.
Likely assets are commercial loans or paper from a highly rated entity.
(b)
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
Though a case could be made for portfolios of long (not short) bonds
or property.
(c)
(iii)
(a)
(b)
Someone less risk averse or with no specific liabilities (or who has free
capital).
Perhaps a younger person saving for retirement or looking for
relatively high real (but not very high risk) returns.
(c)
Part (i)
Part (ii) This question was answered reasonably well, but some candidates
failed to comment on the likelihood of the returns from investment C.
Part (iii) This had mixed responses, those candidates that analysed the
investment opportunities and considered the characteristics of each
investment scored well.
Q6
(i)
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
Current index levels are likely to be a better guide to future levels of inflation.
Government projections and the risk free real returns indicated by the
current yields on long-term index-linked bonds could be used e.g. yield gap v
conventional bonds.
It will be important to use an index that relates to how benefits (in deferment
and payment) actually increase e.g. RPI or CPI.
There may be data available on historic levels of mortality in the country,
e.g. general population mortality.
There will also be insurance company and general pension scheme data which,
may be more useful (selection by employees joining the scheme).
There may have been recent investigations of scheme mortality.
Separate rates will be needed for rates in service, after normal retirement, after
ill health retirement and for early leavers.
There may be less scheme or organisation data for ill-health or deferred
mortality.
The data will need to be relevant to the individuals in the scheme and
adjustments may be needed to allow for this (e.g. if not from scheme sources).
This may be particularly relevant if the organisation is non-standard and hence
has unique mortality features.
The historical data can be used to project future improvements in mortality.
Mortality data is mainly affected by medical advances and historical data
should be considered with this in mind.
This is likely to result in significant emphasis being placed the most recent
data with consideration of past trends and their underlying reasons being
important in determining the extent of future change.
Historical scheme data e.g. experience investigations can also be used when
determining the probability of individuals leaving employment or becoming
ill. But it may be volatile or out of date. Non scheme data is probably of less
use here.
The organisation may be able to provide information on likely future rates of
withdrawal e.g. if they have significant changes in mind (could be
confidential).
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
They may also have information on how ill health retirement rates relating to
the scheme may change e.g. changes in work practices and the business or
how the definition in the rules is applied.
Historical country, industry and scheme data on proportions married or with
dependants may not be of much use.
Cost will depend on the circumstances when benefits become payable.
For example married at death, leaving or retirement.
Common law marriages or same sex relationships may give rise to benefits in
the future.
(iii)
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
This question was answered well with most candidate covering all
the relevant assumptions.
Part (ii) This question was generally poorly answered. Those that structured
their answers did well, focusing on more than one or two
assumptions covered in part (i).
Part (iii) Some good answers here with the best answers considering a
number of actions rather than just focusing on one or two possible
actions.
Q7
(i)
Employer
Injury or accident to employees at work e.g. sorting machinery or related.
Issues to do with delivery routes e.g. claims relating to heavy loads, faulty
equipment e.g. vehicles.
Claims relating to workloads e.g. too excessive or stressful (time deadlines).
Claims relating to dangerous practices (negligence) e.g. being sent into
dangerous areas, lack of protective clothing (against weather or visibility).
Public
Lost, stolen or damaged letters or parcels could be very valuable.
Injury or accident to members of the public e.g. from vehicles.
Damage to property caused in delivery e.g. trampling gardens etc.
Injury to the public whilst on company property e.g. whilst collecting things.
(ii)
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
In any event, the government wont have the expertise to set correct prices.
As above, this implies low profits or clawback of excesses.
The government postal service may give input as they will have expertise
but this could be ignored.
Competitors can and will cherry pick. That is they can choose not to deliver to
certain addresses
They will deliver on low cost routes and ignore high cost ones (e.g. urban v
rural).
They can undercut the government service on price on low cost routes.
Hence the government service will be left with high cost routes and the same
price for all routes means losses on those routes.
Competitors will have lower admin costs as they will be selective needing
lower overheads.
Compliance with regulation implies more costs for the government service.
Essentially, competition takes the profitable services.
(iii)
(a)
Beneficial
More on-line shopping implies more need for delivery of purchased
goods.
(b)
Detrimental
More e-mail communication implies fewer letters.
(iv)
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
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Subject CA1 (Actuarial Risk Management), Paper 2 September 2015 Examiners Report
In particular the postal service is primarily retail based. There will be some
complications where the service acts as an agent e.g. benefit or bill payments.
But generally accounting will be about reconciling revenue to sales.
Life insurers are involved in managing customer policies and accounts in
particular linking benefits to premiums. Record keeping and updating will be
more complex than for a retailer.
The need to calculate reserves and value assets will add further complications.
Hence the new system is likely to contain a lot of expensive features and
functions not required by a retailer.
Any problems could cause political problems for the government.
Part (i)
Part (ii)
Part (iii)
Part (iv)
Part (v)
This part was not answered very well. Candidates generally picked
one or two ideas and went into significant depth on these, which
scored well but did not give the range of answers required to score
the marks available for this part.
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