ct52010 2014

Faculty of Actuaries Institute of Actuaries
EXAMINATION
26 April 2010 (am)
Subject CT5 Contingencies

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
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.
4. Attempt all 14 questions, beginning your answer to each question on a separate sheet.
5. Candidates should show calculations where this is appropriate.
Graph paper is NOT required for this paper.
AT THE END OF THE EXAMINATION
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.
Faculty of Actuaries
CT5 A2010 Institute of Actuaries
1 Explain what the following represent:
(a) l[ x ]+ r
(b) n|m q x
(c) dx
[3]
2 Define spurious selection, giving two distinct examples. [3]
3 Calculate the standardised mortality ratio for the population of Urbania using the
following data:
Standard Population Urbania

Age Population Deaths Population Deaths
60 2,500,000 26,170 10,000 130
61 2,400,000 29,531 12,000 145
62 2,200,000 32,542 11,000 173
[3]
4 A life insurance company offers an increasing term assurance that provides a benefit
payable at the end of the year of death of 10,000 in the first year, increasing by 100 on
each policy anniversary.
Calculate the single premium for a five year policy issued to a life aged 50 exact.
Basis:
Rate of interest 4% per annum

Mortality AM92 Select
Expenses Nil
[4]
5 A population is subject to the force of mortality x = e0.0002x1.
Calculate the probability that a life now aged 20 exact:
(i) survives to age 70 exact [2]
(ii) dies between ages 60 exact and 70 exact [3]

[Total 5]
CT5 A20102
6 You are provided with the following extract from a life table:
x lx
50 99,813
51 97,702
52 95,046
Calculate 0.75p50.5 using two different methods. [5]
7 A company is about to establish a pension scheme that will provide an age retirement
benefit of n/60ths of final pensionable salary where n is total number of years of
service. Final pensionable salary is the average salary in the three years before
retirement.
An employee who will become a member of the pension scheme is currently aged 55
exact has and will be granted exactly 20 years of past service. The employees salary
in the year before the valuation date was 40,000.
(i) Calculate the present value of benefits for this member (including future
service). [3]
(ii) Calculate the contribution required to fund this benefit as a percentage of

future salaries. [3]
Basis:
Pension Scheme from the Formulae and Tables for Actuarial Examinations
[Total 6]
8 100 graduates aged 21 exact decide to place the sum of 1 per week into a fund to be
shared on their retirement at age 66 exact.
(i) Show that each surviving member can expect to receive on retirement a fund
of approximately 7,240. [4]
Basis:

Mortality AM92 Ultimate
One of the survivors uses the accumulated fund to buy a weekly annuity payable for
10 years certain. After 10 years the annuity is payable at two-thirds of the initial level
for the rest of life.
(ii) Calculate the weekly amount of the annuity on the basis used in part (i). [2]
[Total 6]
CT5 A20103 PLEASE TURN OVER

9 A life insurance company models the experience of its pension scheme contracts
using the following three-state model:
Active(A) Retired (R)

x
x x
Dead (D)
(i) Derive the dependent probability of a life currently Active and aged x retiring
in the year of age x to (x + 1) in terms of the transition intensities. [2]
(ii) Derive a formula for the independent probability of a life currently Active and
aged x retiring in the year of age x to (x + 1) using the dependent probabilities.
[4]
[Total 6]
10 The decrement table extract below is based on the historical experience of a very large
multinational companys workforce.
Age (x) Number of employees Deaths Withdrawals

(al ) x (ad ) dx (ad ) wx
40 10,000 25 120
41 9,855 27 144
42 9,684
Recent changes in working conditions have resulted in an estimate that the annual
independent rate of withdrawal is now 75% of that previously used.
Calculate a revised table assuming no changes to the independent death rates, stating
your results to one decimal place. [7]
11 Thieles differential equation for the policy value at duration t (t > 0), tVx , of an
immediate life annuity payable continuously at a rate of 1 per annum from age x is:

t V x = x +t t V x 1 + t V x
t
(i) Derive this result algebraically showing all the steps in your working. [5]
(ii) Explain this result by general reasoning. [3]

[Total 8]
CT5 A20104
12 On 1 January 2005, a life insurance company issued 1,000 10-year term assurance
policies to lives aged 55 exact. For each policy, the sum assured is 50,000 for the
first five years and 25,000 thereafter. The sum assured is payable immediately on
death and level annual premiums are payable in advance throughout the term of this
policy or until earlier death.
The company uses the following basis for calculating premiums and reserves:

Interest 4% per annum
Expenses Nil
(i) Calculate the net premium retrospective reserve per policy as at 31 December
2009. [6]
(ii) (a) Give an explanation of your numerical answer to (i) above.
(b) Describe the main disadvantage to the insurance company of issuing

this policy.
(c) Give examples of how the terms of the policy could be altered so as to
remove this disadvantage.
[3]
There were, in total, 20 deaths during the years 2005 to 2008 inclusive and a further 8
deaths in 2009.
(iii) Calculate the total mortality profit or loss to the company during 2009. [3]
[Total 12]

13 A life insurance company issues a 3-year unit-linked endowment assurance policy to a
male life aged 45 exact.
Level premiums of 4,000 per annum are payable yearly in advance throughout the
term of the policy or until earlier death. 95% of the premium is allocated to units in
the first policy year, 100% in the second and 105% in the third. A policy fee of 50 is
deducted from the bid value of units at the start of each year. The units are subject to
a bid-offer spread of 5% on purchase. An annual management charge of 1.75% of the
bid value of units is deducted at the end of each policy year.
Management charges are deducted from the unit fund before death, surrender and
maturity benefits are paid.
If the policyholder dies during the term of the policy, the death benefit of 125% of the
bid value of the units is payable at the end of the policy year of death. On maturity,
100% of the bid value of the units is payable.
The policyholder may surrender the policy only at the end of the first and second
policy years. On surrender, the bid value of the units less a surrender penalty is
payable at the end of the policy year of exit. The surrender penalty is 1,000 at the
end of the first policy year and 500 at the end of the second policy year.
The company uses the following assumptions in carrying out profit tests of this
contract:
Rate of growth on assets in the unit fund 5.5% per annum in year 1
5.25% per annum in year 2
Rate of interest on non-unit fund cash flows 4.0% per annum
Initial expenses 200
Renewal expenses 50 per annum on the second and third
premium dates
Initial commission 15% of first premium
Renewal commission 2.0% of the second and third years
premiums
Rate of expense inflation 2.0% per annum
Risk discount rate 7.0% per annum
For renewal expenses, the amount quoted is at outset and the increases due to inflation
start immediately. In addition, you should assume that at the end of the first and
second policy years, 12% and 6% respectively of all policies still in force then
surrender immediately.
(i) Calculate the profit margin for the policy. [13]
(ii) Calculate the expected present value of profit for the policy if the company
assumed that there were no surrenders at the end of each of the first and
second policy years. [3]
[Total 16]
CT5 A20106
14 A life insurance company issues a 30-year with profits endowment assurance policy
to a life aged 35 exact. The sum assured of 100,000 plus declared reversionary
bonuses are payable on survival to the end of the term or immediately on death if
earlier.
(i) Show that the quarterly premium payable in advance throughout the term of
the policy or until earlier death is approximately 616.
Pricing basis:
Mortality: AM92 Select

Interest: 6% per annum
Initial commission: 100% of the first quarterly premium
Initial expenses: 250 paid at policy commencement date
Renewal commission: 2.5% of each quarterly premium from the start of the
second policy year
Renewal expenses: 45 at the start of the second and subsequent policy
years
Claim expense: 500 on death; 250 on maturity
Future reversionary bonus: 1.92308% of the sum assured, compounded and vesting
at the end of each policy year (i.e. the death benefit does
not include any bonus relating to the policy year of
death)
[10]
At the end of the 25th policy year, the actual past bonus additions to the policy have
been 145,000.
(ii) Calculate the gross prospective policy reserve at the end of that policy year
immediately before the premium then due.
Policy reserving basis:
Mortality: AM92 Ultimate

Interest: 4% per annum
Bonus loading: 4% of the sum assured and attaching bonuses,
compounded and vesting at the end of each policy year
Renewal commission: 2.5% of each quarterly premium
Renewal expenses: 90 at the start of each policy year
Claim expense: 1,000 on death; 500 on maturity
[6]
[Total 16]
END OF PAPER
CT5 A20107
EXAMINERS REPORT
April 2010 Examinations

Core Technical
Introduction
The attached subject report has been written by the Principal Examiner with the aim of
helping candidates. The questions and comments are based around Core Reading as the
interpretation of the syllabus to which the examiners are working. They have however given
credit for any alternative approach or interpretation which they consider to be reasonable.
R D Muckart
Chairman of the Board of Examiners
July 2010
Comments
These are given in italics at the end of each question.
Institute of Actuaries
Subject CT5 (Financial Mathematics Core Technical) April 2010 Examiners Report
1 (i) The number of lives still alive at age x + r out of lx lives alive at age x subject
to select mortality.
(ii) The probability that a life age x will die between age x + n and x + n + m.
(iii) The number of lives that die between x and (x + 1) out of l x lives alive at x.
Question generally answered well.
2 Spurious selection occurs when mortality differences ascribed to groups are formed
by factors which are not the true causes of these differences.
For example mortality differences by region may be put down to the actual class
structure of the region itself whereas a differing varying mix of occupations region by
region could be having a major effect. So Region is spurious and being confounded
with occupation.
Another example might be in a company pension scheme which might be showing a

significant change in mortality experience which could be viewed as change over
time. However withdrawers from the scheme may be having an effect as their
mortality could be different. To that degree Time Selection may be spurious.
Question generally answered well. Credit was given for a wide range of valid examples.
3 The Standardised mortality ratio is the ratio of actual deaths in the population divided
by the expected number of deaths in the population if the population experienced
standard mortality.
Actual number of deaths for Urbania = 130+145+173 = 448
Mortality rates in standard population are:
Age 60: 26,170 / 2,500,000 = 0.0104680

Age 61: 29,531 / 2,400,000 = 0.0123046
Age 62: 32,542 / 2,200,000 = 0.0147918
Expected number of deaths for Urbania
= 0.010468 10,000 + 0.0123046 12,000 + 0.0147918 11,000 = 415
SMR = 448/415 = 107.95%
Question generally answered well.
Page 2
1
4 EPV = (10, 000 100) A[50]:5 + 100( IA)1[50]:5
= 9,900( A[50] v5 5 p[50] A55 ) + 100(( IA)[50] v5 5 p[50] (5 A55 + ( IA)55 ))
9557.8179
= 9,900(0.32868 v5 *0.38950)
9706.0977
9557.8179
+100* 8.5639 v5 (5*0.38950 + 8.57976)
9706.0977
= 132.96 + 4.34
= 137.30
Many students answered the question well. The most common error was the use of 10,000 as
the multiplier before the temporary assurance function rather then 9,900.
x +t
5 t px = exp( s ds )
x
x +t
= exp( (e0.0002 S 1)ds )
x
x +t 0.0002 S x +t
= exp( e ds + ds )
x x
e0.0002( x +t ) e0.0002 x
= exp +t
0.0002

(i) Probability =
e0.0002 x 70 e0.0002 x 20

= exp + 50
0.0002

= 0.6362
Page 3
(ii) This is the probability that the life survives to 60 and then dies between 60 and
70
Probability = 40 p20 (1 10 p60 )
e0.0002 x 60 e0.0002 x 20 e0.0002 x 70 e0.0002 x 60

= exp
+ (60 20) . 1 exp + (70 60)

0.0002 0.0002

= 0.725 x(1 0.8773)
= 0.0889
This question was answered poorly overall. It was an unusual representation of the x
function but other than that was a straight forward probability and integration question.
6 p50 = 97,702 / 99,813 = 0.978850

p51 = 95,046 / 97,702 = 0.972815
Uniform distribution of deaths
p50 0.25 p51 p50 (1 0.25(1 p51 )) 0.978850 * (1 0.25* (1 0.972815))

= = = 0.982588
0.5 p50 (1 0.5(1 p50 )) (1 0.5* (1 0.978850))
Constant force of mortality
t = ln(pt)
50 = ln(0.978850) = 0.021377
51= ln(0.972815) = 0.027561
0.5*0.021377
0.5 p50 * 0.25 p51 =e * e 0.25*0.027561 = 0.989368* 0.993133 = 0.982574
Generally answered well. A limited number of students used the Balducci Assumption as one
of their answers. This is not in the CT5 Course whilst the above 2 methods clearly are. This
method was however credited solution not published as not in CT5
7 (i) Age retirement benefit
z ra
1 (20 z M 55
ra
+ R55 )
40, 000
60 s54 D55
Page 4
1 (20 *128,026 + 963,869)

= 40,000
60 9.745*1,389
= 173,584
(ii) Contributions
s
N 55
K 40, 000.
s54 D55
88,615
= K .40,000 x
9.745*1,389
= 261,868K
Therefore K = 173,584 / 261,868 i.e. 66.3%
Most students answered reasonably well. Most common error was the wrong sx function.
Also some students included early retirement calculations which were not asked for.
Also students often did not include the past service benefits in the final contribution rate
believing the final result would have been too high (the question however was quite specific
on providing past benefits).
1.04(6621) a21:45
8 (i) Fund = 52*
45 p21
1 1 8695.6199
a21:45 = a21:45 *(1 v 45 * l66 / l21 ) = a21:45 * 1 0.17120*
2 2 9976.3909
= a21:45 0.42539
8821.2612
a21:45 = a21:44 + v 44 * l65 / l21 = 21.045 + .17805* = 21.202
9976.3909
a21:45 = 20.777
52*1.0445 (20.777)
therefore fund = = 7, 240
( 8695.6199
9976.3909 )
Page 5
(ii) Let annuity be P per week. Then EPV of annuity at 66 is
52 P ( a10 + 2 * v10 10 p66 .a76 )

3
(1 v10 ) 6589.9258
= 52 P + 2 * 0.675564 * (8.169 0.5)
3
ln(1.04) 8695.6199
= 52 P [8.272 + 2.618]]
= 566.26P
Therefore pension is given by
7, 240 = 566.26P
P = 12.79
Many students struggled with this question and indeed a large number did not attempt it. As
will be seen from the solution above the actuarial mathematics involved are relatively
straightforward.
Note that 52.18 (i.e. 365.25/7) would have been an acceptable alternative to 52 as the
multiplier which will of course have adjusted the answer slightly.
9 (i) We are looking to derive (aq) rx in terms of x and x
Use the Kolmogorov equations (assuming the transition intensities are

constant across a year age):
( + )t
t ( aq ) x = e
r
t

(aq) rx = (1 e( + ) )
( + )
(ii) Similarly

(aq) dx = (1 e (+ ) )
( + )
Note that:
1 ((aq) rx + (aq) dx ) = e (+ )
+ = log(1 ((aq) rx + (aq) dx ))
Page 6
So

(aq ) rx = ((aq ) rx + (aq ) dx )
( log(1 ((aq ) rx + (aq ) dx )))
this can be rearranged to show
(aq ) rx
= log(1 ((aq ) rx + (aq ) dx ))
(aq ) rx + (aq ) dx
Given that:
qxr = 1 e ,
then
( aq ) rx
qxr = 1 1 ((aq) rx + (aq) dx ) (( aq )rx + ( aq )dx )

In general this was poorly answered with most students making a limited inroad to the
question.
However, the question did not specify that constant forces must be assumed. So, a valid
alternative to part (i) is:
1 1 t
(aq ) rx = t (ap ) x x +t dt = exp ( x + r + x + r ) dr x +t dt
0 0 0
This makes no assumptions and provides an answer in the form asked for in the question, and
so would merit full marks. If constant forces are assumed, the above expression will turn into
the answer in the above solution.
For part (ii) a solution is only possible if some assumption is made. The following
alternatives could be valid:
(1) Assume dependent decrements are uniformly distributed over the year of age
With this assumption, deaths occur on average at age x + , so:
(ad ) rx + 12 (ad ) dx qxr (aq) rx

qxr = = (aq ) rx + 12 (aq) dx qxr qxr =
(al ) x 1 12 (aq) dx
(This is covered by the Core Reading in Unit 8 Section 10.1.3.)
(2) Assume independent decrements are uniformly distributed over the year of age
Page 7
This leads to two simultaneous equations:
(aq ) dx (aq ) rx
q xd = and q xr =
1 q xr 1 q xd
which results in a quadratic equation in qxr . (This is covered by the Core Reading Unit 8
Section 10.1.6.)
Whilst a full description has been given above to assist students, in reality those who
successfully attempted this question did assume constant forces.
10 First calculate (aq) dx and (aq ) wx
Age (x) Number of

employees (aq) dx (aq ) wx
(al ) x
40 10,000 .00250 .01200
41 9,855 .00274 .01461
42 9,684
From this table and relationship
1 1
qxd = (aq) dx / (1 *(aq) wx ) and qxw = (aq ) wx / (1 *(aq ) dx )
2 2
d w
Calculate qx and qx
d d
q40 =.00250/(1.006) = .00252 and q41 = .00274/(1.00731) = .00276
w w
q40 =.01200/(1.00125) = .01201 and q41 = .01461/(1.00137) = .01463
Adjusting for the 75% multiplier of independent withdrawal decrements:
1 3
(aq ) d40 = .00252* 1 * *.01201 = .00251
2 4
1 3
(aq ) d41 = .00276* 1 * *.01463 = .00274
2 4
3 1
w
(aq ) 40 = .01201* * 1 *.00252 = .00900
4 2
3 1
w
(aq ) 41 = .01463* * 1 *.00276 = .01096
4 2
Page 8
Using the above data the Table can now be reconstructed
Age (x) Number of Deaths Withdrawals

employees
(al ) x (ad ) dx (ad ) wx
40 10,000 (10000*.00251)=25.1 10000*.00900=90.0
41 9,884.9 (9,884.9*.00274)=27.1 9,884.9*.01096=108.3
42 9749.5
It should be noted that if more decimal places are used in the aq factors then the deaths at 40
become 25.0 so full credit was given for this answer also.
Because of the limited effect on the answer from the original table students were asked to
show the result to 1 decimal place. Many failed to do so and were penalised accordingly.
11 (i) Policy value at duration t of an immediate annuity payable continuously at a

rate of 1 per annum and secured by a single premium at age x is given by:

tVx = ax +t = e s s px +t ds
0

tVx = ax +t = es s px +t ds = e s s px +t ds
t t t t
0 0
1
s px +t = ln( s px +t ) = (ln l x +t + s ln l x +t ) = x +t + s + x +t
s p x +t t t t

s p x +t = s p x +t ( x +t + s + x +t )
t

tVx = e s s px +t ( x +t x +t + s )ds
t
0

= x +t ax +t e s s px +t x +t + s ds
0

= x +t ax +t e s s px +t es s px +t ds
0
0
= x +t ax +t 1 + ax +t
Page 9
= x +t t Vx 1 + t Vx
(ii) Consider a short time interval (t, t + dt) then equation implies:
t + dtV tV = x +t t Vx dt 1 dt + t Vx dt + o(dt )
where
x +t t Vx dt = reserve released as a result of deaths in time interval

(t, t + dt)
1 dt = annuity payments made in time interval (t, t + dt)
t Vx dt = interest earned on reserve over time interval (t, t + dt)
In general very poorly answered on what was a standard bookwork question.
12 (i) Annual premium P for the term assurance policy is given by:
1 1
25, 000 A[55]:10 + 25, 000 A[55]:5
P =
a[55]:10
where
1 1
25, 000 A[55]:10 + 25, 000 A[55]:5
(
= 25,000 (1 + i )1/2 ( A[55] v10 10 p[55] A65 ) + ( A[55] v 5 5 p[55] A60 ) )
8821.2612
(0.38879 0.67556 9545.9929 0.52786)
= 25,000 1.019804
+ (0.38879 0.82193 9287.2164 0.4564)

9545.9929
= 25, 495.10 ( (0.38879 0.32953) + (0.38879 0.36496) ) = 2118.39
Therefore
2118.39
P = = 257.46
8.228
Page 10
Net Premium Retrospective Reserves at the end of the fifth policy year is
given by:
l[55]
(1 + i )5 Pa[55]:5 50, 000 A[55]:5
1
l60
9545.9929
= 1.21665 [257.46 4.59 50,000 1.019804 (0.38879 0.36496)]
9287.2164
= 41.71
(ii) Explanation more cover provided in the first 5 years than is paid for by the
premiums in those years. Hence policyholder in debt at time 5, with size of
debt equal to negative reserve.
Disadvantage if policy lapsed during the first 5 years (and possibly longer),
the company will suffer a loss which is not possible to recover from the
policyholder.
Possible alterations to policy structure
Collect premiums more quickly by shortening premium payment term or make

premiums larger in earlier years, smaller in later years
Change the pattern of benefits to reduce benefits in first 5 years and increase
them in last 5 years.
(iii) Mortality Profit = EDS ADS
Death strain at risk = 50,000 (42) = 50,042
EDS = (1000 20) q59 50, 042

= 980 0.00714 50, 042 = 350,154
ADS = 8 50, 042 = 400,336
Total Mortality Profit = 350,154 400,336 = -50,182 (i.e. a mortality loss)
Quite reasonably answered by the well prepared student.
In (i) it should be noted that in this case the retrospective and prospective reserves are equal.
If the student recognised this, explicitly stated so and then did the easier prospective
calculation full marks were given. No credit was given for a prospective calculation without
explanation.
Page 11
13
Annual premium 4000.00 Allocation % (1st yr) 95.0%

Risk discount rate 7.0% Allocation % (2nd yr) 100.0%
Interest on investments (1st yr) 5.5% Allocation % (3rd yr) 105.0%
Interest on investments (2nd yr) 5.25% B/O spread 5.0%
Interest on investments (3rd yr) 5.0% Management charge 1.75%
Interest on non-unit funds 4.0% Surrender penalty (1st yr) 1000

Death benefit (% of bid value of units) 125% Surrender penalty (2nd yr) 500
Policy Fee 50
% prem
Initial expense 200 15.0%
Renewal expense 50 2.0%
Expense inflation 2.0%
(i) Multiple decrement table:
x q xd qxs
45 0.001201 0.12
46 0.001557 0.06
47 0.001802 0.00
x (aq) dx (aq) sx (ap) t 1 ( ap )

45 0.001201 0.11986 0.878943 1.000000
46 0.001557 0.05991 0.938536 0.878943
47 0.001802 0.00000 0.998198 0.824920
Unit fund (per policy at start of year)
yr 1 yr 2 yr 3
value of units at start of year 0.000 3690.074 7693.641
Alloc 3800.000 4000.000 4200.000
B/O 190.000 200.000 210.000
policy fee 50.000 50.000 50.000
Interest 195.800 390.604 581.682
management charge 65.727 137.037 213.768
value of units at year end 3690.074 7693.641 12001.554
Page 12
Cash flows (per policy at start of year)
yr 1 yr 2 yr 3
unallocated premium + pol fee 250.000 50.000 150.000
B/O spread 190.000 200.000 210.000
expenses 800.000 131.000 132.020
Interest 14.400 4.760 2.881
man charge 65.727 137.037 213.768
extra death benefit 1.108 2.995 5.407
surrender penalty 119.856 29.953 0.000
end of year cashflow 189.926 287.755 133.461
probability in force 1 0.878943 0.824920

discount factor 0.934579 0.873439 0.816298
expected p.v. of profit 133.280
premium signature 4000.000 3285.769 2882.069
expected p.v. of premiums 10167.837

profit
Margin 1.31%
(ii) Revised profit vector (309.781, 257.802, 133.461)

Revised profit signature (309.781, 257.492, 133.093)
Revised PVFNP = 289.515 + 224.904+ 108.643 = 44.032
Again most well prepared students made a good attempt at this question. The most common
error was to ignore dependent decrements.
Substantial credit was given to students who showed how they would tackle this question even
if they did not complete all the arithmetical calculations involved.
14
(i) Let P be the quarterly premium. Then:
EPV of premiums:
4 Pa(4) @ 6% = 56.1408 P
[35]:30
where
3
(4)
a[35]:30 = a[35]:30
8
(
1 30 p[35]v 30 )
Page 13
3 8821.2612
= 14.352 1 0.17411
8 9892.9151
= 14.0352
EPV of benefits:
100, 000(q[35]v 0.5 + q[35] (1 + b)v1.5 + ... + q[35] (1 + b) 29 v 29.5 )

1 29
+100, 000 (1 + b)30 v30 30 p[35]
where b = 0.0192308
=
100, 000 (1.06)0.5

(1 + b)0.5 (1 + b)0.5
(
q[35] (1 + b)v + q[35] (1 + b) 2 v 2 + ... + q[35] (1 + b)30 v 30
1 29
)
+100, 000(1 + b)30 v 30 30 p[35]
100, 000
= (1.06)0.5 A[35]:30
1
@ i + 100, 000v30 30 p[35] @ i
(1 + b)
100, 000 (1.06)0.5 8821.2612

= 0.32187 0.30832
(1 + b) 9892.9151
8821.2612
+100, 000 0.30832
9892.9151
= 4, 742.594 + 27, 492.112 = 32, 234.706
where
1.06
i = 1 = 0.04
1+ b
EPV of expenses (at 6%)
= P + 250 + 0.025 4 Pa[35]:30

(4)
0.025 4 Pa[35]:1
(4)
+ 45 a[35]:30 1

+500 A[35]:30
1
+ 250v30 30 p[35]
= P + 250 + 0.025 56.1408 P 0.025 4 P 0.97857 + 45 13.352
Page 14
8821.2612 8821.2612
+500 1.060.5 0.18763 0.17411 + 250 0.17411
9892.9151 9892.9151
= 2.30566 P + 906.322
where
a(4)
[35]:1
= a[35]:1
3
8
(
1 p[35]v )
3 9887.2069
= 1 1 0.9434 = 0.97857
8 9892.9151
Equation of value gives:
56.1408P = 32, 234.706 + 2.30566 P + 906.322
33,141.028
P= = 615.60
53.8351
(ii) Gross prospective policy value (calculated at 4%) is given by:
245,000
V prospective = (1 + i )1/2 A 1 @ i + 245,000 v 5 5 p60 @ i + 0.025 4 Pa(4) + 90a60:5 4 Pa(4)
(1 + b) 60:5 60:5 60:5
+1000 A160:5 + 500v5 5 p60
245, 000 l65

= 0.5
1
A60:5 @ i + 245, 000 v5 @ i + 90a60:5 0.975 4 Pa(4)
(1.04) l60 60:5
l l
+1000 1.040.5 A60:5 v5 65 + 500v5 65
l60 l60
3 l 3 8821.2612
where a(4) = a60:5 1 v5 65 = 4.55 1 0.82193 = 4.4678
60:5 8 l60 8 9287.2164
4
1.04
d60+t 465.9551
and i = 1 = 0 A160:5 @ i = 0
= = 0.05017
1.04 l60 9287.2164
245, 000
= 0.05017 + 245, 000 0.94983 + 90 4.55 0.975 4 615.60 4.4678
(1.04)0.5
+1000 1.040.5 ( 0.82499 0.78069 ) + 500 0.78069
Page 15
= 12, 052.954 + 232, 708.35 + 409.5 10, 726.473 + 45.177 + 390.345 = 234,880
Part (i) answered reasonably well. Students had more problems with (ii)
END OF EXAMINERS REPORT
Page 16
EXAMINATION
6 October 2010 (am)

Core Technical
booklet.
supervisor.
question paper.
CT5 S2010 Institute of Actuaries
1 Calculate:
(a) 20|10 q[45]
(b) 30 p[45]:[50]
Basis: AM92 Select

[3]
2 Calculate 0.5p45.75 using the Uniform Distribution of Deaths assumption.
Basis: AM92 Ultimate

[3]
3 Calculate the single premium payable for a temporary reversionary annuity of

12,000 per annum payable monthly in arrear to a female life currently aged 55 exact
on the death of a male life currently aged 50 exact. No payment is made after 20
years from the date of purchase.
Basis:

Mortality of male life PMA92C20
Mortality of female life PFA92C20
Expenses Nil
[4]
4 A gymnasium offers membership for a three-year period at a fixed fee of 240 per
annum payable monthly in advance. The contract may only be cancelled at a renewal
anniversary. Monthly premiums cease immediately on the death of the member.
Calculate the expected present value of membership fees if the gymnasium sells 120
memberships:
Basis:

Rate of mortality 1% per annum
Probability of renewal 80% at each anniversary
Expenses Nil
[5]
CT5 S20102
5 A pension scheme provides an age retirement benefit of n/80ths of final pensionable
salary where n is total number of years of service. Final pensionable salary is the
average salary in the three years before retirement. Normal retirement age is 65 and
age retirement is only permitted between ages 60 and 65 exact.
A member of the pension scheme currently aged 45 exact has 12 years of service and
their salary in the year before the valuation date was 25,000.
Give a formula for the expected cashflows between the 66th and 67th birthdays as a
result of entitlement from this past service. [5]
6 Calculate:
(a) A30:40
(b) a30:40:20
Basis:
= 0.01 throughout for the life aged 30 now

= 0.02 throughout for the life aged 40 now
= 4% per annum
[6]
7 A life insurance company issues a 10-year term assurance policy to a life aged 55
exact. The sum assured which is payable immediately on death is given by the
formula:
50, 000 (1 + 0.1t ) t = 0,1, 2........,9
where t denotes the curtate duration in years since the inception of the policy.
Level premiums are payable monthly in advance throughout the term of the policy or
until earlier death.
Calculate the monthly premium for this policy using the following basis:

Expenses Nil
[6]
8 Describe the causal factors that explain observed differences in mortality and
morbidity. [6]
CT5 S20103 PLEASE TURN OVER

9 The actuary advising a pension scheme has decided that the independent mortality in
the standard table for pension schemes (PEN) from page 142 of the Formulae and
Tables for Actuarial Examinations is no longer appropriate for that pension scheme.
Calculate the revised row of the service table for age 61, assuming that the revised
independent mortality rate at that age is 80% of the previous independent mortality
rate.
[7]
10 Define the following terms, giving formulae and defining all notation used:
(a) Crude mortality rate

(b) Indirectly standardised mortality rate
[7]
11 A life insurance company issues a four-year unit-linked policy to a male life. The
following non-unit cash flows, NUCFt (t = 1,2,3,4), are obtained at the end of each
year t per policy in force at the start of the year t:
Year t 1 2 3 4
NUCFt 50.2 43.1 32.1 145.5
Assume that the annual mortality rate for the male life is constant at 1% at all ages.
(i) Show that the annual internal rate of return is 6%. [3]
The company sets up reserves in order to zeroise future negative cash flows. The rate
of interest earned on non-unit reserves is 2.5% per annum.
(ii) Calculate the net present value of the profits after zeroisation using a risk
discount rate of 6% per annum. [3]
(iii) Comment on the results obtained in (i) and (ii) above. [1]
[Total 7]
CT5 S20104
12 A life insurance company issued a with profits whole life policy to a life aged 40
exact on 1 January 2000. Under the policy, the basic sum assured of 50,000 and
attaching bonuses are payable immediately on death. Level premiums are payable
annually in advance under the policy until age 65 or earlier death.
The company declares simple reversionary bonuses at the start of each year including
the first year and the bonus entitlement on the policy is earned immediately the bonus
is declared.
(i) Give an expression for the gross future loss random variable under the policy
at the outset, defining symbols where necessary. [4]
(ii) Calculate the annual premium using the following assumptions:

Bonus loading 2.5% per annum simple
Renewal expenses 25 at the start of the second and subsequent policy
years while the policy is in force
Claim expenses 250
[4]
On 31 December 2009, the policy is still in force. Bonuses declared to date total
13,750.
(iii) Calculate the gross premium prospective reserve for the policy as at
31 December 2009 using the following assumptions:

Bonus loading 3% per annum simple
Renewal expenses 35 at the start of each policy year while the policy is in
force
Claim expenses 250
[4]
[Total 12]

13 On 1 January 2009, a life insurance company issued 10,000 joint life whole life
assurance policies to couples. Each couple comprised one male life aged 60 exact and
one female life aged 55 exact when the policy commenced. Under each policy, a sum
assured of 100,000 is payable immediately on the death of the second of the lives to
die.
Premiums under each policy are payable annually in advance while at least one of the
lives is alive.
The life insurance company uses the following basis for calculating premiums and net
premium reserves:
Mortality PMA92C20 for the male

PFA92C20 for the female
Expenses Nil
(i) Calculate the annual premium payable under each policy. [4]
During the calendar year 2009, there was one claim for death benefit, in respect of a
policy where both the male and the female life died during the year. In addition, there
were 20 males and 10 females who died during the year.
(ii) Calculate the mortality profit or loss for the group of 10,000 policies for the
calendar year 2009. [10]
[Total 14]
CT5 S20106
14 A life insurance company issues four-year without profits endowment assurance
policies to male lives aged 56 exact. The sum assured is 21,500 payable on maturity
or at the end of the year of death if earlier. Premiums of 5,000 are payable annually
in advance throughout the term of the policy.
The company holds net premium reserves for these policies, calculated using AM92
Ultimate mortality and interest of 4% per annum.
Surrenders occur only at the end of a year immediately before a premium is paid. The
surrender value is 70% of the net premium reserve calculated at the time the surrender
value is payable.
contract:
Rate of interest on cash flows 4% per annum

Surrenders 10% of all policies still in force at the end of each of
the first, second and third policy years
Renewal expenses 45 per annum on the second and subsequent
premium dates
Risk discount rate 6% per annum
Calculate the expected profit margin for this contract. [15]
END OF PAPER
CT5 S20107
INSTITUTE AND FACULTY OF ACTUARIES
EXAMINERS REPORT
September 2010 examinations

Core Technical
Introduction
T J Birse
December 2010
Institute and Faculty of Actuaries

Subject CT5 (Contingencies Core Technical) September 2010 Examiners Report
20|10 q[45] = (l65 l75 ) / l[45]

1 (a)
= (8,821.2612 6,879.1673) / 9, 798.0837 = 0.198212
l75 l80 6,879.1673 5, 266.4604

(b) 30 p[45]:[50] = = = 0.380951
l[45] l[50] 9, 798.0837 9, 706.0977
Question generally done well.
2 .5 p45.75 = .25 p45.75 * .25 p46
.25 q45.75 = .25* q45 / (1 .75* q45 ) = .25*.001465 / (1 .75*.001465)

= .000367 by UDD
.25 q46 = .25* q46 = .25*.001622 = .000406
Hence .5 p45.75 = (1 .000367) *(1 .000406) = .999227
In general question done well. However many students did not appreciate the split in line 1
above and attempted to apply formula directly.
3 Value of Single Premium is:
(
12 1,000 a (12) a (12)
55:20 ) 50:55:20
= 12,000 ( ( 13 ) v
55
24
p ( 13 ) (
20
24
20 55 75 13 ) v
24 50:55
20
20 p50:55 (
70:75 13 ))

24
= 12,000 (18.210 13 ) v (10.933 13 )

8784.955 20
24 9917.623 24

(
16.909 13
24
v 20 )
8784.955 9238.134
9917.623 9941.923
8.792 13 (
24 )
= 12,000((17.668 4.201) (16.367 3.099))
= 2,388
Many students struggled with how to break down the monthly annuity functions into those
which could then utilise the Tables. However question generally done well by well prepared
students.
Page 2
4 The value of 1 per annum payable monthly for 1 year is
(12) = x(12) v. px x(12)

+1 = x:1 11/ 24(1 v. p x )
x:1
Where x:1 = 1
Therefore
(12) = 1 11/ 24(1 0.99 /1.06) = 0.96973

x:1
The probability of reaching the beginning of each year is :
Year 1 = 1
Year 2 = 0.99*0.8 = 0.792
Year 3 = 0.792 * 0.792 = 0.6273
The value is therefore
120 240 0.96973 (1 + 0.792 / 1.06 + 0.6273 / (1.06)2 )

= 64,388
This question was overall done very poorly with few students realising that the key
element to the calculation involved a one year annuity due payable monthly.
5 The formula is:
19 12 z45+ t + 0.5 r45+ t ( rl )66+ t 12 z65 r65 ( rl )66

25000 + 25000
t =15 80 s44 l45 ( rl )45+ t + 0.5 80 s44 l45 ( rl )65
Question done very poorly. Many students attempted to use annuity functions
whereas the question sought was a pure cash flow one.
Page 3
6 (a)

A______ = e.04t {e .01t (1 e .02t ) *.01 + e .02t (1 e.01t ) *.02}dt
30:40 0

= {.01*(e .05t e .07t ) + .02*(e .06t e.07t )}dt
0

= (.01*e.05t + .02* e .06t .03* e.07t )dt
0

.01 .05t .02 .06t .03 .07t
= *e *e + *e
.05 .06 .07 0
= (1/ 5 + 1/ 3 3 / 7) = .10476
20 .04t
(b) a30:40:20 = e * e.01t * e .02t dt
0
20 .07t
= e dt
0
20
1 .07t
= e
.07 0
= (1/ .07) e 1.4 / .07) = 10.763
Question generally done well.
7 Let P be the monthly premium. Then equating expected present value of premiums
and benefits gives:
12 Pa(12) = 45000 A[55]:10

1
+ 5000( IA)1[55]:10
[55]:10
where
a(12)
[55]:10
= a[55]:10
11
24
( )
1 v10 10 p[55] = 8.228 0.458 1 .67556

8821.2612
= 8.056
9545.9929
1
A[55]:10 ( )
= 1.040.5 A[55]:10 v10 10 p[55] = 1.040.5 ( 0.68354 0.62427 ) = 0.06044
( IA)1[55]:10 = 1.040.5 (( IA) [55]

v10 10 p[55] ( IA )65 10v10 10 p[55] A65 )
= 1.040.5 (8.58908 0.62427 7.89442 10 0.62427 0.52786) = 0.3728
45000 0.06044 + 5000 0.3728
12 P = = 568.99
8.056
P = 47.42
In general question done well by well prepared students.
Page 4
8 Occupation either because of environmental or lifestyle factors mortality may be

directly affected. Occupations may also have health barriers to entry, e.g. airline
pilots
Nutrition poor quality nutrition increases morbidity and hence mortality
Housing standard of housing (reflecting poverty) increases morbidity
Climate climate can influence morbidity and may also be linked to natural disaster
Education linked to occupation but better education can reduce morbidity, e.g. by
reducing smoking
Genetics there is genetic evidence of a predisposition to contracting certain

illnesses, even if this has no predictive capability
A straightforward bookwork question generally done well although not all students captured
the full range. All valid examples not shown above were credited.
Students who misunderstood the question and tried to answer using Class, Time, Temporary
Initial Selection were given no credit.
9 Use the formula
(aq )x
q x =
(1 0.5((aq )
x ))
to derive the independent probabilities:
(aq ) dx (50 / 6548)

q xd = = = 0.00809
(1 0.5((aq ) x d )) (1 0.5*((219 + 516) / 6548))
(aq )ix (219 / 6548)

q ix = = = 0.03496
(1 0.5((aq )x i )) (1 0.5*((50 + 516) / 6548))
(aq ) rx (516 / 6548)

q xr = = = 0.080455
(1 0.5((aq ) x r )) (1 0.5*((50 + 219) / 6548))
Then the revised qxd = 80% *0.00809 = 0.006472

then use the formula
1 1
(aq)x = qx (1 (qx + ...) + (qx .qx + ...) ...)
2 3
Page 5
to derive dependent probabilities:
1 1
(aq)dx = qxd (1 (qix + qxr ) + (qix .qxr )) = 0.0061046
2 3
1 1
(aq)ix = qix (1 (qxd + qxr ) + (qxd .qxr )) = 0.0334465
2 3
1 1
(aq) rx = qxr (1 ( qxd + qix ) + ( qxd .qix )) = 0.0787948
2 3
The resulting service table is:
lx dx ix rx
6,548 40 219 516
This question was done poorly. Many students appeared not to remember the derivation
process for multiple decrements etc. Some students wrote down the final table without
showing intermediate working. This gained only a proportion of the marks.
10 (a) Crude mortality rate = actual deaths / total exposed to risk
Exc,t mx,t
= x
Exc,t
x
where
Exc,t is central exposed to risk in population between age x and x+t

mx,t is central rate of mortality in population between age x and x+t
(b) Indirectly standardised mortality rate
s Exc,t s mx,t
x
s Exc,t
= x
Exc,t s mx,t
x
Exc,t mx,t
x
Page 6
s c
Ex,t is central exposed to risk in standard population between age x and x+t
s
mx,t is central rate of mortality in standard population between age x and x+t
This question generally done well. Other symbol notation was accepted provided it was
consistent and properly defined.
11
Year t qx px t 1 p x NUCFt Profit Signature
1 0.01 0.99 1 50.2 50.2

2 0.01 0.99 0.99 43.1 42.7
3 0.01 0.99 0.9801 32.1 31.5
4 0.01 0.99 0.9703 145.5 141.2
(i) PV of profit @ 6%
= 50.2v 42.7v 2 31.5v3 + 141.2v 4

= 47.4 38.0 26.4 + 111.8
= 0.0 IRR = 6%
32.1
(ii) 2V = = 31.3
1.025
1V 1.025 px 2V = 43.1 1V = 72.3
revised cash flow in year 1 = 50.2 px 1V = 50.2 71.6 = 121.8
and NPV of profit = 121.8/1.06 + 111.8 = -3.1
(iii) As expected, the NPV after zeroisation is smaller because the emergence of
the non- unit cash flow losses have been accelerated and the risk discount rate
is greater than the accumulation rate.
Parts (i) and (iii) done well generally. In Part (ii) many students failed to develop the
formulae properly although they realised the effect in (iii).
Page 7
12 (i) The gross future loss random variable is
50, 000 1 + b ( K 40 + 1) vT40 + ( I e) + eaK + fvT40 Pamin( K

40 +1 40 +1,25)
Note: select functions also acceptable
where b is the annual rate of bonus

I is the initial expense
e is the annual renewal expense payable in the 2nd and
subsequent years
f is the claim expense
P is the gross annual premium
K40(T40) is the curtate (complete) random future lifetime of a life
currently aged 40
(ii) The annual premium P is given by
Pa[40]:25 = 50, 250 A[ 40] + 1, 250 ( IA ) + 300 + 25(a[40] 1)

[ 40]
P 13.29 = 50, 250 1.060.5 0.12296 + 1, 250 1.060.5 3.85489

+300 + 25(15.494 1)
13.29 P = 6361.402 + 4961.065 + 300 + 362.35
P = 901.79
(iii) The required reserve is
64, 000 A50 + 1,500 ( IA ) + 35a50 901.79 a50:15

50
= 64, 000 1.040.5 0.32907 + 1,500 1.040.5 8.55929

+35 17.444 901.79 11.253
= 21, 477.560 + 13, 093.196 + 610.54 10,147.84
= 25, 033.32
In general question done well by well prepared students. In (i) credit also given if the
formulae included a limited term on the expense element although in reality this is unlikely.
Page 8
13 (i) Let P be the annual premium. Then equating expected present value of
premiums and benefits gives:
Pa = 100000 A
60m :55 f 60m :55 f
where a = a60m + a55 f a60m:55 f = 15.632 + 18.210 14.756 = 19.086

60m :55 f
A = 1.040.5 A = 1.040.5 (1 d a )

60m :55 f 60m :55 f 60m :55 f
= 1.040.5 (1 0.038462 19.086) = 0.2711804
P 19.086 = 100000 * 0.2711804
P = 1, 420.83 .
(ii) Reserves at the end of the first policy year:
Where both lives are alive:
a m f
100000 1.040.5 1 61 :56
a m f
60 :55
15.254 + 17.917 14.356

= 100000 1.040.5 1 = 1448.01
15.632 + 18.210 14.756
Where the male life is alive only:
100000 A61m Pa61m

0.04
100000 1.040.5 1 15.254 1420.83 15.254 = 20475.94
1.04
Where the female life is alive only:
100000 A56 f Pa56 f

0.04
100000 1.040.5 1 17.917 1420.83 17.917 = 6247.12
1.04
Page 9
Mortality Profit = Expected Death Strain Actual Death Strain
(a) Both lives die during 2009 = 1 actual claim.
Mortality Profit
( ) (
= 10, 000 q60m q55 f 1 100000 1.040.5 1448.01 )
= (10, 000 0.002451 0.001046 1) (100532.38 ) = 97954.99
(b) Males only die during 2009 = 20 actual deaths (and therefore we need
to change reserve from joint life to female only surviving).
Mortality Profit
( )
= 10, 000 p55 f q60m 20 ( 6247.12 1448.01)
= (10, 000 0.998954 0.002451 20 ) ( 4799.11) = 21520.95
(c) Females only die during 2009 = 10 actual deaths (and therefore we
need to change reserve from joint life to male only surviving).
Mortality Profit
( )
= 10, 000 p60m q55 f 10 ( 20475.94 1448.01)
= (10, 000 0.997549 0.001046 10 ) (19027.93) = 8265.02
Hence overall total mortality profit
= 97954.99 + 21520.95 + 8265.02 = 68,169.01
i.e. a mortality loss
Part (i) generally done well. Part (ii) was challenging and few students realised the full
implications of reserve change on 1st death. Only limited partial credit was given if
students used only joint life situations.
Page 10
14 Reserves required on the policy per unit sum assured are:
a56:4
0V56:4 = 1 =0
a56:4
a57:3 2.870
1V56:4 = 1 = 1 = 0.23364
a56:4 3.745
a58:2 1.955
2V56:4 = 1 = 1 = 0.47797
a56:4 3.745
a59:1 1.0
3V56:4 = 1 = 1 = 0.73298
a56:4 3.745
Multiple decrement table:
T d
q[56] s
q[56] (aq) d[56]+t 1 (aq) s[56]+t 1 (ap)[56]+t 1 t 1 ( ap )[56]
+ t 1 + t 1
1 0.003742 0.1 0.003742 0.09963 0.896632 1.000000

2 0.005507 0.1 0.005507 0.09945 0.895044 0.896632
3 0.006352 0.1 0.006352 0.09936 0.894283 0.802525
4 0.007140 0.0 0.007140 0.0 0.992860 0.717685
Probability in force (ap)[56]+t 1 = (1 q[56]

d
+t 1 ) (1 q[56]+t 1 )
s
The calculations of the profit vector, profit signature and NPV are set out in the table
below:
Policy Death Maturity Surrender In force

year Premium Expenses Interest claim claim claim cash flow
1 5000 600.00 176.00 80.45 0.00 350.31 4145.23

2 5000 45.00 198.20 118.40 0.00 715.38 4319.42
3 5000 45.00 198.20 136.57 0.00 1096.1613 3920.475
4 5000 45.00 198.20 153.51 21346.49 0.00 16346.80
Policy Increase in Interest on Cum probability Discount NPV

year reserves reserves Profit vector of survival factor profit
1 4504.02 0.00 358.78 1.00000 0.943396 338.47

2 4174.53 200.93 345.82 0.89663 0.890000 275.96
3 3816.72 411.05 514.84 0.80253 0.839619 346.91
4 15759.07 630.36 42.63 0.71768 0.792094 24.24
Total NPV = 308.63
Page 11
The calculations of the premium signature and profit margin are set out in the table
below:
Policy year 1 2 3 4
Premium 5000.00 5000.00 5000.00 5000.00

probability in force 1.00000 0.89663 0.80253 0.71768
discount factor 1.00000 0.943396 0.890000 0.839619
p.v. of premium signature 5000.000 4229.40 3571.22 3012.91

=> expected p.v. of premiums 15813.53
profit margin = 2.0%
Many well prepared students were able to outline the process required without being totally
accurate on the calculation. Significant credit was awarded in such situation.
Many students failed to appreciate the multiple decrement element.
Page 12
EXAMINATION
26 April 2011 (am)

Core Technical
booklet.
supervisor.
question paper.
CT5 A2011 Institute and Faculty of Actuaries

1 Give a different example of selection shown by each of the following mortality tables:
(a) ELT15
(b) PMA92
(c) AM92
[3]
2 Calculate:
(a) 23 p65
(b) 10|5 q60
(c) s65:10
Basis:
Mortality PMA92C20
Rate of interest 4% per annum [4]
3 Calculate ( Ia ) x
Basis: x = 0.02 for all x

= 4% per annum
[4]
4 Outline the benefits that are usually provided by a pension scheme on retirement due
to ill health. [5]
5 A pension scheme uses the following model to calculate probabilities, where the
transition intensities are = 0.05 and = 0.08.

Active Retired
Dead
Calculate:
(a) the dependent probability of retirement

(b) the independent probability of death from active service
using the Kolmogorov equations. [5]
CT5 A20112
6 (i) Define uniform distribution of deaths [2]
(ii) Using the method in (i) above calculate 1.25q65.5 [4]
Basis:
Mortality ELT15(Males) [Total 6]
7 Explain how education influences morbidity. [6]
8 A life insurance company issues a with profits whole life assurance policy to a life
aged 40 exact. The sum assured of 100,000 plus declared reversionary bonuses are
payable immediately on death. Level premiums are payable annually in advance to
age 65 or until earlier death.
A simple bonus, expressed as a percentage of the sum assured, is added to the policy
at the start of each year (i.e. the death benefit includes the bonus relating to the policy
year of death).
The following basis is used to price this policy:
Rate of Interest 4% per annum
Initial expenses 300 plus 50% of the first annual premium, incurred at the
policy commencement date
Renewal commission 2.5% of each premium from the start of the second policy
year
Claim expense 350 at termination of the contract
Using the principle of equivalence, calculate the level simple bonus rate that can be
supported each year on this policy if the annual premium is 3,212. [6]

9 A male life aged 52 exact and a female life aged 50 exact take out a whole life
assurance policy. The policy pays a sum assured of 100,000 immediately on first
death. Premiums are payable for a period of five years, monthly in advance.
Calculate the monthly premium payable.
Basis:
Mortality PMA92C20 (male life), PFA92C20 (female life)
Expenses Nil [7]
10 Calculate the expected present value and variance of the present value of an
endowment assurance of 1 payable at the end of the year of death for a life aged 40
exact, with a term of 15 years.
Basis:
Expenses Nil [8]
11 A life insurance company issues a 4-year unit-linked endowment policy to a life aged
61 exact under which level premiums of 2,500 are payable yearly in advance
throughout the term of the policy or until earlier death. In the first policy year 40% of
the premium is allocated to units, while in the second and subsequent policy years
110% of the premium is allocated to units. The unit prices are subject to a bid-offer
spread of 5%.
If the policyholder dies during the term of the policy, the death benefit of 10,000 or
the bid value of the units, whichever is higher, is payable at the end of the policy year
of death.
The policyholder may surrender the policy, in which case a value equal to a fixed
percentage of the total premiums paid on the policy is payable at the end of the policy
year of surrender. The percentage is based on the policy year of surrender as follows:
Policy year % of total premiums payable

as a surrender value
1 0
2 25
3 50
4 75
On maturity, 105% of the bid value of units is payable.
An annual management charge of 0.5% of the bid value of units is deducted at the end
of each policy year before death, surrender and maturity benefits are paid.
CT5 A20114
contract:
Rate of growth on assets in the unit fund 4.25% per annum
Rate of interest on non-unit fund cash-flows 3.5% per annum
Independent rate of mortality AM92 Select
Independent rate of surrender 6% per annum
Renewal expenses 74 per annum on the second

and subsequent premium dates
Renewal commission 2.5% of the second and

subsequent years premiums
(i) Construct a multiple decrement table for this policy assuming that there is a
uniform distribution of both decrements over each year of age in the single
decrement table. [3]
(ii) Construct tables showing the growth of the unit fund and the non-unit fund.
Include all commissions in the non-unit fund. [7]
(iii) Calculate the profit margin for this policy on the assumption that the company
does not zeroise future expected negative cashflows. [3]
[Total 13]

12 On 1 April 1988, a life insurance company issued a 25-year term assurance policy to a
life then aged 40 exact. The initial sum assured was 75,000 which increased by 4%
per annum compound at the beginning of the second and each subsequent policy year.
The sum assured is payable immediately on death and level monthly premiums are
payable in advance throughout the term of the policy or until earlier death.
Initial commission 50% of the total premium payable in the first policy year
Initial expenses 400 paid at the policy commencement date
Renewal commission 2.5% of each premium from the start of the second policy
year
Renewal expenses 75 per annum, inflating at 4% per annum compound, at the

start of the second and subsequent policy years (the renewal
expense quoted is as at the start of the policy and the
increases due to inflation start immediately)
Claim expense 300 on termination (the claim expense is fixed over the
duration of the policy)
(i) Show that the monthly premium for the policy is approximately 56. [10]
(ii) Calculate the gross premium prospective reserve as at 31 March 2011. [6]
[Total 16]
CT5 A20116
13 (i) Explain, including formulae, the following expressions assuming that the sum
assured is payable at the end of the year of death:
death strain at risk

expected death strain
actual death strain [6]
(ii) A life insurance company issues the following policies:
25-year term assurances with a sum assured of 200,000

25-year endowment assurances with a sum assured of 100,000
The death benefit under each type of policy is payable at the end of year of
death.
On 1 January 2000, the company sold 10,000 term assurance policies to male
lives then aged 40 exact and 20,000 endowment assurance policies to male
lives then aged 35 exact. For each type of policy, premiums are payable
annually in advance.
During the first ten years, there were 145 actual deaths from the term
assurance policies written and 232 actual deaths from the endowment
assurance policies written.
(a) Calculate the death strain at risk for each type of policy during 2010.
During 2010, there were 22 actual deaths from the term assurance policies and
36 actual deaths from the endowment assurance policies.
Assume that there were no lapses/withdrawals on each type of policy during

the first eleven years.
(b) Calculate the total mortality profit or loss to the office in the year 2010.
(c) Comment on the results obtained in (b) above.
Basis:
Expenses Nil
[11]
[Total 17]
END OF PAPER
CT5 A20117
EXAMINERS REPORT
April 2011 examinations

Core Technical
Introduction
T J Birse
July 2011

Subject CT5 (Contingencies Core Technical) Examiners Report, April 2011
1 (a) Time selection because it is based on a period of three calendar years

(b) Class selection applies only to male pensioners
(c) Temporary initial selection as there are select rates
Other valid answers acceptable
This question was generally done well. However some students did not supply different
selection types for each part and this was penalised.
l88 3534.054
2 (a) 23 p65 = = = 0.366307
l65 9647.797
(l l ) (9238.134 8405.160)
(b) 10|5 q60 = 70 75 = = 0.084771
l60 9826.131
(c)
(1 + i )10 a65:10 (1 + i )10 (a65 v10 10 p65 a75 )
s65:10 = =
10 p65 10 p65
=
(1.04)10 (13.666 (1.0410 ) 8, 405.160 ( 9, 647.797 ) 9.456)
(8, 405.160 9, 647.797)
= 1.48024 (13.666 0.67556 0.87120 9.456) / 0.87120
= 13.764
This question was generally done well for parts (a) and (b) but students struggled more with
part (c).
3
1 2 3
( Ia ) x = v t t p x dt + 2 v t t p x dt + 3 v t t p x dt + .......
0 1 2
.04 .02 .06
Now vp x = e *e =e throughout.
Hence
( Ia ) x = (1 + 2e 0.06 + 3( e .06 )2 + 4( e .06 )3 + .........)a 1 at force of interest 6%
= (1/(1 e .06 ))2 ((1 e .06 ) / .06)
= 294.8662 0.970591
= 286.19
This question was not done well. The majority of students failed to realise that the increasing
function I was not continuous, although the payment is continuous. Instead most attempted

to compute ( Ia ) x = tvt t px dt . Only minimal credit was given for this.
0
Page 2
4 Schemes usually allow members to retire on grounds of ill-health and receive a

pension benefit after a minimum length of scheme service.
Benefits are usually related to salary at the date of ill-health retirement in similar ways
to age retirement benefits.
However, pensionable service is usually more generous than under age retirement
with years beyond those served in the scheme being credited to the member e.g. actual
pensionable service subject to a minimum of 20 years, or pensionable service that
would have been completed by normal retirement age.
A lump sum may be payable on retirement and a spouse pension on death after
retirement.
Other valid points were credited. Generally this bookwork question was done well.
5 The Kolmogorov equations in this case are:
r (+)t
t (aq ) x = e
t
d (+)t
t (aq ) x = e
t
For the case where t = 1 the solution for the dependent probability of retirement is:

( aq) rx = (1 e (+ ) )
+
Hence the dependent probability of retirement is
0.08
(aq) rx = (1 e (0.05+0.08) )
0.08 + 0.05
= 0.07502
The formula for the independent probability of death is
qxd = 1 e
Hence the independent probability of death is:
qxd = 1 e 0.05 = 0.04877
Generally this question was completed satisfactorily by well prepared students.
Page 3
6 (i) The definition of the uniform distribution of deaths (UDD) is s qx = s.qx

(alternatively t px x +t is constant).
(ii) We have
1.25 p65.5 = 0.5 p65.5 0.75 p66

= (1 0.5 q65.5 ) = (1 (0.5q65 / (1 0.5q65 ))) by UDD
0.5 p65.5
= (1 ((0.5 0.02447) / (1 0.5 0.02447)))
= 0.98761
0.75 p66 = 1 0.75 q66 = 1 0.75 q66 = 1 0.75 0.02711

= 0.97967
Hence
1.25 p65.5 = 0.98761 0.97967 = 0.96753

1.25 q65.5 = 1 1.25 p65.5 = 1 0.96753
= 0.03247
A straightforward question that was generally done well.
7 Education influences the awareness of a healthy lifestyle, which reduces morbidity.
Education includes formal and informal processes, such as public health awareness
campaigns.
Shows in:
Increased income
Better diet
Increased exercise
Better health care
Reduced alcohol and tobacco consumption
Lower levels of illicit drug use
Safer sexual practices
Some effects are direct (e.g. drug use); some are indirect (e.g. exercise)
Students generally scored on a range of points but in most cases did not write enough of them
to gain all the marks.
Students who mentioned over indulgence risks for the better educated were given credit.
Page 4
8 Let b be the simple bonus rate (expressed as a percentage of the sum assured). Then
the equation of value at 4% p.a. interest is (where P = 3,212):
P(.975a[40]:25 + 0.025) = (100, 000 + 350) A[40] + 1, 000b( IA)[40] + 300 + 0.5 P
P(.975 15.887 + 0.025) =
(100, 000 + 350) (1.04 ) 0.23041 + 1, 000b (1.04 )
0.5 0.5
7.95835 + 300 + 0.5 P
49,833.6179 = 23,579.5423 + 8,115.9564b + 1,906
24,348.0756
b= = 3.00
8,115.9564
i.e. a simple bonus rate of 3% per annum
Generally done well although some students treated b as not vesting in the first year.
9 Value of benefits using premium conversion
100,000 A52:50 = 100,000 (1.04)1/2 A52:50

= 100,000 (1.04)1/2 (1 (0.04 / 1.04) a52:50 )
= 101,980.4 (1 0.0384615 17.295)
= 34,143.89
Value of monthly premium of P
(12) 5 l57:55 (12)

12 P (12) = 12 P 52:50 v
52:50:5 l52:50 57:55
(12)
52:50 = 52:50 11/ 24 = 17.295 0.458 = 16.837
(12)
57:55 = 57:55 11/ 24 = 15.558 0.458 = 15.100
v5 l57:55 = (0.82193 9,880.196 9,917.623) / (9,930.244 9,952.697)
l
52:50
= 0.81491
Hence 12 P (12) = 12 P(16.837 0.81491 15.100) = 54.3823P

52:50:5
Therefore:
P = 34,143.89 / 54.3823 = 627.85
There was an anomaly in this question in that it was not fully clear that the premium paying
period ceased on 1st death within the 5 year period. Even though the vast majority of students
who completed this question used the above solution a small minority used 12Pa5(12) i.e.
ignoring the joint life contingency. This was credited.
Page 5
None the less many students struggled with this question
10 Expected present value is A [40]:15 where
A [40]:15 = A[40]:15
1
+ A[40]:115
= A[40] v15 15 p [40] A55 + v15 15 p [40]
9,557.8179 9,557.8179
= 0.23041 0.55526 0.38950 + 0.55526
9,854.3036 9,854.3036
= 0.23041 0.20977 + 0.53855
= 0.55919
Variance
= 2 A [40]:15 ( A [40]:15 )2
2
A [40]:15 = 2 A[40]:15
1
+ 2 A[40]:115
= 2 A[40] (v 2 )15 15 p [40] 2 A55 + (v 2 )15 15 p [40]
9,557.8179 9,557.8179
= 0.06775 0.30832 0.17785 + 0.30832
9,854.3036 9,854.3036
= 0.06775 0.05318 + 0.29904

= 0.31361
So variance = 0.31361 0.559192 = 0.000917
Note answers are sensitive to number of decimal places used.
Question done well by well prepared students. Many students failed to realise that the
endowment function needed to be split into the term and pure endowment portions.
Page 6
11 Summary of assumptions:
Annual premium 2,500.00 Allocation % (1st yr) 40%

Risk discount rate 5.5% Allocation % (2nd yr +) 110%
Interest on investments 4.25% Man charge 0.5%
Interest on sterling provisions 3.5% B/O spread 5.0%
Minimum death benefit 10,000.00 Maturity benefit 105%
% prm Total
Initial expense 325 10.0% 575
Renewal expense 74 2.5% 136.5
(i) Multiple decrement table:
x qxd qxs
61 0.006433 0.06
62 0.009696 0.06
63 0.011344 0.06
64 0.012716 0.06
x (aq) dx (aq) sx (ap) t 1 ( ap )
61 0.006240 0.05981 0.933953 1.000000

62 0.009405 0.05971 0.930886 0.933953
63 0.011004 0.05966 0.929337 0.869404
64 0.012335 0.05962 0.928047 0.807969
(ii) Unit fund (per policy at start of year)
yr 1 yr 2 yr 3 yr 4
value of units at start of year 0.00 985.42 3,732.08 6,581.15

alloc 1,000.00 2,750.00 2,750.00 2,750.00
B/O 50.00 137.50 137.50 137.50
interest 40.37 152.91 269.65 390.73
management charge 4.95 18.75 33.07 47.92
value of units at year end 985.42 3,732.08 6,581.15 9,536.46
Page 7
Non-unit fund (per policy at start of year)
yr 1 yr 2 yr 3 yr 4
unallocated premium 1,500.00 250.00 250.00 250.00

B/O spread 50.00 137.50 137.50 137.50
expenses/commission 575.00 136.50 136.50 136.50
interest 34.12 8.72 8.72 8.72
man charge 4.95 18.75 33.07 47.92
extra death benefit 56.25 58.95 37.62 5.72
extra surrender benefit 58.94 148.20 168.91 121.41
extra maturity benefit 0.00 0.00 0.00 442.51
end of year cashflow 1,016.76 149.71 93.36 536.62
(iii)
probability in force 1 0.933953 0.869404 0.807969

discount factor 0.947867 0.898452 0.851614 0.807217
expected p.v. of profit 419.03
premium signature 2,500.00 2,213.16 1,952.79 1,720.19

expected p.v. of
premiums 8,386.15
profit
margin 5.00%
Credit was given to students who showed good understanding of the processes involved even
if the calculations were not correct. Generally well prepared students did this question quite
well.
12 (i) Let P be the monthly premium. Then:
EPV of premiums:
12 Pa(12) @ 4% = 186.996 P
[40]:25
where
a[40]:25
(12)
= a[40]:25
11
24
(
1 25 p[40]v 25 )
11 8821.2612
= 15.887 1 0.37512
24 9854.3036
= 15.583
Page 8
EPV of benefits:
75, 000(q[40]v 0.5 + q[40] (1 + b)v1.5 + ... + q[40] (1 + b) 24 v 24.5 )

1 24
where b = 0.04
75, 000 (1 + i )0.5 75, 000 (1 + i )0.5

= A[40]:25
1
@ i/ = A[40] 25 p [40] v 25 A65 @ i /
(1 + b) (1 + b)
75, 000 8821.2612

= 1 1 1
9854.3036
0.5
(1.04)
= 7709.6880
where
1.04
i/ = 1 = 0.00 i.e. i / = 0%
1+ b
EPV of expenses (at 4% unless otherwise stated
= 0.5 12 P + 400 + 0.025 12 Pa[40]:25

(12)
0.025 12 Pa[40]:1
(12)
+ 75 a[40]:25
@0%
1

+300 A[40]:25
1
= 6 P + 400 + 0.025 12 P 15.583 0.025 12 P 0.982025 + 75 23.27542

+300 0.05422
= 6 P + 400 + 4.6749 P 0.2946 P + 1745.6558 + 16.266
= 10.3803P + 2161.9218
where
11
a(12) = a[40]:1
[40]:1 24
1 p[40]v ( )
11 9846.5384
= 1 1 0.96154 = 0.982025
24 9854.3036
l64
a[40]:25
@0%
1 =
1
l[40]
(l
[40]+1 + .... + l64 ) = e[40]
l[40]
e64
8934.8771
= 39.071 17.421 = 23.27541
9854.3036
Page 9
l
1
A[40]:25 = 1.040.5 A[40]:25
1
= 1.040.5 A[40]:25 v 25 65
l[40]
8821.2612
= 1.040.5 0.38896 0.37512 = 0.05422
9854.3036
186.996 P = 7709.6880 + 10.3803P + 2161.9218

9871.6098
P= = 55.89
176.6157
(ii) Gross prospective policy value at t = 23 (calculated at 4%) is given by:
V prospective = 75, 000 (1.04) 23 v 0.5 [ q63 + (1.04) p63q64 v ] + 300v 0.5 [ q63 + p63q64v ] + 0.025 12 Pa(12)
63:2
+75 (1.04) 23
[1 + (1.04) p63v ] 12 Pa(12)
63:2
= 184,853.66 0.98058 [ 0.011344 + (1.04) 0.988656 0.012716 0.96154]

+300 0.98058 [ 0.011344 + 0.988656 0.012716 0.96154] + 0.025 12 55.89 1.90629
+184.854 [1 + (1.04) 0.988656 0.96154] 12 55.89 1.90629
11 2 l65 11 8821.2612
where a(12) = a63:2 1 v = 1.951 1 0.92456 = 1.90629
63:2 24 l63 24 9037.3973
= 4,335.0628 + 6.8932 + 31.9628 + 367.6104 1, 278.5106

= 3, 463.02
This question was generally not done well especially part (ii). In part (i) although it was
commonly recognised that a resultant rate of interest of 0% emerged students did not often
seem to know how to progress from there.
13 (i) The death strain at risk for a policy for year t + 1 (t = 0, 1, 2) is the excess of
the sum assured (i.e. the present value at time t + 1 of all benefits payable on
death during the year t + 1) over the end of year provision.
i.e. DSAR for year t + 1 = S t +1V
The expected death strain for year t + 1 (t = 0, 1, 2) is the amount that the
life insurance company expects to pay extra to the end of year provision for
the policy.
i.e. EDS for year t + 1 = q ( S t +1V )
Page 10
The actual death strain for year t + 1 (t = 0, 1, 2) is the observed value at

t+1 of the death strain random variable
i.e. ADS for year t + 1 = ( S t +1V ) if the life died in the year t to t+1
= 0 if the life survived to t + 1
Note: Full credit given if definition of death strain is given for a block of
policies rather than for a single policy as per above.
(ii) (a) Annual premium for endowment assurance with 100,000 sum assured
given by:
100, 000 100, 000

P EA = A35:25 = 0.38359 = 2,393.40
a35:25 16.027
Annual premium for term assurance with 200,000 sum assured given
by:
1
TA 200,000 A40:25
P =
a40:25
1
where A40:25 = A40:25 v 25 25 p40
8,821.2612
= 0.38907 0.37512 = 0.38907 0.33573 = 0.05334
9,856.2863
200,000 0.05334
PTA = = 671.62
15.884
Reserves at the end of the 11th year:
for endowment assurance with 100,000 sum assured given by:
EA
11V = 100,000 A46:14 P EAa46:14
= 100,000 0.58393 2,393.40 10.818

= 58,393.0 25,891.8 = 32,501.2
for term assurance with 200,000 sum assured given by:
Page 11
TA
11V = 200, 000 A51:14
1
PTA a51:14
1
where A51:14 = A51:14 v14 14 p51
8,821.2612
= 0.58884 0.57748 = 0.58884 0.52583 = 0.06301
9, 687.7149
TA
11V = 200, 000 0.06301 671.62 10.69
= 12, 602.0 7,179.6 = 5, 422.4
Therefore, sums at risk are:
Endowment assurance: DSAR = 100,000 32,501.2 = 67,498.8
Term assurance: DSAR = 200,000 5,422.4 = 194,577.6
(b) Mortality profit = EDS ADS
For endowment assurance
EDS = 19768 q45 67, 498.8 = 19768 0.001465 67, 498.8 = 1,954, 773.3
ADS = 36 67, 498.8 = 2, 429,956.8
mortality profit = 475,183.5 (i.e. a loss)
For term assurance
EDS = 9,855 q50 194,577.6 = 9,855 .002508 194,577.6 = 4,809, 246.1
ADS = 22 194,577.6 = 4, 280,707.2
mortality profit = 528,538.9

Hence, total mortality profit = 528,538.9 475,183.5 = 53,355.4
(c) Although there is an overall mortality profit in 2010, the actual number
of deaths for the endowment assurances is approximately 25% higher
than expected, which is a concern. Further investigation would be
required to determine reasons for poor mortality experience for the
endowment assurances, e.g. there may have been limited underwriting
requirements applied to this type of contract when they were written.
Generally (a) was done well. The most common error in (b) was to assume reserves at 10
years rather than 11. On the whole well prepared students coped with (b) well. Many
students did not attempt (c) or at best gave a somewhat sketchy answer.
Page 12
EXAMINATION
4 October 2011 (am)

Core Technical
booklet.
supervisor.
question paper.
CT5 S2011 Institute and Faculty of Actuaries

1 Calculate:
(a) 10|1 q[50]

(b) 10 p[60]+1
(c) a(12)
[40]:20
Basis:
Mortality AM92
2 Calculate 0.5 q75.25 using the assumption of a constant force of mortality.
Basis:
Mortality AM92 [3]
3 In a special mortality table with a select period of one year, the following
relationships are true for all ages:
0.5 q[ x ] = 0.25qx
0.5 q[ x ]+ 0.5 = 0.45qx
Express p[x] in terms of px . [3]
4 A term assurance contract with a term of 20 years pays a sum assured of 1

immediately on death to a life now aged 30 exact.
Calculate the expected value and variance of this contract.
Basis:
5 (a) Write down the random variable form of A1x: y .
(b) Calculate A1x: y on the following assumptions:
x = 0.02 for all x

y = 0.03 for all y
= 4% per annum [5]
CT5 S20112
6 Explain why it is necessary to have different mortality tables for different classes of
lives. [6]
7 A special joint life last survivor annuity of 10,000 per annum is payable
continuously in respect of a male and female life each aged 60 exact. Payments
commence on the first death and continue for 5 years after the second death.
Calculate the expected present value of this annuity.
Basis:
Expenses Nil [6]
8 The following data is extracted from a population census:
All Professions Profession A

Age Population Deaths Population Deaths
2029 120,000 256 12,500 30

3039 178,000 458 15,000 40
4049 156,000 502 16,000 50
5064 123,000 600 14,000 60
(a) Calculate the area comparability factor for Profession A using the data for All
Professions as the standard population.
(b) Hence or otherwise derive the standardised mortality ratio and the indirectly
standardised mortality rate.
[6]
9 Members of a pension scheme are subject to three decrements:
(a) Deaths - with independent decrement rates that are assumed to follow
ELT15(Males)
(b) Ill-health retirement - with an independent decrement rate of 0.01 at age 50

exact increasing by 0.005 for each additional year of age (so the ill-health
independent decrement at age 53 exact is 0.025)
(c) Age retirement - with an independent decrement rate of 0.2 at each age from
60 to 64 all exact.
Age retirements are assumed to take place on the attainment of the exact age, whilst
other decrements act uniformly across the year of age.
Calculate the probability that a member currently aged 59 exact will retire at age 62
exact. [6]

10 (i) Five years ago a with profits whole life assurance policy was sold to a life then
aged 30 exact.
The sum assured is 150,000 payable at the end of year of death and
premiums are payable annually in advance throughout life. The super
compound method of adding bonuses to the policy is used as follows:
each year there is a simple bonus of 2.5% on the sum assured
and an additional bonus of 5% on all existing bonuses (excluding the

simple bonus relating to that policy year)
Assume that bonuses vest at the start of each policy year and that the actual
past bonus additions have followed the assumptions stated above.
Calculate the net premium policy value just before payment of the 6th
premium.
Basis:

(b) Suggest two reasons why a life insurance company might use the super
compound method of adding bonuses to with profits policies, as opposed to
the compound method. [2]
[Total 7]
11 A pension scheme provides a pension on retirement of 1% of final pensionable salary

for each completed year of pensionable service. On retirement due to ill-health,
pensionable service is calculated as service that would have been completed by the
normal retirement age of 65. Final pensionable salary is defined as the average salary
in the last three years before retirement.
Derive an expression, without using commutation functions, for the present value of
the benefits for a new member age 30 with salary of 20,000 in the year after entry to
the scheme. Define all symbols used. [8]
CT5 S20114
12 (i) List the main features of a unit-linked policy. [4]
A four-year unit-linked policy issued by a life insurance company to a life aged 56

exact has the following profit vector:
(1525.89, 334.08, 292.05, 933.82)
(ii) Determine the net present value of the profits of this policy, assuming that the
company sets up reserves in order to zeroise future negative expected cash
flows on the policy.
Basis:
Risk discount rate 7.5% per annum [5]
[Total 9]
13 A life insurance company issues a 3-year without profits endowment assurance policy
to a male life aged 57 exact for a sum assured of 15,000 payable on maturity or at
the end of the year of death if earlier. Premiums of 4,700 are payable annually in
advance throughout the term of the policy.
The office holds net premium reserves for these policies, calculated using AM92
Ultimate mortality and interest of 4% per annum.
Surrenders occur only at the end of a year immediately before a premium is paid. The
surrender value payable is 75% of total premiums paid on the contract at the time the
surrender value is payable. Assume that at the end of the first and second policy
years, 10% and 5% respectively of all policies still in force at that time then surrender.
contract:
Rate of interest on cash flows

and Reserves 5% per annum
Initial expenses 10% of the annual premium
Renewal expenses 65 per annum on the second and subsequent
premium dates
(i) Calculate the net present value of profits for this contract. [10]
(ii) Calculate the internal rate of return for this contract. [2]
The company weakens the reserving basis by assuming that net premium reserves for
these policies are now calculated using AM92 Ultimate mortality and interest of 6%
per annum.
(iii) Calculate the revised net present value of profits and comment on your
answer. [4]
[Total 16]

14 On 1 January 2001, a life insurance company issued a number of 30-year endowment
assurance policies that pay 100,000 at maturity, or 50,000 at the end of the year of
earlier death to lives then aged 35 exact. Premiums are payable annually in advance.

Initial commission 50% of the premium payable in the first policy year
Initial expenses 300 paid at policy commencement date
Renewal expenses 2.5% of each premium from the start of the second policy year
(i) Write down the recursive relationship between the gross premium reserves at
successive durations of these policies, defining all symbols used. [4]
(ii) Show that the annual premium for each policy is approximately 1,803. [4]
There were 385 policies in force on 1 January 2010. During 2010, there were three
actual deaths, actual interest earned by the company was 5% and expenses were as
expected.
(iii) Calculate the profit or loss made by the company from both mortality and
interest in respect of these policies for the year 2010 based on the formula
stated in (i) above. [10]
[Total 18]
END OF PAPER
CT5 S20116
EXAMINERS REPORT

Core Technical
Purpose of Examiners Reports
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 who are 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. Although
Examiners have access to the Core Reading, which is designed to interpret the syllabus, the
Examiners are not required to examine the content of Core Reading. Notwithstanding that,
the questions set, and the following comments, will generally be based on Core Reading.
For numerical questions the Examiners preferred approach to the solution is reproduced in
this report. Other valid approaches are always given appropriate credit; where there is a
commonly used alternative approach, this is also noted in the report. For essay-style
questions, and particularly the open-ended questions in the later subjects, this report contains
all the points for which the Examiners awarded marks. This is much more than a model
solution it would be impossible to write down all the points in the report in the time allowed
for the question.
T J Birse
December 2011

Subject CT5 (Contingencies Core Technical) Examiners Report, September 2011
General comments on Subject CT5
CT5 introduces the fundamental building blocks that stand behind all life insurance and
pensions actuarial work.
Credit is given to students who produce alternative viable numerical solutions. In the case of
descriptive answers credit is also given where appropriate to different valid points made
which do not appear in the solutions below.
In questions where definitions of symbols and then formulae are requested, a different
notation system produced by a student to that used by examiners is acceptable provided it is
used consistently, is relevant and is properly defined and used in the answer.
Comments on the September 2011 paper
The general performance was slightly worse than in April 2011 but well-prepared candidates
scored well across the whole paper. Questions that were done less well were 7, 9, 10, 11 and
14(iii) and here more commentary is given to students to assist with further revision.
Most of the short questions were very straightforward where an answer could be produced
quickly and this is where many successful candidates scored particularly well. Students
should note that for long questions a reasonable level of credit is given if they can describe
the right procedures although to score well reasonable accurate numerical calculation is
necessary.
Page 2
d 60
1 (a) 10|1 q[50] = = 74.5020 = 0.00768
l[50] 9, 706.0977
(b) 10 p[60]+1 = l71 = 7,854.4508 = 0.85285

l[60]+1 9, 209.6568
v 20l60
(c) a(12) = (a[40]:20 11/ 24 (1 ))
[40];20 l[40]
= 12.000 11/ 24 (1 0.3118 9, 287.2164 / 9,854.3036)
= 11.676
Straightforward question generally done well.
2 We have:
1 p75 = 6,589.9258 / 6,879.1673 = 0.95795
= e where is the constant force
Hence = ln(0.95795) = 0.04296

75.75
0.04296dt
Hence 0.5 p75.25 = e
75.25
= e 0.02148 = 0.97875
Hence 0.5 q75.25 = 1 0.5 p75.25 = 0.02125
Again done well. Credit was given to those students who jumped straight to the solution of
(1 ( 1 p75 )0.5 ) .
p[ x ] 0.5 p[ x ] * 0.5 p[ x ]+0.5 = (1 0.5 q[ x] )*(1 0.5 q[ x]+0.5 )

3 =
= (1 0.25qx ) *(1 0.45qx ) = (1 0.25(1 p x )) *(1 0.45(1 p x ))
= (0.75 + .25 px ) *(.55 + .45 px ) = 0.4125 + 0.475 p x + 0.1125 p x2
This question was done reasonably well but many students failed to make the connection in
line 1.
1
4 The expected value is A
30:20
This equals
( A30 ( v 20 (l50 / l30 ) A50 )) (1.04)1/2

= (0.16023 (0.45639 (9,712.0728 / 9,925.2094) 0.32907)) 1.019804
= 0.01353
The variance equals
2 1
A30:20 ( A1 )2
30:20
2
A30:20 = (( A30 ( v ) (l50 / l30 ) A50 )) (1.04)
1 2 20 2 2
= (0.03528 (0.20829 (9,712.0728 / 9,925.2094) 0.13065)) 1.04

= 0.008997
Variance = 0.008997 0.013532 = 0.008814
This question was done reasonably well. The most common error was to forget to use
continuous functions which was penalised as one of the key attributes being tested was to see
if students could work out the 1.04 factor for the variance.
viTx if Tx Ty
5 (a) Z =
0 if Tx > Ty
where i is the valuation rate of interest.
1
(b) A x: y = e .04t t p x +t dt
0 xy

= e .04t e .02t e.03t (0.02)dt = 0.02 e.09t dt
0 0
= 0.02 / 0.09
= 0.22222
In part(a)many students did not appreciate what a random variable form was. Part (b) was
generally well done.
Part (a) comes directly from Core Reading but there is some debate about the situation
where Tx = Ty i.e .a simultaneous death where it could be argued either that Z =0 or is
undefined. The examiners decided to accept all these alternative situations.
Page 4
6
When a life table is constructed it is assumed to reflect the mortality experience of
a homogeneous group of lives i.e. all the lives to whom the table applies follow
the same stochastic model of mortality represented by the rates in the table. This
means that the table can be used to model the mortality experience of a
homogeneous group of lives which is suspected to have a similar experience.
If a life table is constructed for a heterogeneous group then the mortality

experience will depend on the exact mixture of lives with different experiences
that has been used to construct the table. Such a table could only be used to model
mortality in a group with the same mixture. It would have very restricted uses.
For this reason separate mortality tables are usually constructed for groups which
are expected to be heterogeneous. This can manifest itself as class selection e.g.
separate tables for males and females, whole life and term assurance
policyholders, annuitants and pensioners, or as time selection e.g. separate tables
for males in England and Wales in 198082 (ELT14) and 199092 (ELT15).
Sometimes only parts of the mortality experience are heterogeneous e.g. the
experience during the initial select period for life assurance policyholders, and the
remainder are homogeneous e.g. the experience after the end of the select period
for life assurance policyholders. In such cases the tables are separate (different)
during the select period, but combined after the end of the select period. In fact
there are separate (homogeneous) mortality tables for each age at selection, but
they are tabulated in an efficient (space saving) way.
Well prepared students answered this question well. However many did not get to the heart
of the homogeneity discussion and went off on tangents regarding various forms of selection.
7 EPV is
10, 000(a60:60 a60:60 ) + 10, 000 a5 A60:60
a60:60 = a60
m
+ a60
f
a60:60 = (15.632 0.5) + (16.652 0.5) (14.090 0.5) = 17.694
Ax: y = (1 ax: y ) = 1 ln(1.04) 17.694 = 0.30603
Therefore
(1 v5 )
EPV = 10, 000 (17.694 (14.090 0.5)) + 10, 000 0.30603

= 41,040 + 13,894
= 54,934
Many students struggled here with the second term in the equation in the 2nd line and did not
appreciate how to mix a continuous assurance factor with an annuity.
8
All professions Profession A
Age Population Deaths Population Deaths Expected
deaths
2029 120,000 256 12,500 30 26.667

3039 178,000 458 15,000 40 38.595
4049 156,000 502 16,000 50 51.487
5064 123,000 600 14,000 60 68.293
Total 577,000 1,816 57,500 180 185.042
(a) Total Expected deaths 185.042
1,816 185.042
Area comparability factor = = 0.978
577, 000 57,500
(b) Standardised mortality ratio = 180/185.042 = 0.973
1,816 185.042
Indirectly standardised mortality rate = = 0.003062
577, 000 180
Straightforward with no issues and generally well done.
Page 6
9 Age retirement can be ignored in constructing the dependent decrements.
The following rates are required:
Age q xd qix
59 0.01243 0.055
60 0.01392 0.06
61 0.01560 0.065
The dependent decrements are calculated as:
(aq )x = qx (1 0.5qx )
Age (aq) dx (aq)ix
59 0.012088 0.054658
60 0.013502 0.059582
61 0.015093 0.064493
Probability of reaching 60 = (1 0.012088 0.054658) = 0.933254

Probability of retiring at age 60 = 0.2 * 0.933254 = 0.186651
Probability of reaching 61 = 0.8 * 0.933254 * (1 0.013502-0.059582) = 0.692038
Probability of reaching 62 = 0.8 * 0.692038 * (1-0.015093 0.064493) = 0.509569
Overall required probability thus 10.19%
This question was not done well overall. Students struggled to follow through the logical
sequences. In fact this question can be solved with the same answer without using multiple
decrements and the few students who realised this were given credit.
10 (a) At the end of the 5th policy year, we have:
Year SA b1 b2 b
0 150,000
1 150,000 3,750 3,750.00
2 150,000 3,750 187.50 7,687.50
3 150,000 3,750 384.38 11,821.88
4 150,000 3,750 591.09 16,162.97
5 150,000 3,750 808.15 20,721.12
If net premium denoted by P then
150, 000 A[30] 150, 000 0.16011

P= = = 1099.81
a[30] 21.837
Therefore, net premium reserve at end of 5th policy year is given by:
5V = (150, 000 + 20, 721.12) A35 Pa35

= 170,721.12 0.19219 1,099.81 21.003
= 32,810.89 23,099.31 = 9,711.58
(b) The sum assured and bonuses increase more slowly than under other
methods for the same ultimate benefit, enabling the office to retain
surplus for longer.
This method rewards longer standing policyholders and discourages

surrenders, relative to other methods.
This question was also done poorly overall. A very large number of students attempted to
construct a complex net premium from the existing bonus flow where the question was only
seeking the normal net premium method. Part (b) was done better.
11 Retirement other than ill-health:
65 30 1 *
0.01 20,000 tz30 + t + 0.5r30 + t v t + 0.5a30
*
+ + + (65 30) z65r65v 35a65 / s30l30
t 0.5
t =0
Retirement due to ill-health:
65 30 1
0.01 20,000 (65 30) z30+ t + 0.5i30+ t v t + 0.5a30
*
+ t + 0.5 / s30l30
t =0
Page 8
Where
a*x is the annuity value at age x including any contingent spouse pensions
ix , rx , lx are values from a multiple decrement table at age x
sx is the salary index for age x where s x +1 / sx is the ratio of salary in the
year beginning age x + 1 to salary in the year beginning age x
zx (sx3 + sx2 + sx1)/3
Other schemes were accepted but overall very few students managed to derive a full answer
in this question.
12 (i)
Allocated premiums are invested in a fund(s) chosen by the policyholder
which purchases a number of units within that fund(s)
Each investment fund is divided into units, which are priced regularly
(usually daily)
Policyholder receives the value of the units allocated to their own policy
Benefits are directly linked to the value of the underlying investments
Unallocated premiums are directed to the companys non-unit fund
Bid/offer spread is used to help cover expenses and contribute towards

profit
Charges are made from the unit account periodically to cover expenses and
benefits (i.e. fund management charge) and may be varied after notice of
change given.
Unit-linked contracts may offer guaranteed benefits (e.g. minimum death

benefit)
Unit-linked contracts are generally endowment assurance and whole of life

contracts
(ii) To calculate the expected reserves at the end of each year we have (utilising
the end of year cashflow figures):
p58 = 0.99365 p57 = 0.99435 p56 = 0.99497
933.82
3V = = 893.61
1.045
2V 1.045 p58 3V = 292.05 2V = 1,129.17
1V 1.045 p57 2V = 334.08 1V = 1,394.13
The revised cash flow for year 1 will become:
1,525.89 p56 1,394.13 = 138.77
Revised profit vector becomes (138.77, 0, 0, 0) and

Net present value of profits = 138.77/(1.075) = 129.09
This question was generally done well.
13 (i) Reserves required on the policy per unit sum assured are:
a57:3
0V57:3 = 1 =0
a57:3
a58:2 1.955
1V57:3 = 1 = 1 = 0.318815
a57:3 2.870
a59:1 1.0
2V57:3 = 1 = 1 = 0.651568
a57:3 2.870
Multiple decrement table:
T d
q[57] s
q[57] ( aq ) d[57]+t 1 ( aq ) s[57]+t 1 (ap)[57]+t 1 t 1 (ap)[57]
+ t 1 + t 1
1 0.004171 0.10 0.004171 0.099583 0.896246 1.000000

2 0.006180 0.05 0.006180 0.049691 0.944129 0.896246
3 0.007140 0.00 0.007140 0.000000 0.992860 0.846172
Probability in force (ap)[56]+t 1 = (1 q[56]

d
+t 1 ) (1 q[56]+t 1 )
s
Page 10
The calculations of the profit vector, profit signature and NPV are set out in
the table below:
Policy Premium Expenses Interest Death Maturity Surrender In force

Year claim claim claim cash flow
1 4700 470.00 211.50 62.57 0.00 351.03 4027.91

2 4700 65.00 231.75 92.70 0.00 350.02 4423.73
3 4700 65.00 231.75 107.10 14892.90 0.00 10133.25
Policy year Increase Interest Profit Cum probability Discount NPV

in reserves on reserves vector of survival factor Profit
1 4286.05 0.00 258.15 1.00000 0.93458 241.26

2 4445.24 239.11 217.60 0.89625 0.87344 170.34
3 9773.52 488.68 128.95 0.84617 0.81630 89.07
Total NPV profit = 18.15
(ii) IRR is determined by solving the following equation for i:
258.15(1 + i ) 1 + 195.02(1 + i ) 2 + 109.11(1 + i ) 3 = 0
If i = 0.12 then LHS of equation = 2.64

Therefore IRR is 13%
(iii) The revised reserves required on the policy per unit sum assured are:
a57:3
0V57:3 = 1 =0
a57:3
a58:2 1.937
1V57:3 = 1 = 1 = 0.312389
a57:3 2.817
a59:1 1.0
2V57:3 = 1 = 1 = 0.645012
a57:3 2.817
And the revised cashflows become:
Policy
year Increase Interest Revised Cum probability Discount NPV
in reserves on reserves Profit vector of survival factor profit
1 4199.66 0.00 171.76 1.00000 0.93458 160.52

2 4448.78 234.29 209.24 0.89625 0.87344 163.79
3 9675.18 483.76 25.69 0.84617 0.81630 17.74
Total NPV profit = 21.02
The NPV of profit increases slightly if the reserving basis is weakened, as a

result of the surplus emerging being brought forward and the fact that the risk
discount rate is greater than the interest rate being earned on reserves.
In general well prepared students made a reasonable attempt with this question. Credit was
given to students who showed they understood the processes even if not all the arithmetical
calculations were correct.
Note that it is possible to solve (ii) using a quadratic equation process.
14 (i)
Formula is
(t V + P e) (1 + i ) = qx +t S + px +t t +1V
Definitions:
tV = gross premium reserve at time t
qx +t / p x +t = probability that a life aged x+t dies within /survives one year on
premium/valuation basis
P = office premium
e = initial/renewal expense incurred at start of policy year
i = rate of interest in premium/valuation basis
S = sum assured payable at end of year of death
Page 12
(ii)
Let P be the annual premium. Then equation of value is:
Pa[35]:30 = 50, 000 A[35]:30

1
( )
+ 100, 000v30 30 p[35] + 300 + 0.5 P + 0.025 P a[35]:30 1
where
8,821.2612
1
A[35]:30 = A[35]:30 v30 30 p[35] = 0.32187 0.30832 = 0.32187 0.27492 = 0.04695
9,892.9151
a[35]:30 = 17.6313
17.6313P = 50, 000 0.04695 + 100, 000 0.27492 + 300 + 0.5 P + 0.025P 16.6313
30,139.5
P= = 1,803.08
16.71552
(iii)
The gross premium prospective reserve per policy at the end of 2009 is given by:
9V
PRO
= 50, 000 A144:21 + 100, 000v 21 21 p44 0.975 Pa44:21
where
8,821.2612
A144:21 = A44:21 v 21 21 p44 = 0.45258 0.43883 = 0.45258 0.39443 = 0.05815
9,814.3359
a44:21 = 14.2329
9 V PRO = 50, 000 0.05815 + 100, 000 0.39443 0.975 P 14.2329
= 2,907.50 + 39, 443.00 25,021.48 = 17,329.02
The gross premium prospective reserve per policy at the end of 2010 is given by:
10 V
PRO
= 50, 000 A145:20 + 100, 000v 20 20 p45 0.975 Pa45:20
where
8,821.2612
A145:20 = A45:20 v 20 20 p45 = 0.46998 0.45639 = 0.46998 0.41075 = 0.05923
9,801.3123
a45:20 = 13.7805
10 V PRO = 50, 000 0.05923 + 100, 000 0.41075 0.975 P 13.7805
= 2,961.50 + 41,075.00 24, 226.16 = 19,810.34
Combined mortality and interest profit =
385 (17,329.02 + 0.975 1,803.08 ) 1.05 3 50, 000 (385 3) 19,810.34

= 7, 715,929.05 150, 000 7,567,549.88
= 1, 620.83
i.e. a combined mortality and interest loss of 1,620.83 which can be split between mortality
profit and interest profit separately as follows:
DSAR = 50, 000 19,810.34 = 30,189.66

EDS = 385 q44 DSAR = 385 0.001327 30,189.66 = 15, 423.75
ADS = 3 DSAR = 3 30,189.66 = 90,568.98
Therefore
Mortality profit = EDS ADS = 15,423.75 90,568.98 = 75,145.23 (i.e. a mortality loss)
Interest profit = 385 (17,329.02 + 0.975 1,803.08) (0.05 0.04) = 73,489.04
Alternatively: Interest profit = 75,145.23 1,620.83 = 73,524.40 (the small discrepancy

with the figure for interest profit above is due to figures being used from the Actuarial
Tables with only a limited number of decimal places)
Part (i) and (ii) were done well. In part (iii) most well prepared students were able to derive
the mortality profit but most struggled with the interest portion.
If a student got the combined total correct but then did not split up the content it was decided
to give full credit.
Page 14
EXAMINATION
23 April 2012 (am)

Core Technical
booklet.
supervisor.
question paper.

1 (a) Define 4 5 q[60]+1 in words.
(b) Calculate its value.
Basis:
Mortality AM92 [3]
2 Under a policy issued by a life insurance company, the death benefit payable at the
end of year of death is a return of premiums paid without interest. A level premium
of 3,000 is payable annually in advance throughout the term of the policy.
For a policy in force at the start of the 12th policy year, you are given the following
information:
Reserve at the start of the policy year 25,130

Reserve at the end of the policy year per survivor 28,950
Probability of death during the policy year 0.03
Expenses incurred at the start of the policy year 90
Rate of interest earned 4% per annum
Reserves given above are immediately before payment of the premium due.
Calculate the profit/loss expected to emerge at the end of the 12th policy year per
policy in force at the start of that year. [3]
3 Calculate:
(a) a50:15
1
(b) ( IA)50:15
Basis:
Mortality AM92
4 A joint life assurance contract provides a death benefit of 100,000 payable

immediately on the second death of two lives, a male life currently aged 60 exact and
a female life currently aged 55 exact.
Calculate the expected present value of the contract.
Basis:

Expenses Nil
[4]
CT5 A20122
5 A 10-year unit-linked policy has the following profit vector:
(40, 12, 6, 1, 5, 4, 8, 20, 25, 30)
Determine the revised profit vector if reserves are set up to zeroise future negative
cash flows on the following basis:
Mortality 0.5% per annum (i.e. probability of death at each age)

Interest 2.5% per annum
[4]
6 (a) Calculate the constant force of mortality applicable to a life aged between 67
and 68 exact.
(b) Calculate the value of 0.5 q67.25 using the assumption of a constant force of
mortality and the value derived in (a) above.
Basis: AM92 Ultimate [4]
7 Describe the benefits typically provided by a salary-related pension scheme for active
members on age retirement. [6]
8 Explain the impact of occupation on mortality and morbidity. [6]
9 (i) List the main categories of expenses incurred by life insurance companies. [2]
(ii) Give one example of each category in part (i) and indicate the manner in
which it is usually allowed for in the calculation of premiums. [4]
[Total 6]
10 An insurance company writes policies that provides benefits of 1,000 in the event of
becoming disabled due to accident and 10,000 on death.
(a) Construct a multiple state transition model for these policies.

(b) Give a formula for the expected present value of the benefits.
[6]

11 (i) State the advantages and disadvantages of using crude mortality rates and
directly standardised mortality rates as the comparison measure of mortality in
two or more different populations [4]
You are given the following data in respect of a sub-population:
Age Population
50 100,000
55 95,000
60 80,000
Number of deaths in sub-population 1,250
(ii) Calculate the Standardised Mortality Ratio using ELT15 (Males) as the
mortality rate for the standard population. [3]
[Total 7]
12 An endowment assurance contract with a term of 10 years pays a sum assured of

100,000 immediately on death and a sum of 50,000 on survival for 10 years.
Calculate the expected present value and variance of this contract.
Basis:
Mortality x = 0.03 throughout

13 A life insurance company issues a 40-year with profit endowment assurance policy to
a life aged 20 exact. The sum assured of 85,000 plus declared reversionary bonuses
is payable on survival to the end of the term or immediately on death if earlier.
The company assumes that future annual bonuses will be declared at a rate of
1.92308% of the sum assured, compounded and vesting at the end of each policy year
(i.e. the death benefit does not include any bonus relating to the policy year of death).
Calculate the monthly premium payable in advance throughout the term of the policy.
Basis:

Initial commission 480% of the first monthly premium
Renewal commission 2.5% of each monthly premium excluding the first
Renewal expenses 75 per annum at the start of the second and subsequent
policy years. The renewal expense is assumed to increase
by 5 per annum from the start of the third policy year.
[10]
CT5 A20124
14 A life insurance company issues 20-year decreasing term assurance policies to single
lives aged 40 exact. The death benefit, which is payable at the end of the year of
death, is 200,000 in the first policy year, 190,000 in the second policy year
thereafter reducing by 10,000 each year until the benefit is 10,000 in the twentieth
and final policy year. Premiums on the policies are payable annually in advance for
20 years or until earlier death.
The company calculates its reserves on a net premium basis and negative reserves are
permitted.
(i) Show that the annual net premium for each policy is approximately equal to
204 using the basis below. [4]
625 policies were in force at the start of the 10th policy year and 3 policyholders died
during that policy year.
(ii) Calculate the mortality profit or loss to the life insurance company during the
10th policy year using the basis below. [6]
(iii) Comment briefly on the results obtained in part (ii) above. [2]
Basis:

Expenses Nil
[Total 12]

15 A life insurance company issues a three-year term assurance policy to a male life aged
57 exact under which level premiums are payable annually in advance throughout the
term of the policy or until earlier death. The sum assured is 150,000 payable at the
end of year of death.
The company uses the following assumptions to calculate the premium for this policy:
Rate of interest on cash flows 6% per annum

Renewal expenses 50 per annum on the second and third premium
dates
Renewal commission 2.5% of the second and third years premiums
(i) Write down the gross future loss random variable at the outset of the policy.
[5]
(ii) Calculate the office premium using assurance and annuity functions, setting
the expected value of the gross future loss random variable to zero. [4]
(iii) Derive the office premium using a discounted cash flow projection, assuming
no withdrawals and using the same profit criterion as in part (ii). [6]
(iv) Without further calculation explain the effect of:
(a) setting up reserves within the calculation of part (iii).
(b) having set up the reserves in part (a), increasing the risk discount rate
to 8% per annum.
[2]
[Total 17]
END OF PAPER
CT5 A20126
EXAMINERS REPORT

Core Technical
Introduction
candidates, both those who are sitting the examination for the first time and who are 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. Although
Examiners have access to the Core Reading, which is designed to interpret the syllabus, the
Examiners are not required to examine the content of Core Reading. Notwithstanding that,
the questions set, and the following comments, will generally be based on Core Reading.
this report. Other valid approaches are always given appropriate credit; where there is a
commonly used alternative approach, this is also noted in the report. For essay-style
questions, and particularly the open-ended questions in the later subjects, this report contains
all the points for which the Examiners awarded marks. This is much more than a model
solution it would be impossible to write down all the points in the report in the time allowed
for the question.
T J Birse
July 2012

Subject CT5 (Contingencies) April 2012 Examiners Report
Comments on the April 2012 paper
The general performance was better this session than in recent diets and many students scored
well with a very pleasing increase in the number passing. Questions that were done less well
were 2, 10, 12, 13 and 15(i) and (iii) and here more commentary is given to students to assist
with further revision.
Most of the short questions were very straightforward where an answer could be produced
quickly and this is where many successful candidates scored particularly well. Students
should note that for long questions a reasonable level of credit is given if they can describe
the right procedures although to score well reasonable accurate numerical calculation is
necessary.
Page 2
1 (a) 4|5 q[60]+1 is the probability that a life now aged 61 exact who entered the
selection period 1 year ago will die between the ages of 65 and 70 both exact
(b) ( )
4 | 5 q[60] + 1 = l 65 l 70 / l [60]+1 = (8821.2612 8054.0544) / 9209.6568
= 0.0833
A gentle starter generally done well
2 The death benefit in year 12 is 36,000
Profit emerging per policy in force at the start of the year is:
(11V + P e) (1 + i ) (qx +t S ) px +t 12V
= (25,130 + 3, 000 90) 1.04 36, 000 0.03 (1 0.03) 28,950 = 0.10
This question overall caused problems and students sometimes had only a vague recall of the
iterative formula in line 3. The most common error was to forget expenses and the survival
factor before the closing reserve. It was also not on many occasions appreciated that the
accumulation minus the benefit costs gave the profit.
l 65
3 (a) a 50:15 = a 50 v15 ( a 65)
50
l
8,821.2612
= (14.044 1) 0.41727 (10.569 1)
9, 712.0728
= 9.417
l
(b) ( IA) 1 = ( IA)50 v15 65 (( IA)65 + 15 A65 )
50:15
l 50
8,821.2612
= 4.84555 0.41727 (5.50985 + 15 0.40177)
9,712.0728
= 0.47329

In (a) a surprising number of students thought that the required function could be derived
from the a due function for the same term minus 1 which is, of course, wholly incorrect.
Otherwise the question was generally well done.
Page 3
4 The value is 100000A60:55

JJJJJK where 60 relates to the male life and 55 the female life.
JJJJJK = 100000 ( A + A A
100000 A60:55 60 55 60:55 )
= 100000 (1 ln(1.04)(a60 + a55 a60:55 ))
= 100000 (1 ln(1.04)([a60 1 / 2] + [a55 1 / 2] [a60:55 1 / 2]))
= 100000 (1 0.039221 (15.632 + 18.210 14.756 0.5))
= 27104
Generally well done. Other methods such as multiplying non continuous functions by
(1.04)1/2 to obtain the continuous one were quite acceptable.
5 The reserves required at the beginning of policy years 6, 4, 3 and 2 are:
4
5V = = 3.902
1.025
1
3V = = 0.976
1.025
1
2V = (6 + .995 3V ) = 6.801
1.025
1
1V = (12 + .995 2V ) = 18.309
1.025
Revised cash flow in policy year 5 = 5 0.995 5V = 1.118

Revised cash flow in policy year 1 = 40 0.995 1V = 58.218
=> revised profit vector: (58.22, 0, 0, 0, 1.12, 0, 8, 20, 25, 30)
Generally well done by well prepared students who were able to recall the techniques
involved.
Page 4
68
6 (a) p67 = exp( dx) where is the constant force.
67
= ln( p67 ) = ln(1 q67 ) = ln(0.982176)
= 0.017985
(b) Using the constant force assumption:
67.75
0.5 q 67.25 = 1 0.5 p 67.25 = 1 exp( 67.25 dx)
= 1 exp( 0.5 ) = 1 exp( 0.5 0.017985)
= 0.008952
Generally well done. However some students ignored the instruction to use (a) to get (b)
choosing the more direct route. The examiners penalised this approach, although some
credit was given.
7 Pension schemes usually have a fixed Normal Pension Age (NPA).
Age retirement benefits may be provided on early or late retirement.
Pension usually depends on pensionable service at retirement, as defined in the

scheme rules, e.g. complete years of membership.
Pension for each year of service is usually related to pensionable salary, for example
1/80ths of pensionable salary for each year of service. 1/80 is described as the accrual
rate.
Pensionable salary can be defined as:
1. Salary at retirement (final salary)

2. Annual salary averaged over a few years before retirement (final average salary)
3. Annual salary averaged the whole of service (career average salary)
Pensions are commonly increased in payment to offset the effect of inflation.
Some benefit may be in the form of cash, sometimes by converting pension to cash.
There can be a spouses pension for married pensioners which is often a percentage of
the main pension on the members prior death.
Pensions may also be paid for an initial guarantee period like 5 years.
Other relevant comments were credited. No credit was given for any discussion on ill-health
retirement as this was not required from the question.
Many students scored reasonable marks.
Page 5
8 Occupation can have several direct and indirect effects on mortality and morbidity.
Occupation determines a persons environment for 40 or more hours each week. The
environment may be rural or urban, the occupation may involve exposure to harmful
substances e.g. chemicals, or to potentially dangerous situations e.g. working at
heights. Much of this is moderated by health and safety at work regulations.
Some occupations are more healthy by their very nature e.g. bus drivers have a
sedentary and stressful occupation while bus conductors are more active and less
stressed. Some work environments e.g. publicans, give exposure to a less healthy
lifestyle.
Some occupations by their very nature attract more healthy or unhealthy workers.
This may be accentuated by health checks made on appointment or by the need to
pass regular health checks e.g. airline pilots. However, this effect can be produced
without formal checks, e.g. former miners who have left the mining industry as a
result of ill-health and then chosen to sell newspapers. This will inflate the mortality
rates of newspaper sellers.
A persons occupation largely determines their income, and this permits them to adopt
a particular lifestyle e.g. content and pattern of diet, quality of housing. This effect
can be positive and negative e.g. over indulgence.
Generally well done and credit was given for any other relevant points.
9 (i) Initial Expense

Renewal Expense
Claim Expense
Overhead Expense
(ii) Initial Expense
Underwriting (allowed for on a per policy basis although medical expenses

might be sum assured related) or;
Processing proposal and issuing policy (allowed for on a per policy basis) or;
Commission (allowed for directly and usually premium related) or;
Marketing (allowed for on a per policy basis on estimated volumes)
Renewal Expense
Administration (allowed for on a per policy per annum basis with allowance
for inflation) or;
Commission (allowed for directly and usually premium related) or;
Investment Expense (charged as a deduction from investment funds).
Claim Expense
Calculation and payment of benefit (allowed for on a per policy per annum
basis with allowance for inflation)
Page 6
Overhead Expense
Central services e.g. premises, IT, legal (allowed for on a per policy per
annum basis with allowance for inflation) ]
Many students did not give a full answer referring only to direct and indirect expenses for
which only partial credit was given, Also many did not give the full number of distinctly
different examples. Other relevant examples were credited however.
10 The multiple state transition model is:
a = able i = disabled
x x
d = dead
Define the force of interest

Value of death benefit = 10, 000 et ( t pxaa . x +t + t pxai . x +t )dt
0

Value of disablement benefit = 1, 000 et ( t pxaa . x +t )dt
0
Generally the diagram was completed satisfactorily. Many students took the view that
returning to the able state from the disabled one was impossible and thus omitted the return
arrow. This was accepted so long as the assumptions were stated.
The resultant formulae were, however, on the whole poorly done.
11 (i) Crude Mortality Rate
Advantage do not need population and deaths split by age

Disadvantage differences in age structure between populations will be
confounded
Directly Standardised Mortality Rate
Advantage only reflects differences in mortality rates
Page 7
Disadvantage requires age specific mortality rates for the observed

population
(ii) SMR = actual deaths / expected deaths
Expected deaths = 100000*0.00464+95000*0.00797+80000*0.01392 = 2335
SMR = 1250 / 2335 = 0.535
A straightforward question generally done well by well prepared students. Some students
struggled to find the distinctive advantages and disadvantage given above.
1
12 The expected value is 100000 Ax1:n + 50000 A
x :n
10
Ax1:n = exp(( ln(1.05) .03)t ) .03dt
0
10
10 exp( 0.07879t )
= 0.03 exp( 0.07879t )dt = 0.03
0 0.07879 0
0.03
= [1 exp( 0.7879)] =0.20759
0.07879
1
A = exp(0.7879) = 0.45480
x:n
The expected value is thus 100000 0.20759 + 50000 0.45480 = 43499
For the variance the rate used is (1.05)21=10.25% and ln(1.1025)=0.09758.
Hence:
10
10 exp(0.12758t )
2 1
Ax:n = 0.03 exp(0.12758t )dt = 0.03
0 0.12758 0
0.03
= [1 exp(1.2758)] =0.16949
0.12758
2 1
A = exp(1.2758) = 0.27921
x:n
The variance is thus (100000 ) 0.16949 + ( 50000 ) 0.27921 (43499)2 = (22378)2

2 2
The part relating to the expected value was generally done well. However by contrast the
part relating to the variance was done poorly. Many students failed to realise that the
integration process was the same as for the expected value with the exception of building in
the 10.25% interest rate.
Page 8
13 Let P be the monthly premium. Then:
EPV of premiums:
12 Pa(12) @ 6% = 184.6092 P
[20]:40
where
11
(12)
a[20]:40
24
(1 v 40 40 p[20] )
= a[20]:40
11 9287.2164
= 15.801 1 0.09722 = 15.801 0.4169 = 15.3841
24 9980.2432
EPV of benefits:
(
85, 000 q[20]v 0.5 + q[20] (1 + b)v1.5 + ... +
1 39
q[20] (1 + b)39 v39.5 + (1 + b) 40 40 p[20]v 40 )
where b = 0.0192308
= 85, 000
(1.06)0.5
(1 + b)
(
q[20] (1 + b)v + q[20] (1 + b) 2 v 2 + ... + q[20] (1 + b) 40 v 40
1 39
)
+85, 000(1 + b) 40 v 40 40 p[20]
85, 000
= (1.06)0.5 A[20]:40
1
@ i + 85, 000v 40 40 p[20] @ i
(1 + b)
where
1.06
i = 1 = 0.04
1+ b
1
and A[20]:40 @ i = A[20]:40 v 40 40 p[20]
9287.2164
= 0.21746 0.20829 = 0.21746 0.19383 = 0.02363
9980.2432
EPV of benefits
85, 000 (1.06)0.5

= 0.02363 + 85, 000 0.19383
(1 + b)
= 2, 028.911 + 16, 475.550 = 18, 504.461
Page 9
EPV of expenses
= 4.8P + 325 + 0.025 12 Pa[20]:40

(12)
0.025P + 65 a[20]:40 1 + 5 ( Ia)[20]:40 1

= 9.3902 P + 325 + 65 14.801 + 5 208.366 = 9.3902 P + 2, 328.895
where
( Ia)[20]:40 = ( Ia)[20] v 40 40 p[20] 40a60 + ( Ia)60
9287.2164
= 262.666 0.09722 [ 40 11.891 + 113.516]
9980.2432
= 262.666 53.300 = 209.366
Equation of value gives
184.6092 P = 18,504.461 + 9.3902 P + 2,328.895
20,833.356
P= = 118.90
175.219
The difficult part of this question was related to the EPV of Expenses and most students failed
to complete this complex part. The rest of the question was however generally reasonably
done by well prepared students.
14 (i) Annual net premium for the decreasing term assurance is given by:
1
210, 000 A40:20 10, 000( IA)140:20
P =
a40:20
1
where A40:20 = A40:20 v 20 20 p40
9287.2164
= 0.46433 0.45639 = 0.46433 0.43004 = 0.03429
9856.2863
and ( IA)140:20 = ( IA)40 v 20 20 p40 [ 20 A60 + ( IA)60 ]
= 7.95699 0.43004 [ 20 0.45640 + 8.36234 ] = 0.43544
Page 10
210, 000 0.03429 10, 000 0.43544

P = = 204.39
13.927
(ii) Reserve at the end of the 10th policy year given by:
1
10V = 110, 000 A50:10 10, 000( IA)150:10 P a50:10
where
1
A50:10 = A50:10 v10 10 p50
9287.2164
= 0.68024 0.67556 = 0.68024 0.64601 = 0.03423
9712.0728
and
( IA)150:10 = ( IA)50 v10 10 p50 [10 A60 + ( IA)60 ]
= 8.55929 0.64601 [10 0.45640 + 8.36234 ] = 0.20875
10V = 110, 000 0.03423 10, 000 0.20875 204.39 8.314
= 3, 765.30 2, 087.50 1, 699.30 = 21.50
Therefore, sum at risk per policy in the 10th policy year is:
DSAR = 110,000 (21.50 ) = 110,021.50
Mortality profit = EDS ADS
EDS = 625 q49 110, 021.50 = 625 0.002241110, 021.50 = 154, 098.86
ADS = 3 110, 021.50 = 330, 064.50
i.e. mortality profit = 175,965.36 (i.e. a loss)
Page 11
(iii) The death strain at risk per policy in the 10th policy year for this decreasing
term assurance is very large (approximately equal to the sum assured payable
in the event of death).
The actual number of deaths during the 10th policy year (at 3) is approximately
double that expected (at 1.4) which accounts for the mortality loss.
However, a mortality experience investigation would need to consider a longer

time period and ideally, a larger number of policies to determine whether
actual mortality experience is heavier than expected.
Question generally done well by well prepared student. This was a straightforward question
of its type.
15 (i) Gross future loss random variable =
K[57] +1
150, 000v + 350 + 50aK P(0.975aK 0.125) if K[57] < 3
[57] [57] +1)
350 + 50a2 P (0.975a3) 0.125) if K[57] 3
(ii) E (Gross future loss random variable) = 0
150, 000 A[57]:3

1
+ 350 + 50 a[57]:3 1 = P 0.975a[57]:3 0.125
9287.2164
where 1[57]:3 = [57]:3 v 3 3 p[57] = 0.84036 0.83962 = 0.84036 0.82502 = 0.01534
9451.5938
and a[57]:3 = 2.820
150, 000 0.01534 + 350 + 50 1.820 = 2.6245 P
2,301.0 + 350 + 91.0

P= = 1, 044.77
2.6245
(iii) Mortality table:
x t q[ x ]+t 1 p[ x]+t 1 t 1 p[ x ]
57 1 0.004171 0.995829 1.000000
58 2 0.006180 0.993820 0.995829
59 3 0.007140 0.992860 0.989675
Page 12
Cash flows (per policy at start of year) assuming annual premium is denoted
by P:
Year 1 2 3
Premium P P P
Expenses 0.15P + 350 0.025P + 50 0.025P + 50
Interest 0.051P 21 0.0585P 3 0.0585P 3
Claim 625.65 927.00 1071.00
Profit vector 0.901P 996.65 1.0335P980.00 1.0335P1124.00
Cumulative probability
of survival 1.000000 0.995829 0.989675
Profit signature 0.9010P 996.650 1.0292P 975.912 1.0228P 1112.395
Discount factor 0.94340 0.890000 0.83962
NPV of profit 0.85P 940.240 0.9160P 868.562 0.8588P 933.989
Therefore:
3
2742.791
NPV = 0 =2.6248P 2742.791 P =
1 2.6248
= 1, 044.95
which is consistent with the premium calculated in (ii) above (allowing for
rounding)
(iv) (a) profit is deferred but as the earned interest rate is equal to the risk
discount rate, there is no change to the NPV or premium
(b) profit is deferred and because the risk discount rate is greater than the
earned interest rate, NPV falls. Therefore, the premium would need to
be increased to satisfy the same profit criterion.
Most students struggled with part (i) but well prepared ones completed parts (ii) and (iv)
satisfactorily. Part (iii) caused students great difficulties as often occurs with this approach
and many even failed to realise that the answers to (ii) and (iii) should numerically be the
same within rounding.
Page 13
EXAMINATION
2 October 2012 (am)

Core Technical
booklet.
supervisor.
question paper.

1 Calculate:
(a) 12 p43
(b) 10|5 q55
(c) a45:10
Basis:
Mortality AM92
2 Give three different forms of selection that would be expected in a group of lives
purchasing immediate annuities with an example of each. [3]
3 Explain how nutrition affects mortality and morbidity. [4]
4 Calculate 3 p55.75 using the assumption of Uniform Distribution of Deaths.
Basis:
Mortality ELT15 (Females) [4]
5 The Area Comparability Factor is defined as:
s Exc,t s mx,t Exc,t s mx,t

F = x x
s
Exc,t Exc,t
x x
(a) Define the notation used.
(b) Explain what is measured by the Area Comparability Factor by considering

the ratio of the numerator to the denominator.
[4]
6 A life insurance company issues a with profit whole life assurance policy to a life
aged 40 exact, under which the sum assured S and any attaching bonuses, are payable
immediately on death. Compound bonuses are added annually in advance. Premiums
are payable annually in advance ceasing at exact age 85 or on earlier death.
Write down an expression for the net future loss random variable at outset for this
policy defining all symbols that are used. [4]
CT5 S20122
7 On 1 January 2007, a life insurance company sold a large number of 30-year pure
endowment policies to lives then aged 35 exact. The sum assured under each policy
is 125,000 payable on maturity. Premiums are payable annually in advance
throughout the term of the policy.
There were 3521 pure endowment policies still in force on 1 January 2011 and 8
policyholders died during 2011.
Calculate the total mortality profit or loss to the life insurance company during 2011
assuming the company calculates net premium reserves on the following basis:

Expenses Nil
[4]
8 Examine the column of dx shown in the English Life Table No. 15 (Males) in the
Formulae and Tables for Examinations (Pages 6869).
Describe the key characteristics of this mortality table using the data to illustrate your
points. [6]
9 (i) Explain what is meant by the following in the context of life insurance
policies:
(a) gross premium prospective reserve

(b) gross premium retrospective reserve [4]
(ii) State the conditions necessary for gross premium prospective and gross
premium retrospective reserves to be equal. [3]
[Total 7]
10 A pension scheme provides a lump sum benefit to members on reaching retirement at

age 65 equal to one months pensionable salary for each complete year of service.
Pensionable salary is defined as average annual salary in the last two years before
retirement.
Calculate the cost of this benefit as a percentage of salary for a new member of the
scheme aged 35 exact, with salary in the next year of 20,000.
Basis:
Pension Scheme tables in the Formulae and Tables for Examinations

[8]

11 A special joint life annuity of 500 per week is payable in arrear in respect of a male
life aged 65 exact and a female life aged 62 exact. The annuity has the following
features:
The annuity is guaranteed in any event for the first 5 years at the level of 500 per
week.
At the end of the guarantee period if both lives are still surviving the annuity
continues at the same level until one life dies at which time it reduces to two-
thirds of the initial level and continues at this reduced level until the second life
dies.
At the end of the guarantee period if only one life has survived the annuity
reduces to two-thirds of the initial level and continues at this reduced level until
the second life dies.
At the end of the guarantee period if both lives have previously died then the
annuity ceases.
Calculate the expected present value of this annuity.
Basis:

Expenses Nil [8]
12 A life insurance company issues a special endowment assurance policy for a 25 year
term to two lives x and y. Under this policy, a sum assured of 100,000 is paid
immediately on the second death within the 25 year term. At the end of 25 years a
sum of 50,000 is paid to each survivor.
Calculate the annual premium paid continuously under this policy assuming this is
paid throughout the term or until the second death if earlier.
Basis:
Mortality Life x: x = 0.02 for all x

Life y: y = 0.03 for all y
Force of interest 5% per annum
Expenses Nil [10]
CT5 S20124
13 A life insurance company issues a with profit whole life assurance policy to a life
aged 55 exact. The sum assured is 75,000 together with any attaching bonuses and
is payable immediately on death. Level premiums are payable monthly in advance
ceasing on the policyholders death or on reaching age 85 if earlier.
Simple annual bonuses are added at the end of each policy year (i.e. the death benefit
does not include any bonus relating to the policy year of death).
The company calculates the premium on the following basis:
Expenses
Initial 275
Renewal 65 at the start of the second and subsequent policy years and
payable until death
Claim 200 on death
Commission
Initial 75% of the total premium payable in the first policy year
Renewal 2.5% of the second and subsequent monthly premiums
Bonuses Simple bonus of 2.0% of basic sum assured per annum
(i) Calculate the monthly premium for this policy. [6]
(ii) Calculate the gross prospective policy value at the end of the 30th policy year
given that the total actual past bonus additions to the policy have followed the
assumptions stated in the premium basis above (including the bonus just
vested).
Policy value basis:
Expenses
Renewal 80 at the start of each policy year and payable until death
Claim 250 on death
Commission
Renewal 2.5% of the monthly premiums
Bonuses Simple bonus of 2.5% of basic sum assured per annum

[4]
[Total 10]

14 A life insurance company issues a four-year policy to a male life aged 30 exact that
offers the following benefits:
On death during the term of the policy or on survival to the end of the term, a sum
of 60,000.
On redundancy during the term of the policy, a return of 100% of total premiums
paid.
On surrender during the term of the policy, a return of 50% of total premiums
paid.
Premiums of 14,000 are payable annually in advance throughout the term of the
policy or until earlier claim. The death, surrender and redundancy benefits are
payable immediately on claim. The contract ceases on payment of any claim.
The company uses the following basis to profit test this contract:
Interest earned on cash flows 3% per annum

Expenses 5% of each premium paid
Reserves Ignore
The company has also calculated the following dependent rates of mortality, surrender
and redundancy which are used to profit test this contract:
d s r
Year t (aq )[30]+t 1 (aq)30 +t 1 (aq)30 +t 1
1 .000447 .098727 .023744

2 .000548 .049361 .024368
3 .000602 .024680 .024680
4 .000636 0 0
Calculate the expected profit margin to the company on this policy using a risk
discount rate of 5% per annum. [10]
15 A life insurance company issues a three-year unit-linked endowment assurance policy

to a male life aged 45 exact. The main features of the contract are:
Premiums: 3,000 per annum are payable yearly in advance

throughout the term of the policy or until earlier death
Allocation rates: 75% of premium is allocated to units in the first policy

year, 100% in the second and 105% in the third
Policy fee: 35 is deducted from the bid value of units at the start
of each policy year
Death benefit: 150% of the bid value of the units is payable at the end
of the policy year of death
Maturity benefit: 100% of the bid value of the units is payable
CT5 S20126
Bid-offer spread: 5%
Annual management charge: 1.5% of the bid value of units is deducted at the end of
each policy year (management charges are deducted
from the unit fund before death and maturity benefits
are paid).
contract:
Rate of growth on assets in the unit fund 5.0% per annum in year 1

Withdrawals None
Renewal expenses 80 per annum on the second and
subsequent premium dates
Renewal commission 2.5% of the second and subsequent
years premiums
Rate of expense inflation 2.0% per annum
For renewal expenses, the amount quoted is at outset, and the increases due to
inflation start immediately.
(i) Calculate the non-unit fund cash flows in each year of the contract and hence
the expected present value of profit assuming that the policyholder dies in the
third year of the contract. [9]
(ii) Calculate the expected present value of profit for the policy if the policyholder
dies in the:
(a) first year of the contract.

(b) second year of the contract.
[4]
(iii) Hence calculate the expected present value of the contract allowing for the
possibility that the policyholder survives to the end of the contract. [2]
[Total 15]
END OF PAPER
CT5 S20127
EXAMINERS REPORT

Core Technical
Introduction
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.
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.
D C Bowie
December 2012

Subject CT5 (Contingencies) September 2012 Examiners Report
descriptive answers credit is also given to alternative valid points which do not appear in the
solutions below.
The general performance was lower than average this session. Questions that were done less
well were 6, 11, 12, and 15(ii) and (iii); more commentary on these questions is given in this
report to assist candidates with further revision.
However most of the short questions were very straightforward and this is where many
successful candidates scored particularly well. Students should note that for long questions a
reasonable level of credit is given if they can describe the right procedures; however, to score
well reasonable, accurate numerical calculation is necessary.
Page 2
l55 9557.8179
1 (a) 12 p43 = = = 0.97269
l43 9826.2060
l65 l70 8821.2612 8054.0544

(b) 10|5 q55 = = = 0.08027
l55 9557.8179
l
(c) a45:10 = a45 v10 55 a55 at 6%

l45
9557.8179
= 14.850 0.55839 13.057
9801.3123
= 7.740
Generally well done
2
Class selection e.g. males and females have different mortality/longevity
characteristics.
Time Selection mortality rates vary over time (in annuities generally improves).
Adverse Selection lives in better health than average may be more likely to
purchase an annuity
Generally well done-other plausible types and examples were credited.
3 Nutrition has an important influence on morbidity and in the longer term on mortality.
Poor quality nutrition can increase the risk of contracting many diseases and hinder
recovery from sickness.
Excessive or inappropriate (e.g. too much fat) eating can lead to obesity and an
increased risk of associated diseases (e.g. heart disease, hypertension) leading to
increased morbidity and mortality.
Inappropriate nutrition may be the result of economic factors e.g. lack of income to
buy appropriate foods or the result of a lack of health and personal education resulting
in poor nutritional choices.
Also, social and cultural factors encourage or discourage the eating of certain foods
e.g. alcohol consumption.
Many candidates gave a reasonable answer but there was a tendency to overlook the obesity
risk in the second paragraph.
Page 3
4 3 p55.75 = 0.25 p55.75 p56 p57 0.75 p58
= (1 0.25 q55.75 ) (1 q56 ) (1 q57 ) (1 0.75 q58 )
0.25 0.00475
= 1 0.99469 0.99408 (1 0.75 0.00660)
1 0.75 0.00475
= 0.99881 0.99469 0.99408 0.99505
= 0.98274
Generally well done.
5 (a) Definitions of three terms are:
Exc,t Central exposed to risk in population being studied between ages x and x + t.
mx,t Central rate of mortality either observed or from a life table in population
being studied for ages x to x + t.
s
Exc,t Central exposed to risk for a standard population between x and x + t.
s
m x ,t Central rate of mortality either observed or from a life table in standard
population for ages x to x + t.
(b) The area comparability factor (F) is the ratio of the mortality rates in the
standard population weighted by the age structure distribution of the standard
population to the mortality rates in the standard population weighted by the
age structure distribution of the observed population.
F is therefore is a measure of variation between population age structures.
Many candidates gave formulae that were not required. Also many did not give a complete
answer.
6 The net future loss random variable is given by:
S (1 + b) K 40 +1 v
T40
Pamin( K
40 +1,45)
b = annual rate of future bonus

P = annual net premium
K40 = curtate future lifetime of a life aged 40 exact
T40 = complete future lifetime of a life aged 40 exact
Generally not done well. It is often the case that candidates have difficulties in setting out the
random variable expressions.
Page 4
7 Reserve at the end of the 5th policy year is given by:
8821.2612
5V = 125, 000v 25 25 p40 Pa40:25 = 125, 000 0.37512 P 15.884
9856.2863
where annual net premium for the policy is given by
8821.2612
125, 000v30 30 p[35] 125, 000 0.30832
P= = 9892.9151 = 1949.13
a[35]:30 17.631
5 V = 41,966.00 30,959.98 = 11, 006.02
DSAR = 0 5V = 11,006.02
EDS = 3521q39 DSAR = 3521 .00087 DSAR = 33, 714.41
ADS = 8 11,006.02 = 88,048.16
Profit = EDS ADS=54,333.75
Generally done fine by well-prepared candidates
8
Mortality just after birth (infant mortality) is very high.
Mortality then falls dramatically during the first few years of life and is at lowest
around ages 810.
There is a distinct hump in the deaths at ages around 1825. This is often
attributed to a rise in accidental deaths during young adulthood, and is called the
accident hump.
From middle age onwards there is a steep increase in mortality, reaching a peak at
about age 80.

The number of deaths at higher ages falls again (even though the mortality rate qx
continues to increase) since the probabilities of surviving to these ages are small.
Generally well done but many candidates did not score all available marks.
Page 5
9 (i) (a) The gross premium prospective policy reserve is the expected present
value of future benefits (including declared bonus and an allowance for
future bonus if applicable) and future expenses less the expected
present value of future gross premiums.
(b) The gross premium retrospective policy reserve is the expected

accumulation of past gross premiums received, less expected expenses
and benefits including bonuses included in past claims.
(ii) Gross premium retrospective and prospective reserves will be equal if:
the mortality and interest rate basis used is the same as used to determine
the gross premium at the date of issue of the policy; and
the expenses valued are the same as those used to determine the original
gross premium; and
the gross premium is that determined on the original basis (mortality,

interest, expenses) using the equivalence principle
Generally done well but many answers were incomplete on a standard bookwork question.

10 Value of benefit:
s63 + s64
r65 ( 6535) 1 2
v 20, 000 ( 65 35 )
l35 12 s35
11.151 + 11.328
3757 ( 6535) 1 2
= v 20, 000 ( 65 35 )
18866 12 6.655
= 5185
Assume value of contributions is K% of salary
Value of contributions of K% of salary
s
N 35 502,836
20, 000.K %. = 20, 000.K %. = 316, 090.K %
s
D35 31,816
Therefore K = 1.64
This question was generally poorly answered despite being a relatively straightforward
question. The main issue was in understanding how the benefit value arose.
Page 6
11 Because the annuity is payable weekly this can reasonably be represented by

continuous annuity functions.
Working initially for a unit annualised payment:
m f
l70 l67 2 __________ 1
PV = a5 + v5 a70( m ):67( f ) + a70( m ):67( f )
m
l65 l62 3
f 3
m f
5 l70 l67 2
m f
l70 l67 2
+v5 m

1 f 70( m)
a + v 1 m f a67( f ) at 4%

l65 l62 3 l65 l62 3
a5 = (i / ) a5 = 1.019869 4.4518 = 4.5403
m f
l70 9238.134 l67 9605.483
= = 0.95754, = = 0.97973
m
l65 9647.797 f
l62 9804.173
a70( m ) = a70( m ) 0.5 = 11.062, a67( f ) = a67( f ) 0.5 = 13.611,
a70( m ):67( f ) = a70( m ):67( f ) 0.5 = 9.733
__________
a70( m ):67( f ) = 11.062 + 13.611 9.733 = 14.940
2 1
PV = 4.5403 + 0.82193 0.95754 0.97973 14.940 + 9.733
3 3
2
+0.82193 0.95754 0.02027 11.062
3
2
+0.82193 0.04246 0.97973 13.611
3
= 4.5403+10.1816+0.1176+0.3103
= 15.1498
The annualised benefit is 500 52.18 = 26090 p.a. (NB 52 acceptable)
So PV = 26090 15.1498 = 395,258
The key to this question is to break down carefully the component parts of the annuity. Once
this is done the question is then a relatively simple calculation of annuity functions. The
question was generally done poorly and many candidates failed to realise that a weekly
annuity could be closely approximated by a continuous one.
Page 7
12 The value of the death benefit is:
25
100000 e .05t {e .02t (1 e .03t ) .02 + e .03t (1 e .02t ) .03}dt
0
25
= 100000 (.02e .07t + .03e.08t .05e .1t )dt
0
.07t 25 25
.05e .1t
25
0.02e 0.03e.08t
= 100000 +
.07 0 .08
.1
0 0
2 3 1 2e 1.75 3e2 e 2.5

= 100000 + +
2
7 8 2 7 8
= 100000{(0.28571 + 0.375 0.5) (.04965 + .05075 .04104)}
= 10135
The value of the survival benefits are:
e 1.25 (100000e .5 e .75 + 50000e .5 (1 e .75 ) + 50000e .75 (1 e .5 ))
= 50000e1.75 + 50000e2
= 8688.7 + 6766.8 = 15456 say
The value of annualised premium P is:
25 .05t .02t
P e {e (1 e .03t ) + e .03t (1 e.02t ) + e .05t }dt
0
25
= P (e .07t + e .08t e .1t )dt
0
.07t 25 .08t 25 .1t 25

e e e
= P +
0.07 0 0.08 0 0.1 0
1 1 1 e 1.75 e2 e 2.5
= P + +
.07 .08 .1 .07 .08 .1

= P{(14.2857 + 12.5 10) (2.4825 + 1.6917 0.8208)}
= 13.432P
Page 8
10135 + 15456
So P = = 1905.23
13.432
Many well prepared candidates made a very good attempt at this difficult question but in
general terms it was done quite poorly. As in Question 11 the key is to organise the
component parts logically.
13 (i) If the monthly premium and sum assured are denoted by P and S respectively
then:
0.975 12 Pa(12) + 0.025 P

[55]:30
= (0.98S + 200) A[55] + 0.02 S ( IA)[55] +275 + 65(a[55] 1) + 0.75 12 P
0.975 12 Pa(12) + 0.025 P

[55]:30
= (1.04)0.5 (0.98 75, 000 + 200) A[55] + 0.02 75, 000( IA)[55]
+275 + 65(a[55] 1) + 9 P
where
a(12) (12)
= a[55] (12)
v 3030 p[55]a85
[55]:30
11 11
= a[55] v3030 p[55] a85
24 24
11 3385.2479 11
= 15.891 .30832 5.333
24 9545.9929 24
= 15.433 0.533 = 14.900
(0.975 12 14.9 + 0.025)P
= (1.04)0.5 [ 73, 700 0.38879 + 1,500 8.58908] +275 + 65 14.891 + 9 P
174.355 P = (1.04)0.5 [28, 653.823 + 12,883.62] + 275 + 967.915 + 9 P
165.355 P = 42, 360.046 + 275 + 967.915 P = 263.69
Page 9
(ii) Gross prospective policy value (calculated at 4%) is given by:
V prospective = ( 0.975S + B + 250 ) A85 + 0.025S ( IA)85 + 80a85

where B = 30 0.02 75, 000 = 45, 000

V prospective = (1.04)0.5 {( 0.975 75, 000 + 45, 000 + 250 ) A85 + 0.025 75, 000( IA)85 } + 80a85
= (1.04)0.5 (118,375 0.7949 + 1,875 4.40856) + 80 5.333
= 104,389.51 + 426.64 = 104,816.15
Generally part (i) was done well. Very few candidates successfully completed part (ii) as is often the
case with prospective reserve calculations.
14
We have the following multiple decrement table:
Year t (aq )[30]

d
+ t 1 (aq)30
s
+t 1 (aq)30
r
+t 1
(ap)[ x ]+t 1 t 1 (ap)[30]
1 .000447 .098727 .023744 .877082 1.000000
2 .000548 .049361 .024368 .925723 .877082
3 .000602 .024680 .024680 .950038 .811935
4 .000636 0 0 .999364 .771370
Cash flows:
Year Premium Expenses Interest Death Surrender Redundancy Maturity Profit

t P E on P-E Claim Claim Claim Claim Vector
1 14000.00 700.00 399.00 27.22 701.38 337.37 0 12633.04
2 14000.00 700.00 399.00 33.37 701.34 692.46 0 12271.82
3 14000.00 700.00 399.00 36.66 526.00 1051.99 0 12084.35
4 14000.00 700.00 399.00 38.73 0 0 59961.84 -46301.57
Note: allowance for year interest roll up is included in death, surrender and redundancy costs
Year t Profit Cum Profit Discount NPV of

Vector probability signature factor Profit signature
of survival
1 12633.04 1.0 12633.04 .952381 12031.46
2 12271.82 .877082 10763.40 .907029 9762.72
3 12084.35 .811935 9811.71 .863838 8475.72
4 -46301.57 .771370 -35715.60 .822702 -29383.31
=> Total NPV of profit = 886.59
NPV of premium = 14,000 (1 + .877082 .952381 + .811935 .907029 + .771370 .863838)

= 45,333.44
Page 10
Therefore, profit margin = 886.61/45,333.44 = 1.96%
Credit was given for correct data items and many well prepared candidates scored a
reasonable proportion of the marks available. Very few got to the final answer however.
15
Annual premium 3000.00 Allocation % (1st yr) 75.0%

Risk discount rate 6.5% Allocation % (2nd yr) 100.0%
Interest on investments (1st yr) 5.0% Allocation % (3rd yr) 105.0%
Interest on investments (2nd yr) 4.5% B/O spread 5.0%
Interest on investments (3rd yr) 4.0% Management charge 1.5%
Interest on non-unit funds 3.0% Policy Fee 35
Death benefit (% of bid value of units) 150%
% premium
Initial expense 275 20.0%

Renewal expense 80 2.5%
Expense inflation 2.0%
Mortality table:
X q[ x ]+t 1 p[ x]+t 1 t 1 p[ x ]
45 0.001201 0.998799 1.000000

46 0.001557 0.998443 0.998799
47 0.001802 0.998198 0.997244
yr 1 yr 2 yr 3
value of units at start of year 0.000 2174.511 5135.828

Alloc 2250.000 3000.000 3150.000
B/O 112.50 150.000 157.500
policy fee 35.000 35.000 35.000
interest 105.125 224.528 323.733
management charge 33.114 78.211 126.256
value of units at year end 2174.511 5135.828 8290.805
Page 11
yr 1 yr 2 yr 3
unallocated premium + pol fee 785.000 35.000 115.000

b/o spread 112.500 150.000 157.500
expenses 875.000 156.600 158.232
interest 0.675 0.852 3.472
man charge 33.114 78.211 126.256
extra death benefit 1.306 3.998 7.470
profit vector 54.984 103.464 0.418
(i) If policyholder dies in the 3rd year of contract, non unit cash flows at end of each year
are:
yr 1 = ( 785 + 112.5 875 + 0.675 + 33.114 ) = 56.289

yr 2 = ( 35 + 150 156.6 + 0.852 + 78.211) = 107.463
yr 3 = ( 115 + 157.5 158.232 3.472 + 126.256 0.5 8290.805 ) = 4138.351
=> expected present value of these cash flows is given by:
56.289 v + 107.463 v 2 4138.351 v3 p[45] p[45]+1 q47

= [52.854 + 94.746 3425.930] 0.998799 0.998443 0.001802 = 5.891
(ii) (a) If policyholder dies in the 1st year of contract, non unit cash flow at end of 1st
year is:
yr 1 = ( 785 + 112.5 875 + 0.675 + 33.114 0.5 2174.511) = 1030.967
=> expected present value of this cash flow is given by:
1030.967 v q[45] = 968.967 0.001201 = 1.163
(b) If policyholder dies in the 2nd year of contract, non unit cash flows at end of
each year are:
yr 1 == 56.289 (derived above)

yr 2 = ( 35 + 150 156.6 + 0.852 + 78.211 0.5 5135.828 ) = 2460.451
56.289 v 2460.451 v 2 p[45] q[45]+1

= [52.854 2169.279] 0.998799 0.001557 = 3.291
Page 12
(iii) If policyholder survives until end of contract, non unit cash flows at end of each year
are:
yr 1 == 56.289 (derived above)

yr 2 = 107.463 (derived above)
yr 3 = ( 115 + 157.5 158.232 3.472 + 126.256 ) = 7.052
56.289 v + 107.463 v 2 + 7.052 v3 3 p[45]

= [52.854 + 94.746 + 5.838] 0.998799 0.998443 0.998198 = 152.737
Expected present value of policy is therefore = 1.163 3.291 5.891 + 152.737

= 142.39
Candidates generally found this question difficult particularly parts (ii) and (ii). Part credit
was given in (i) for correctly calculating the data items and well prepared candidates scored
a fair proportion of the marks here.
Page 13
EXAMINATION
19 April 2013 (pm)

Core Technical
booklet.
supervisor.
question paper.

1 Calculate:
(a) 10|5 q40
(b) a65
(c) 15 p[46]
Basis:
Mortality AM92
Interest 4% per annum [3]
2 Calculate (aq )x .
Basis:
Mortality: x = 0.1 and x = 0.2 for all x

, are independent decrements [3]
3 Describe how climate and geography affect mortality and morbidity. [3]
4 Describe the use of terminal bonus within the reversionary bonus system. [3]
5 A pension scheme provides a pension on retirement of one-sixtieth of final

pensionable salary for each year of service. Final pensionable salary is average salary
received in the three years before retirement. Normal retirement age is 65 exact. The
same level of pension is payable on retirement on the grounds of ill-health or
otherwise prior to age 65.
Calculate the expected present value of past and future benefits for a life currently
aged 30 exact with 10 years of past service and salary in the previous year of 40,000.
Basis:
PEN Tables in Formulae and Tables for Actuarial Examination.

[4]
CT5 A20132
6 A life insurance company issues a 20-year increasing endowment assurance policy
which provides a sum assured given by the formula:
[50,000 + 1,500t] t = 1, 2, ..., 20
where t denotes the policy year.
The sum assured is payable on maturity at age 50 exact or at the end of year of death
if earlier. Premiums on the policy are payable annually in advance.
Write down an expression for:
(a) the net premium for the policy.
(b) the net premium prospective policy reserve for the policy immediately before
the tenth premium is paid.
[4]
7 Explain why it is necessary to have different mortality tables for different classes of
lives. [6]
8 (i) Define the measures of crude mortality rate and directly standardised mortality
rate. You should include a definition of all symbols used. [5]
The data in the table below is for a sub-population for the year 2012.
Age Number of lives Number of deaths
65 125,000 2,937
66 130,000 3,301
67 140,000 3,756
(ii) Calculate the standardised mortality ratio for this sub-population using ELT15
(Males) as the standard population. [2]
[Total 7]

9 A male life currently aged 65 exact purchases a special joint life annuity of 10,000
per annum payable monthly in advance together with additional benefits detailed
below.
On the death of the male life, the annuity reduces to 5,000 per annum payable
monthly in advance to a female life until her death, assuming she survives him. The
female life is currently aged 62 exact.
The policy additionally provides benefits of:
An annuity certain (extra to the above and not dependent on the survival status of
each life) of 10,000 per annum payable monthly in advance and paid only for ten
years, and
10,000 payable immediately on the death of each life.
Calculate the expected present value of the total benefits.
Basis:
Mortality Male life PMA92C20

Female life PFA92C20
Expenses Nil
[7]
10 A special whole life assurance policy issued to a life aged 40 exact provides a benefit
of 1,000 on death within 20 years of inception, 2,000 on death between 20 and 40
years from inception and 3,000 on death thereafter. Benefits are payable at the end
of the year of death.
Calculate the expected present value and variance of the present value of this policy.
Basis:

[8]
CT5 A20134
11 Two lives are both aged 45 exact.
Calculate:
(i) The probability of both lives surviving to age 65 exact. [1]
(ii) The present value of an annuity of 1,000 per annum increasing by 3% each
year payable annually in advance so long as both lives survive. [3]
(iii) The present value of a 20-year term assurance with a benefit of 100,000
payable immediately on the second death. [5]
Basis:
Mortality x = 0.05 for all x for both lives

[Total 9]
12 A life insurance company issues whole life assurance policies to lives aged 50 exact
for a sum assured of 75,000 payable at the end of the year of death. Premiums are
payable annually in advance.
(i) Calculate the annual gross premium for each policy using the basis below. [4]
(ii) Calculate the minimum annual gross premium that the company should charge
in order that the probability of making a loss on any one policy would be 10%
or less. [6]
Basis:
Initial commission 100% of the annual gross premium
Renewal commission 2.5% of each annual gross premium excluding the first
Renewal expenses 75 per annum at the start of the second and subsequent policy
years
[Total 10]

13 A life insurance company issues 5,000 four-year decreasing term assurance policies
on 1 January 2012 to a group of male lives aged 56 exact at that date.
Premiums are payable annually in advance on each policy. The initial annual gross
premium P reduces to .75P, .5P and .25P at the beginning of the second, third and
fourth policy year respectively.
The sum assured on each policy is payable at the end of year of death and is given by
the formula:
100,000 [1 0.25t] t = 0, 1, 2, 3
(i) Calculate the initial annual gross premium P for each policy using the basis
below. [7]
(ii) Determine the prospective gross premium reserve for each policy in force at
the end of the first policy year using the same basis. [5]
(iii) Calculate the mortality profit or loss for this portfolio of business for the
calendar year 2012 given that 27 policyholders died during that year. [2]
Actual expenses incurred and interest earned by the company on this portfolio of
business during 2012 was the same as that assumed in the premium basis.
(iv) Derive the mortality profit or loss for the calendar year 2012 using the
recursive relationship between the opening and closing prospective reserves in
the first policy year. [2]
Basis:
Initial commission 25% of the first annual premium
Renewal commission 3% of each annual premium excluding the first
Renewal expenses 35 per annum at the start of the second and subsequent policy
years. The renewal expense is assumed to increase by
1.92308% compound per annum from inception of the policy.
[Total 16]
CT5 A20136
14 A life insurance company issues a three-year unit-linked endowment assurance policy
to a life aged 67 exact. Level premiums are payable yearly in advance throughout the
term of the policy or until earlier death. In the first year, 50% of the premium is
allocated to units and 110% in the second and third years. The units are subject to a
bid-offer spread of 5% and an annual management charge of 0.75% of the bid value
of units is deducted at the end of each policy year.
Management charges are deducted from the unit fund before death and surrender
benefits are paid.
If the policyholder dies during the term of the policy, the death benefit of the bid
value of the units is payable at the end of the year of death. The policyholder may
surrender the policy only at the end of each year immediately before a premium is
paid. On surrender or on survival to the end of the term, the bid value of the units is
payable at the end of the year of exit.
contract:
Rate of growth on assets in the unit fund 4% per annum
Rate of interest on non-unit fund cash flows 3% per annum
Mortality 90% AM92 Ultimate
Surrenders 8% at end of first year, 4% at end of

second year based on policies in force
at that time.
Renewal expenses 45 per annum on the second and third

premium dates
Initial commission 12.5% of first premium
Renewal commission 2.5% of the second and third years

premiums
Claim expense 75 on deaths and surrenders only
The company sets premiums so that the net present value of the profit for the policy is
10% of the annual premium, using a risk discount rate of 6% per annum.
(i) Calculate the premium for the policy on the assumption that the company does
not zeroise future expected negative cash flows. [12]
(ii) Calculate the net present value of the profit on the policy on the assumption
that the company does set up reserves in order to zeroise future expected
negative cash flows. [5]
[Total 17]
END OF PAPER
CT5 A20137
EXAMINERS REPORT

Core Technical
Introduction
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.
D C Bowie
July 2013

Subject CT5 (Contingencies Core Technical) April 2013 Examiners Report
The general performance was similar this session to previous ones although it was felt that
this paper was a little easier than some previous ones. Questions that were done less well
were 9, 10 (variance), 11, 12(b) and 14(ii). The examiners hope that the detailed solutions
given below will assist students with further revision.
However most of the short questions were very straightforward where an answer could be
produced quickly and this is where many successful candidates scored particularly well.
Students should note that for long questions some credit is given if they can describe the right
procedures although to score well reasonably accurate numerical calculation is necessary.
Page 2
1 (a) 10|5 q40 = (l50 l55 ) / l40 = (9712.0728 9557.8179) / 9856.2863

= 0.01565
(b) a65 = a65 1/ 2 = 11.776
(c) 15 p[46] = l61 / l[46] = 9212.7143 / 9783.3371 = 0.94167
Generally question done well.
2 The constant force of decrement is consistent with the Kolmogorov equations where
the transition intensities are constant.
Thus:
( + )
(aq)x = (1 e )
( + )
0.1
= (1 e 0.3 ) = 0.086394
0.3
Generally question done well. Other approaches given credit.
3 Climate and geographical location are closely linked. Levels and patterns of rainfall
and temperature lead to an environment which is amicable to certain kinds of diseases
e.g. those associated with tropical regions.
Effects can also be observed within these broad categories e.g. the differences
between rural and urban areas in a geographical region. Some effects may be
accentuated or mitigated depending upon the development of an area e.g. industry
leading to better roads and communications.
Natural disasters (such as tidal waves and famines) will also affect mortality and
morbidity rates, and may be correlated to particular climates and geographical
locations.
Generally question done well. Other valid points given credit.
4
Terminal bonuses are allocated when a policy matures or becomes a claim as a
result of the death of the life assured.
Terminal bonuses are usually allocated as a percentage of the basic sum assured
and the bonuses allocated prior to a claim.
Page 3
The terminal bonus percentage rate will vary with the term of the policy at the
date of payment.
Because the policy is being terminated, the terminal bonus rate is usually chosen
so as to distribute all the surplus available to the policy based on asset share.
Distributing available surplus as a terminal bonus delays the distribution of

surplus and may allow the insurer to choose investments that are more volatile in
the short term but are expected to be more profitable in the long term.
Generally question done well. Other valid points given credit. In particular comments about
effects on lapse rates were an important extra point.
5 Past Service:
10 ( z M 30
ra
+ z M 30
ia
) 1 128026 + 64061
Value is * 40000* = * 40000* = 32585.5
60 s29 D30 6 4.991*7874
Future Service:
1 ( z R30
ra
+ z R30
ia
) 1 4164521 + 1502811
Value is * 40000* = * 40000* = 96140.1
60 s29 D30 60 4.991*7874
Total Value is 32585.5+96140.1 = 128,726 rounded
Generally question done well. It was not necessary to give the total in the last line for full
credit.
6 The death benefit in policy year 10 is 65,000 which increases by 1,500 each year
and the maturity value is 80,000. Therefore:
(a) Net premium P for the policy is given by
20 l50
50, 000 A30:20 + 1,500( IA)30:20 + 80, 000 v
1 1
P=
l30
a30:20
(b) Net premium prospective policy reserve at duration t = 9 is given by:
l50
9V
Pr o
= 63,500 A39:11
1
+ 1,500( IA)39:11
1
+ 80, 000 v11 Pa39:11
l39
Well prepared students scored good marks but many made elementary mistakes the most
common of which was 48500 as the 1st factor in the numerator of the first formula above.
The alternative solution for the numerator in (a) is:
50000 A30:20 + 1500( IA)30:20
Page 4
And for (b) overall:
V = 63500 A39:11 + 1500( IA)39:11 Pa39:11

9
7 When a life table is constructed it is assumed to reflect the mortality experience of a

homogeneous group of lives i.e. all the lives to whom the table applies follow the
same stochastic model of mortality represented by the rates in the table. This means
that the table can be used to model the mortality experience of a homogeneous group
of lives which is suspected to have a similar experience.
If a life table is constructed for a heterogeneous group then the mortality experience
will depend on the exact mixture of lives with different experiences that has been used
to construct the table. Such a table could only be used to model mortality in a group
with the same mixture. It would have very restricted uses.
For this reason separate mortality tables are usually constructed for groups which are
expected to be heterogeneous. This can manifest itself as class selection e.g. separate
tables for males and females, whole life and term assurance policyholders, annuitants
and pensioners, or as time selection e.g. separate tables for males in England and
Wales in 198082 (ELT14) and 199092 (ELT15).
Sometimes only parts of the mortality experience are heterogeneous e.g. the
experience during the initial select period for life assurance policyholders, and the
remainder are homogeneous e.g. the experience after the end of the select period for
life assurance policyholders. In such cases the tables are separate (different) during
the select period, but combined after the end of the select period. In fact there are
separate (homogeneous) mortality tables for each age at selection, but they are
tabulated in an efficient (space saving) way.
Generally question done well. Other valid points given credit.
8 (i) The crude mortality rate is defined as
Exc,t mx,t actual deaths

x
=
Exc,t total exposed to risk
x
It is a weighted average of mx,t using E xc,t as weights where:
E xc,t Central exposed to risk in population being studied between ages x and
x + t.
mx,t Central rate of mortality either observed or from a life table in

population being studied for ages x to x + t.
Page 5
The directly standardised mortality rate is defined as
s Exc,t mx,t
x
s Exc,t
x
It is a weighted average of mx,t using s Exc,t as weights where
s c
Ex,t Central exposed to risk for a standard population between x and x + t.
(ii)
Age Lives Deaths ELT15 Expected

M rate Deaths
65 125000 2937 0.02447 3058.8

66 130000 3301 0.02711 3524.3
67 140000 3756 0.02997 4195.8
9994 10778.9
Standardised mortality ratio is 9994/10778.9 = 0.927
Generally question done well. It was not necessary to make the weighted average remarks in
line 3 and 7 above to obtain full marks.
PV=10000a(12) + 5000*(a65:62
(12)
+ a65
(12)
) + 10000*( A65 + A62 )
9 10
where 65 relates to the male life and 62 the female.
10000a(12) = 10000*(i / d (12) ) * a10 = 1021537 *8.1109 = 82855.85

10
11 11 11 11
(12)
a65:62 = a65 + a62 a65:62 = 13.666 + 15.963 12.427
24 24 24 24
= 16.744
(12) 11 11
a65 = a65 = 13.666 = 13.208
24 24
10000 A65 = 10000*(1 ln(1.04) *(13.666 .5)) = 4836.20
10000 A62 = 10000*(1 ln(1.04) *(15.963 .5)) = 3935.30
Page 6
Total Value = 82855.85 + 5000*(16.744 + 13.208) + 4836.20 + 3935.30
= 241387 rounded
Well prepared students completed this question satisfactory but others had problems with the
joint life portion. A very few students concluded that the question wording could be taken to
mean that for the joint part the annuity ceases altogether on the female life death and
examiners agreed that this was a potential ambiguity and the alternative approach was
allowable.Thisalternative approach gave an answer of 228,994.
10 The expected value is:
l60 l
1000(A40 + v 20 A60 + v 40 80 A80 )
l40 l40
9287.2164 5266.4604
= 1000*(0.23056 + (0.45639* *0.45640) + (0.20829* *0.73775))
9856.2863 9856.2863
= 1000*(0.23056 + 0.19627 + 0.08211)
= 509 to nearer
To get the variance we calculate the second moment by defining the benefit as three
temporary assurances, two of which are deferred, thus:
Benefit from age 4060
l60 2
(1000) 2 *[ 2 A40 v 20 A60 ] (v at 8.16%)
l40
9287.2164
= (1000) 2 *(0.06792 0.20829* *0.23723)
9856.2863
= 1, 000, 000*.021361 = 21,361
Benefit from age 6080
l60 2 l
(2000) 2 *v 20 *[ A60 v 20 80 2 A80 ] (v at 8.16%)
l40 l60
9287.2164 5266.4604
= (2000) 2 *0.20829* (0.23723 0.20829* *0.56432)
9856.2863 9287.2164
= 4, 000, 000*.033478 = 133,911
Page 7
Benefit from age 80
l80 2
(3000)2 *v 40 * A80 (v at 8.16%)
l40
5266.4604
= (3000)2 *0.04338* *0.56432
9856.2863
= 9, 000, 000*.013082 = 117, 735
Second moment:
= 21,361 + 133,911 + 117,735
= 273,007
Variance = 273,007 (509)2
= 13,926
= (118)2
The calculation for the mean was generally well done but the calculation for the variance
was poorly done overall.
11 (i) The probability is (e( 20*.05) ) 2 = e2 = 0.13534
(ii) The value is
1000*(1+(1.03/1.04)(e.05 )2 + (1.03 /1.04)2 (e.1 )2 + (1.03 /1.04)3 (e.15 )2 + ..........)

= 1000*(1/ (1 (1.03 /1.04)e.1 )) = 1000 / 0.10386 = 9628
(iii) The value is
20
0 (100000*(1.04)t *(2e .05t (1 e .05t ) *.05)dt
20
= 10000 (e t (ln(1.04)+.05) e t (ln(1.04)+.1) )dt
0
20
20 .089221t .139221t e .089221t e .139221t
= 10000 (e e )dt = 10000 +
0 .089221 .139221 0
e 1.78442 e 2.78442 1 1
= 10000* + +
.089221 .139221 .089221 .139221

Page 8
= 10000 * ( 1.88180 + 0.44365 + 11.20812 7.18282)
= 25872
Parts (ii) and (iii) were poorly done. In (ii) many students failed to realise that the
expression needed was a geometric series rather than an integral.
12 (a) Let P be the annual premium for the policy. Then (functions at 6%):
EPV of premiums:
Pa[50] = 14.051P
EPV of benefits:
75, 000 A[50]
EPV of expenses:
P + 325 + ( 75 + 0.025 P ) a[50]
Pa[50] = 75, 000 A[50] + 325 + P + ( 0.025 P + 75 ) a[50]
P 14.051 = 75, 000 0.20463 + 325 + P + ( 0.025 P + 75 ) 13.051
16, 651.075
P= = 1,308.56
12.724725
(b) The insurers loss random variable for this policy is given by (where K and T
denote the curtate and complete future lifetime of a policyholder):
L = 75, 000v
K[50] +1
( )
+ 325 + P + 0.025 P + 75 aK
[50]
P aK
[50] +1
We need to find a value of t such that
P ( L > 0 ) = P (T < t ) = 0.1 P (T t ) = 0.9
Using AM92 Select, we require:
l[50]+t
0.9 l[50]+t 0.9l[50] = 0.9 9706.0977 = 8735.488
l[50]
Page 9
As l65 = 8821.2612 and l66 = 8695.6199 then t lies between 15 and 16 so K[50]
= 15.
We therefore need the minimum premium such that
( )
L = 0 = 75, 000v16 + 325 + P + 0.025 P + 75 a15 P a16
( )
0 = 75, 000 0.39365 + 325 + P + 0.025 P + 75 9.712254 10.712254 P
30,577.169
P = = 3, 229.03
9.46944765
Part (a) was done well. However very few students completed part (b).
13 (i) If P is the initial premium payable, then
EPV of premiums
l l l l
= P 1 56 + 0.75 57 v + 0.5 58 v 2 + 0.25 59 v3
l56 l56 l56 l56
P
= [9515.104 + 0.75 9467.2906 0.9434 + 0.5 9413.8004 .89 + 0.25 9354.004 .83962]
9515.104
= 2.350603P
EPV of benefits
= 100, 000 q56 v + 0.75 p56 q57 v 2 + 0.5 2 p56 q58 v3 + 0.25 3 p56 q59 v 4

0.005025 0.9434 + 0.75 0.994975 0.00565 0.89

= 100, 000
+0.5 0.989353 0.006352 0.83962 + 0.25 0.983069 0.00714 0.79209
= 1252.116
EPV of renewal expenses =
= 35 a@ i/
1 = 35 2.745 = 96.075
56:4
1.06
where i / = 1 = 0.04
1.0192308
Page 10
EPV of other expenses =

125 + 0.25 P + 0.03 ( EPV of premiums 1)
= 125 + 0.25 P + 0.040518 P
2.350603P = 1252.116 + 96.075 + 125 + 0.25P + 0.040518P
P = 715.11
(ii) Prospective gross premium policy reserve at the end of the 1st policy year
given by:
1V = EPV ( future benefits + exp enses premiums ) where:
EPV of premiums
l l l
= P 0.75 57 + 0.5 58 v + 0.25 59 v 2
l57 l57 l57
715.11
= [0.75 9467.2906 + 0.5 9413.8004 .9434 + 0.25 9354.004 .89] = 1028.952
9467.2906
EPV of benefits
= 100, 000 0.75 q57 v + 0.5 p57 q58 v 2 + 0.25 2 p57 q59 v3

0.75 0.00565 0.9434 + 0.5 0.99435 0.006352 0.89

= 100, 000
+0.25 0.9880339 0.00714 0.83962
= 828.911
EPV of renewal expenses
/
= 35 1.0192308 a@ i
57:3
= 35.673 2.870 = 102.382
EPV of renewal commission

= 0.03 EPV of premiums = 30.867
Therefore 1V = 828.911 + 102.382 + 30.867 1028.952 = 66.79
Page 11
(iii) Therefore, sum at risk per policy in the 1st policy year is:
DSAR = 100,000 ( 66.79) = 100,066.79

EDS = 5000 q56 100, 066.79 = 5000 0.005025 100, 066.79 = 2,514,178.1
ADS = 27 100, 066.79 = 2, 701,803.3
Mortality profit =
= 5000 (0V + P E ) (1 + i ) S actual deaths 1V number of policie s in force

= 5000 (0 + 715.11 0.25 715.11 125) 1.06 100, 000 27 (66.79) 4973
= 187, 791.1
i.e. approximately the same figure as derived in (c) above
Reasonably well done by well prepared students. Partial credit was given in (b) for showing
understanding of the processes involved.
14 (i) Let P be the annual premium required to meet the companys profit criteria.
Multiple decrement table although deaths can be assumed to be uniformly

distributed over the year, surrenders occur only at the year end. Therefore:
(aq ) dx = q xd and (aq ) wx = q xw (1 qxd )
x qxd q xw ( aq )dx ( aq )wx ( ap ) x t 1 ( ap ) x
67 0.016042 0.08 0.016042 0.07872 0.905242 1

68 0.017922 0.04 0.017922 0.03928 0.942795 0.905242
69 0.020003 0.00 0.020003 0.0 0.979997 0.853458
Unit fund cashflows (per policy at start of year)
Year 1 Year 2 Year 3

Value of units at start of year 0 0.490295P 1.584731P
Allocation 0.5P 1.1P 1.1P
Bid/offer 0.025P 0.055P 0.055P
Interest 0.019P 0.061412P 0.105189P
Management charge 0.003705P 0.011975P 0.020512P
Value of units at end of year 0.490295P 1.584731P 2.714408P
Page 12
Non-unit fund cashflows
Year 1 Year 2 Year 3

Unallocated premium 0.5P 0.1P 0.1P
Bid/offer 0.025P 0.055P 0.055P
Expenses 0.125P+235 0.025P+45 0.025P+45
Interest 0.012P7.05 0.0021P1.35 0.0021P1.35
Management charge 0.003705P 0.011975P 0.020512P
Claim expense 7.10715 4.29015 1.500225
End of year cashflows 0.415705P249.15715 0.060125P50.64015 0.051588P47.850225
Probability in force 1 0.905242 0.853458

Discount factor 0.943396 0.889996 0.839619
Expected present value
of profit 0.392174P235.0539 0.048440P40.7987 0.036967P34.2886
NPV of profit = .10P = 0.306767P 310.1412 => P = 1500.0

(i.e. NPV of profit = 150.0)
(ii) The profit vector for the policy is (374.401, 140.827, 125.232)
In order to set up reserves in order to zeroise future expected negative cash

flows, we require:
125.232
2V = = 121.584
1.03
1V 1.03 ( ap )68 2V = 140.827 1V = 248.016
revised cash flow in year 1 = 374.401 (ap )67 1V = 149.887
and NPV of profit = 149.887/1.06 = 141.402
Again reasonably well done by well prepared students for part (i). Part (ii) caused more
difficulties however. As before partial credit was given for showing understanding of the
processes involved.
Page 13
EXAMINATION
27 September 2013 (pm)

Core Technical
booklet.
supervisor.
Hand in BOTH your answer booklet, with any additional booklets firmly attached, and this
question paper.

11 Calculate:
(a) 10 q63
(2)
(b) a63
(c) s55:10
Basis:
Mortality PFA92C20
[2]
12 Define temporary initial selection, giving a distinct example of the process. [2]
13 A whole life assurance policy was issued to a life aged x exact for a sum assured of S
payable at the end of year of death. A premium of P is payable annually in advance
until death. The following expense assumptions were used to derive the gross
premium payable on the policy:
Initial commission a% of the annual premium
Initial expenses B
Renewal commission c% of each annual premium excluding the first
Renewal expenses D per annum at the start of the second and subsequent policy
years
Claim expenses e% of the sum assured
Let t Vx represent the gross premium reserve on this policy at duration t.
Write down an equation linking the gross premium reserve at the beginning and the
end of:
(a) the first policy year
(b) the t th policy year where t > 1

[3]
14 Calculate 2.25 p90.25 using the method of Uniform Distribution of Deaths.
Basis:
Mortality AM92 [3]
CT5 S20132
15 A three-year unit-linked endowment assurance policy is sold to a male life aged 40
exact. The profit signature for this policy, calculated using AM92 Select mortality and
making no allowance for surrenders, is:
(209.80, 253.55, 109.85)
It is now assumed for the cash flows for this policy that 15% of all policies in force at
the end of the first policy year are surrendered at that time. The surrender value
payable at that time is the bid value of units at the end of the policy year less a
surrender penalty of 500. There are no other changes to the policy.
(a) Calculate the revised profit signature in the first policy year.
(b) Comment on the impact on the profit signature in the second and third policy
years.
[4]
16 A life aged 75 exact purchases a ten-year temporary annuity of an initial amount of

1,200 per annum. This annuity increases on each policy anniversary by 100 per
annum, the last increase being at the beginning of the tenth policy year. All annuity
payments are annual in advance.
Calculate the expected present value of the annuity benefits.
Basis:

Expenses Nil
[4]
17 Calculate ( IA)20 (the present value of a whole life assurance issued to a life aged 20
exact payable immediately on death where the benefit paid on death at time t is t)
using the following basis:
Basis:
Mortality x = 0.03 for x<40 inclusive and 0.04 for x 40

Force of interest 5% per annum
[6]
18 Show, using the random variable approach, that the expected present value of an
annuity of 1 per annum payable annually in arrears to a life now aged x, deferred for n
years is equal to ax ax:n . [7]

19 The following statistics have been provided in relation to a particular country and one
of its regions:
Region A Country
Age Population Number Population Number
band exposed of Deaths exposed of Deaths
1835 25,000 25 500,000 1,000

3650 50,000 80 125,000 375
5170 70,000 170 110,000 500
(i) Calculate:
(a) the mortality rates for each age band both for Region A and Country
(b) the crude mortality rate for each of Region A and Country
(c) the directly standardised mortality rate for Region A by reference to

the Country
(d) the standardised mortality ratio for Region A by reference to the

Country [5]
(ii) Comment on the results. [2]

[Total 7]
20 The following is an extract of a decrement table assumed for a funeral plan, showing
deaths (d) and withdrawals (w):
Age x (al)x (ad)xd (ad)xw
85 10,000 1,400 2,300

86 6,300 1,000 1,100
87 4,200
It has been established that the independent rates of decrement of withdrawal are now
only 50% of those assumed in the table above for the ages of 85 and 86. The
underlying independent mortality rates are unchanged.
Construct a revised decrement table to reflect this change. [7]
CT5 S20134
21 A pension scheme provides a lump sum benefit on death in service of three times
salary in the 12 months before death. Normal retirement age is 65 exact.
(i) Calculate the expected cashflow between ages 40 and 41 in respect of the
death benefit for a life now aged 35 exact with salary in the previous 12
months of 25,000.
Basis: Pension scheme tables in the Formulae and Tables for Examinations [3]
(ii) (a) Give a formula for the expected present value of the death benefit.
(b) Hence express this value using commutation factors.

[5]
[Total 8]
22 At the beginning of 2004, a life insurance company issued a number of 20-year

special endowment assurance policies to male lives then aged 40 exact. Each
policy provides a death benefit of 75,000 payable at the end of year of death and a
maturity benefit of 150,000.
Premiums on each policy are payable annually in advance for the term of the policy,
ceasing on earlier death.
(i) Calculate the annual gross premium for each policy using the following
premium basis: [4]

Initial commission 25% of the first annual premium
Renewal expenses 45 per annum at the start of the second and subsequent
policy years
(ii) Determine the gross premium reserve for each policy in force at the end of the
eighth policy year and for each policy in force at the end of the ninth policy
year, using the same basis as above. [6]
At the beginning of 2012, there were 625 policies in force. Actual experience for this
portfolio of business during 2012 was as follows:
Number of deaths 3
Interest earned 4.5%
Expense incurred per policy in force at beginning of policy year 45
(iii) Derive, using the recursive relationship between the opening and closing
reserves, the profit/loss from this portfolio of business in 2012 separately
from:
mortality
interest
expenses [4]
[Total 14]

23 A life insurance company issues a 15-year increasing term assurance policy to a life
aged 50 exact.
The death benefit on the policy, payable immediately on death, is given by the
formula:
10,000 [6+t] t = 0, 1, 2, ......, 14
Level premiums on the policy are payable monthly in advance for the term of the
policy, ceasing on death if earlier.
(i) Calculate the monthly premium for the policy using the following premium
basis:
Expenses
Initial 225
Renewal 65 per annum inflating at 1.92308% per annum, at the start
of the second and subsequent policy years
Commission
Initial 30% of the total premium payable in the first policy year
Renewal 4% of the second and subsequent monthly premiums
Claim 275 on termination, inflating at 1.92308% per annum
Inflation For renewal and claim expenses, the amounts quoted are at
outset, and the increases due to inflation start immediately.
[8]
(ii) Calculate the gross prospective reserve for the policy at the end of the 14th
policy year using the elements of the premium basis that are relevant. [3]
(iii) Write down an expression for the gross future loss random variable at the end
of the 14th policy year, again using the elements of the premium basis that are
relevant. [4]
[Total 15]
CT5 S20136
24 A life insurance company issues a four-year with profits endowment assurance policy
for a basic sum assured of 25,000 to a life aged 56 exact. Level premiums are
payable annually in advance throughout the term of the policy.
Compound reversionary bonuses are added to the policy at the start of each year,
including the first. The basic sum assured (together with any bonuses attaching) is
payable at maturity or at the end of year of death, if earlier.
(i) Show that the annual premium is approximately 6,483 using the following
premium basis:
Initial expenses 100 plus 25% of the first premium (all incurred on
policy commencement)
Renewal expenses 2.5% of the second and subsequent premiums plus 40 at

the start of the second and subsequent policy years
Bonus rates A compound reversionary bonus will be declared each

year at a rate of 1.92308% per annum
[5]
(ii) The insurance company holds net premium reserves using a rate of interest of
4% per annum and AM92 Ultimate mortality.
Calculate the expected profit margin on this policy using the following profit
test basis:
Mortality 80% AM92 Select

Interest earned on funds 7.5% per annum
Initial expenses as per premium basis
Renewal expenses as per premium basis
Bonus rates as per premium basis
[13]
[Total 18]
END OF PAPER
CT5 S20137
EXAMINERS REPORT

Core Technical
Introduction
D C Bowie
December 2013

The general performance was similar this session to previous ones. Well prepared students
generally scored well. Questions that were done less well were 15, 18, 11, 21, 22(iii) and
23(iii). The examiners hope that the detailed solutions given below will assist students with
further revision.
As in past examinations most of the short questions were very straightforward and this is
where many successful candidates scored particularly well. Students should note that for
long questions some credit is given if they can describe the right procedures although to score
well reasonably accurate numerical calculation is necessary.
l63 l73 9775.888 9073.650

11 (a) 10 q63 0.07183
l63 9775.888
1
(b) (2)
a63 a63 15.606 0.25 15.356
4
(1.04)10 * a55:10 (1.04)10 *((a55 1) (1.04) 10 *(l65 / l55 ) *(a65 1))

(c) s55:10 = =
10 p55 (l65 / l55 )
(1.04)10 *17.210 (0.97843*13.871)

=
0.97843
= 12.166
This question was generally well done.

12 Temporary Initial Selection describes the modelling of rates by sub-dividing a

population by duration since entry to that class. The rates modelled are dependent on
duration up to a duration of s (the length of the select period) and after s they are
independent of duration, so the effect is temporary.
An example is a life purchasing a life assurance policy who has been medically
selected and thus initially would be expected to enjoy better mortality. This
advantage however wears off over time.
This question was generally well done. Credit was given for all relevant comments. To earn
full marks it was important to stress in the answer the fact that the effect of selection wears
off.
13 (a) For the first policy year
a e
[ 0V P P B ] (1 i ) (1 ) S q x 1V p x
100 100
(b) For subsequent policy years
c e
(t V P P D ) (1 i ) (1 ) S q x t t 1V px t
100 100
Students had in many cases difficulties in setting out these standard formulae which are
fundamental in CT5. In (a) expressing 0V as zero was fine so long as this definition was
stated. Also using t-1and t instead of t and t+1 respectively was acceptable.
Page 3
Subject CT5 (Contingencies Core Technical) September 2013 Marking Schedule
14 2.25 p90.25 = 0.75 p90.25 * p91 * .5 p92
= (1 0.75 q90.25 )(1 q91 )(1 .5 q92 )
.75q90
1 (1 q91 )(1 .5q92 )
(1 .25q90
)
.75*.170247
= 1 *.815286*.89996
(1 .25*.170247)
= 0.63587
Generally well done. An alternative correct method is to use straight line interpolation on l
factors. This is fine so long as it produces an accurate answer.
s
15 (a) If qd40 and q40 represent the independent rates of mortality and surrender
respectively in the 1st policy year, then the dependent rate of surrender at the
end of the 1st policy year is:
s
( aq ) 40 1 qd40 q40
s
= (1 0.000788) 0.15 = 0.14988

The cash flows are now modified to include a surrender charge at the end of
the 1st policy year
500 ( aq) 40
s
500 0.14988 74.94
The revised profit vector = revised profit signature

= 209.80 + 74.94 = 134.86
(b) Although the profit vector for this policy will remain the same for policy years
2 and 3, the profit signature for each year will reduce as the probability of the
policy being in force at the start of each year will reduce.
This question was done poorly overall with few students being able to derive the correct
answer.
Page 4
16
PV 1100a75:10 100( Ia)75:10
1100(a75 v10 * 10 p75 a85 ) 100(( Ia)75 v10 * 10 p75 (10a85 ( Ia)85 ))
3385.2479 3385.2479
= 1100 7.679 0.55839 * * 4.998 100(48.128 0.55839 * * (49.98 21.503))
6879.1673 6879.1673
6936.2 2848.6
= 9785 rounded
This was a very straightforward question that was generally well done. The most common error was
for the first function above to be multiplied by 1000 rather than the correct 1100.
17 EPV =
.03* 20 te.08t dt .04* e1.6 * e1.8 te.09t dt .03* 20 te.08t dt .04* e0.2 te.09t dt

0
20
0
20

20 20
20 te.08t 1 20 .08t te.08t e.08t
0 e dt .08 (.08)2
.08t
0 te dt =
.08 0 .08 0
20e1.6 e1.6 1
= 0 2
50.474 31.546 156.25
.08 (.08) (.08)2
= 74.230

te.09t 1 .09t te.09t e.09t
e dt .09 (.09)2
.09t
20 te dt =
.09 20 .09 20 20
20e1.8 e1.8
= 0 0 36.733 20.407 57.140
.09 (.09)2
EPV = .03*74.230 .04*1.2214*57.140
= 5.019
A challenging question. Well prepared students coped well but many failed at the basic level
in constructing the integral.
Page 5
18 Define the random variable Kx for the curtate duration of life aged x.
The expected present value is:
nk 0 0 P[K x k ]
k n 1 n | ak n P[K x k ]
( nk 0 ak P[K x k ] an P[K x n]) (nk 0 ak P[K x k ] an P[K x n])

k n 1 n | ak n P[K x k ]
( nk 0 ak P[K x k ] an P[K x n]
k n 1 n | ak n P[K x k ])
( nk 0 ak P[K x k ] an P[K x n])
(
k 0 ak P[K x k ]) ( k 0 ak P[K x k ] an P[K x n])
n
ax ax:n
This is a straight bookwork question taken straight from Core Reading. Most students
struggled to reproduce it and the primary error was that students did not appreciate the
random variable aspect often trying to solve it in a non random variable manner. This gained
no credit.
19 (i) (a)
Region A Country
Age Population Number of Mortality Population Number of Mortality
exposed Deaths exposed Deaths
1835 25000 25 0.00100 500000 1000 0.00200

3650 50000 80 0.00160 125000 375 0.00300
5170 70000 170 0.00243 110000 500 0.00455
145000 275 735000 1875
The mortality rates are shown in Columns 4 and 7 above.
(b) Crude Mortality Rate (Region A) = 275/145000 = 0.00190

Crude Mortality Rate (Country) = 1875/735000 = 0.00255
(c) The directly standardised mortality rate for Region A is:
((500000 * .00100) + (125000 * .00160) + (110000 * .00243))/735000

= 0.00132
Page 6
(d) The standardised mortality ratio for Region A is:
Actual deaths in Region A/Expected Deaths in Region A based on

Country mortality rates i.e.
275/((25000 * .00200) + (50000 * .00300) + (70000 * .00455))

= 275/518.5 = 0.53
(ii)
Crude mortality rate in Region A suggests Region A has only 75% of the
mortality rate of Country as a whole.
However the directly standardised mortality rate for Region A is

significantly lighter than the appropriate crude rate.
This difference is explained by the fact that Region A has a much higher
proportion of older lives than the Country as a whole thus inflating the
crude rate.
The standardised mortality ratio shows the true difference i.e. the mortality
rates for Region A are on average 53% of those for the Country as a
whole.
Generally this was another straightforward question on which students did well. The most
common error was that not all points were covered in (ii).
1400 1000
d
( aq )85 0.14; ( aq )86
d
0.15873
20 10000 6300
2300 1100
w
( aq )85 0.23; (aq )86
w
0.17460
10000 6300
d
(aq )85 0.14
d
q85 0.158192
1 w 0.885
1 (aq )85
2
0.15873
d
q86 0.173913
Similarly 0.9127
w
(aq )85 0.23
w
q85 0.247312
1 d 0.93
1 (aq )85
2
0.17460
w
q86 0.189659
Similarly 0.9206
Page 7
w w
But q85 and q86 are now reduced by 50% so their new values are:
w
q85 0.123656 and q86
w
.0948295
1 1
d
Hence (aq )85 0.158192* 1 *0.123656 0.14841;(aq )86
d
0.173913* 1 *.0948295 0.16567
2 2
1 1
w
Hence (aq )85 0.123656* 1 *0.158192 0.113875;(aq )86
w
0.0948295* 1 *0.173913 0.086583
2 2
Using the above the new table is:
Age x (al ) x (ad ) dx (ad ) wx
85 10000 1484 1139

86 7377 1222 638
87 5518
Note that values are sensitive to rounding-other close values accepted.
This was another relatively straightforward question generally well done by well prepared
students. Most marks were awarded on knowing the principles of calculation rather than the
precision of the calculations themselves.
21 (i) Assume that decrements on average occur at time x+ .
d s
3 25, 000 40 39.5
l35 s34
14 7.623 7.814 / 2
3 25, 000
18866 6.389
67.24
(ii) Expected present value
t 64 x
s34t 1/2 d35t v35t
3 25, 000
s34 l35 v35
t 0
Page 8
Define:
s
D35 = s34l35v35
s
Cxdt = s34t d35t v35t
t 64 x
s d
M 35 = s d
C35 t
t 0
Then the expected value is:
s d
M 35
3 25, 000 s
D35
This question was very poorly done. Students seem to struggle continually with questions
involving pension commutation functions and this was felt to be a reasonably straightforward
derivation from 1st principles.
22
(i) Let P be the annual premium for the policy. Then (functions at 4%):
EPV of premiums:
Pa 40:20 13.930 P
EPV of benefits:
1
75, 000 A[40]:20 150, 000v 20 20 p[40]
where:
9287.2164
v 20 20 p[40] = 0.45639 0.43013
9854.3036
1
A[40]:20 = A[40]:20 v 20 20 p[40] 0.46423 0.43013 0.0341
75, 000 0.0341 150, 000 0.43013
67, 077.0
Page 9
EPV of expenses:
0.25P 400 45(a[40]:20 1) = 0.25P 400 45 12.93
0.25P 981.85
13.93P 67, 077.0 0.25 P 981.85
68, 058.85
P 4,975.06
13.68
(ii) The gross prospective policy reserve at the end of the 8th policy year is given by:
8V 75, 000 A148:12 150, 000v12 12 p48 (45 P)a48:12
where:
v12 12 p48 0.62460 0.95220 0.59474
8V 75, 000 (0.63025 0.59474) 150, 000 0.59474 (45 4975.06) 9.613
= 44, 481.58
The gross prospective policy reserve at the end of the 9th policy year is given by:
9V 75, 000 A49:11

1
150, 000v11 11 p49 (45 P)a49:11
where:
v11 11 p49 0.64958 0.95411 0.61977
9V 75, 000 (0.65477 0.61977) 150, 000 0.61977 (45 4975.06) 8.976
= 51338.28
Note: students can alternatively calculate these reserves on a retrospective basis i.e.
D[40]
8V Pa 75, 000 A[40]:8
1
400 45(a[40]:8 1) 0.25P
D48 [40]:8
Page 10
where:
1
A[40]:8 A[40] v8 8 p[40] A48 0.23041 0.73069 0.98977 0.30695 0.008419
and:
a[40]:8 a[40] v8 8 p[40] a48 20.009 0.73069 0.98977 18.019 6.9774
8V 1.382713[4975.06 6.9774 75, 000 0.008419 400 45 5.9774 0.25 4975.06]
D[40]
9V Pa 75, 000 A[40]:9
1
400 45(a[40]:9 1) 0.25P
D49 [40]:9
where:
1
A[40]:9 A[40] v9 9 p[40] A49 0.23041 0.70259 0.98778 0.31786 0.009814
and:
a[40]:9 a[40] v9 9 p[40] a49 20.009 0.70259 0.98778 17.736 7.7001
9V 1.440915 4975.06 7.7001 75, 000 0.009814 400 45 6.7001 0.25 4975.06
= 51, 335.68
(iii) Using the gross prospective policy reserve calculated in b) above then:
Sum at risk per policy in the 9th policy year is:
DSAR = 75,000 51,338.28 = 23,661.72
EDS = 625 q48 23, 661.72 625 0.002008 23, 661.72 29, 695.46
ADS = 3 23, 661.72 70, 985.16
total profit/loss in 2012 =
625 (8V P E ) (1 i) S actual deaths 9V number of policies inforce
Page 11
625 (44, 481.58 4, 975.06 45) 1.045 75, 000 3 51, 338.28 622
114,567.22
i.e. total profit from mortality, interest and expense combined = 114,567.22
As expenses incurred per policy during 2012 were the same as assumed in the
premium basis, then expense surplus = 0
= 44, 480.23
Therefore interest surplus = 114,567.22 (41,289.7) = 155,856.92
Most well prepared students did parts (i) and (ii) well. Part (iii) was less well done
as few students realised expense surplus was zero and many attempted only the
mortality surplus.
23
(i) Let P be the monthly premium payable for this policy. Then:
EPV of premiums (at 6% p.a.)
12 Pa 117.114 P
[50]:15
where:
11 11
a a[50]:15 1 v15 15 p[50] ) (1 0.379230) 9.7595
[50]:15 24 24
EPV of benefits: (at 6% p.a.)
50, 000 A 1
10, 000( IA) 1
[50]:15 [50]:15
50, 000{ A[50] v15 15 p[50] A65 } 10, 000{( IA)[50] v15 15 p[50] (15 A65 ( IA)65 )}
1.060.5 [50, 000 A[50] 10, 000( IA)[50] v15 15 p[50] (200, 000 A65 10, 000( IA)65 )]
50, 000 0.20463 10, 000 4.84789

1.02956
0.41727 8821.2612 200, 000 0.40177 10, 000 5.50985
9706.0977
1.02956[10, 231.5 48, 478.9 0.37923 (80, 354.0 55, 098.5)]
Page 12
7, 559.80
EPV of expenses (functions @6% p.a. unless otherwise stated):

[50]:15
1
12
4%

225 0.3 12 P 0.04 12 P a 65 a[50]:15
1 275 A 1 4%
[50]:15
225 3.6 P 0.48P 9.6762 65 10.259 275 A[50] v

@ 4% 15
p A
(4%) 15 [50] 65
4%
225 3.6 P 4.6446 P 666.835 275 1.040.5[0.32868 0.55526 0.90884 0.52786]
909.307 8.2446P
117.114P = 7559.80 + 909.307 + 8.2446P P = 77.79
(ii) Gross prospective reserve at the end of the 14th policy year is given by (functions
@6% p.a. unless otherwise stated):
14V 200, 000q64v 0.5 275(1.0192308)14 q64v0.04

0.5
65(1.0192308)14 0.96 12Pa

641
200, 000 0.012716 0.97129 359.044 0.012716 0.98058 84.865 867.967
2, 470.185 4.4769 84.865 867.967 1691.60
where:
11 11
a a641 (1 v p64 ) 1 (1 0.9434 0.98728) 0.96856
641 24 24
(iii) If K64 1
GFLRV = 65(1.0192308)14 0.96 12 77.79 a12

1
If K64 < 1
GFLRV = 200, 000vT64 275(1.0192308)14 vT64

.06 .04
65(1.0192308)14 0.96 12 77.79 a12 @ 6%

1
12
112T64
where [12T64 ] represents the integer part of 12T64
Page 13
Again well prepared students did part (i) well although part (ii) was done less well. Very few
students made a serious attempt at part (iii) which was set to test higher skills.
24
(i)
Let P be the annual premium payable. Then equation of value gives (functions at 6% unless
otherwise stated):

Pa[56]:4 25, 000 A@ i 0.25 P 100 0.025 P 40 a[56]:4 1
[56]:4
1.06
where i 1 0.04
1.0192308
3.648P 25,000 0.8558 0.25P 100 (0.025P 40) 2.648
21, 600.92
P 6, 483.26
3.3318
(ii) Decrement table
x qx qx 0.8qx px t 1 px
56 0.003742 0.002994 0.997006 1
57 0.005507 0.004406 0.995594 0.997006
58 0.006352 0.005082 0.994918 0.992614
59 0.007140 0.005712 0.994288 0.987570
Accrued bonus at start of policy year t for each in force policy is given by:
t Accrued
bonus
1 480.77
2 970.79
3 1470.22
4 1979.27
Reserves required on the policy at 4% interest are:
1V56:4 25, 480.77 A57:3 NPa57:3
a 2.87
25, 000 1 57:3 480.77 A57:3 25, 000 1 480.77 0.88963 6268.83
a 3.745
56:4
Page 14
a 1.955
2V56:4 25, 000 1 58:2 970.79 A58:2 25, 000 1 970.79 0.92479 12847.04
a 3.745
56:4
a 1.0
3V56:4 25, 000 1 59:1 1470.22 A59:1 25, 000 1 1470.22 0.96154 19738.11
a 3.745
56:4
Cash flows for the policy under the profit test are given by:
Year Opening Premium Expense Interest Death Maturity Closing

T reserve Claim Claim reserve
1 0 6483.26 1720.82 357.18 76.28 0 6250.06
2 6268.83 6483.26 202.08 941.25 114.42 0 12790.44
3 12847.04 6483.26 202.08 1434.62 134.51 0 19637.81
4 19738.11 6483.26 202.08 1951.45 154.11 26825.16 0
Year Profit Profit Discount NPV of profit

t 1 p
t vector signature factor signature
1 1206.71 1.0 1206.71 .913242 1102.02
2 586.40 0.997006 584.64 .834011 487.60
3 790.51 0.992614 784.67 .761654 597.65
4 991.47 0.987570 979.15 .695574 681.07
NPV of profit signature = 664.30
Year Discount NPV of

Premium t 1 p
t factor premium
1 6483.26 1.0 1 6483.26
2 6483.26 0.997006 .913242 5903.06
3 6483.26 0.992614 .834011 5367.17
4 6483.26 0.987570 .761654 4876.62
NPV of premiums = 22,630.11
664.30
Profit margin = 0.0294 i.e. 2.94%
22, 630.11
A relatively straightforward if detailed question where well prepared students scored well. In
these types of question credit is given for understanding of the method and how to approach
the calculations even if the calculation part contains numerical errors.
Page 15
EXAMINATION
29 April 2014 (am)

Core Technical
booklet.
supervisor.
4. Attempt all 13 questions, beginning your answer to each question on a new page.
question paper.

1 Define Class Selection giving two distinct examples. [2]
2 Calculate:
(a) a(4)
25:20
(b) ( IA) 1
25:20
Basis: Mortality AM92

[4]
3 For a particular species of animal the mortality and rate of interest are shown
according to the Basis below.
Calculate A3:5 .
Basis: Mortality l x = l0 e0.15 x

[4]
4 Outline with examples the advantages of cash flow or discounted emerging costs
techniques for product pricing, compared with the use of traditional commutation
functions. [4]
5 A pension scheme provides a pension of 1/40 of final pensionable salary for each year
of service, limited to a maximum of 2/3 of final pensionable salary, upon retirement at
age 65. No other retirement age is allowed.
Final pensionable salary is defined as average annual salary over the 3 years
immediately preceding retirement.
A member is now aged exactly 45 and has 16 years of past service. He earned
40,000 in the previous 12 months.
Calculate the expected present value now of this members expected total pension on
retirement.
Basis:
PEN Tables in the Formulae and Tables for Actuarial Examinations Interest 4% per
annum
[4]
CT5 A20142
6 (a) Describe the Method of Constant Force of Mortality.
(b) Calculate 2.75 q85.5 using the method given in (a) above.
Basis: Mortality ELT15 (Males) [5]
7 A Joint Life Annuity is issued to a male aged 65 exact and a female aged 62 exact.
The annuity is payable quarterly in arrear the first payment commencing 3 months
after issue.
The annuity has the following conditions:
10,000 per annum whilst both lives survive.
If the male life predeceases the female life the annuity reduces to 7,500 per
annum payable for the remainder of her lifetime.
If the female life predeceases the male life the annuity reduces to 6,000 per
annum payable for the remainder of his lifetime.
Calculate the expected present value of the annuity.
Basis: Mortality PMA92C20 (male) and PFA92C20 (female)

Expenses Ignore
[6]
8 A double decrement table is to be constructed from two single decrement tables. The
modes of decrement are and . The basis for each of the single decrement tables is
shown below:
Basis:
In the table for single decrement : l x+t = l x t 3d x for 0 t 1

In the table for single decrement : l x+t = l x t 5 d x for 0 t 1
The l function represents the number of lives and the d function the number of
decrements in the appropriate table.
(i) Show that
t px x +t = 5t 4 qx for 0 t 1 [3]
(ii) Hence or otherwise show that
5
(aq )x = qx 1 qx [5]
8
[Total 8]

9 Calculate the expected present value and the variance of A1x:20 given the basis below.
Basis: Mortality x = 0.03 for all x

Force of interest = 5% per annum throughout
[8]
10 (i) Define the following terms in words without giving any formulae:
(a) crude mortality rate

(b) directly standardised mortality rate
(c) indirectly standardised mortality rate
(d) area comparability factor
[4]
The following table gives a summary of mortality for a particular occupational

group compared to the whole population.
Occupational Group Whole Population

Age Group Number Deaths Number Deaths
2034 20,000 67 1,000,000 3,500

3549 15,000 92 1,500,000 7,800
5064 11,000 125 700,000 8,000
TOTAL 46,000 284 3,200,000 19,300
(ii) Calculate the crude mortality rate, the directly standardised mortality rate and
the indirectly standardised mortality rate for the occupational group. [5]
[Total 9]
11 On 1 January 2008, a life insurance company issued a number of without profit

endowment policies maturing at age 60 to lives then aged 40 exact. The sum assured
is payable at the end of year of death or on survival to the end of the term and level
premiums are payable annually in advance throughout the term of the contract.
Premiums and reserves on each policy are both calculated on the following basis:

Initial commission 60% of the first premium
Renewal commission 6% of each annual premium excluding the first
(i) Calculate the annual office premium per 1,000 sum assured for each policy.
[2]
(ii) Calculate the gross premium prospective reserve per 1,000 sum assured for
each policy in force at 31 December 2012. [2]
CT5 A20144
(iii) Calculate the profit or loss to the company in 2013 in respect of these policies
given the following information:
The total sums assured in force on 1 January 2013 were 15,500,000
The company incurred expenses relating to these policies of 76,500 on

1 January 2013 (including renewal commission).
The total sums assured paid on 31 December 2013 in respect of deaths

during 2013 were 295,000.
The total sums assured surrendered during 2013 were 625,000. The
surrender value on each policy (which was paid on 31 December 2013)
was calculated as 85% of the gross premium prospective reserve
applicable at the date of payment of the surrender value.
The company earned interest of 3.5% per annum on its assets during 2013.
[10]
[Total 14]

12 A life assurance company issues a policy which provides a three-year temporary
annuity of 15,000 per annum payable annually in arrear to a male life aged 65 exact.
The single premium payable at outset on the policy is 42,000.
The company uses the following basis to profit test the policy:
Mortality PMA92C20
Interest earned on cash flow
and reserves 5% per annum
Initial commission 1% of the single premium
Renewal expenses 55 per annuity payment which is assumed to
increase by 3% per annum from inception of the
policy
In addition, the company establishes reserves on the policy at the beginning and end
of each policy year where:
tV = 15, 000 ( 3 t ) for t = 1 and 2

tV = 0 otherwise
(i) Calculate the net present value of the expected profits on the policy:
(a) allowing for reserves

(b) ignoring reserves
[10]
(ii) Briefly comment on the reason for the difference in the two values calculated
in part (i). [2]
(iii) Describe briefly how the net present value calculated in part (i)(a) and part
(i)(b) would change if a risk discount rate of 4% per annum had been used
(instead of 7% per annum) and state the reasons for the difference. [3]
[Total 15]
CT5 A20146
13 On 1 January 2003, an insurance company issued a 35 year with profit endowment
assurance policy to a life aged 30 exact for a sum assured of 60,000. The sum
assured (together with any bonuses attaching) is payable at maturity or immediately
on death, if earlier. Level premiums are payable annually in advance throughout the
policy term or until earlier death. Compound reversionary bonuses vest at the end of
each policy year (i.e. the death benefit does not include any bonus relating to the
policy year of death).
The company calculates the premium on the following basis:

Initial expenses 250 plus 60% of the first years premium, incurred at outset
Renewal expenses 2.5% of the second and each subsequent years premium,
incurred at the beginning of the respective policy years
Bonuses: 1.92308% per annum
(i) Show that the annual premium is approximately 1,146. [8]
(ii) Express, in stochastic form, the gross future loss random variable for this
policy at duration t, where t is an integer and 0 < t < 35 .
You should use Tx , K x or both, together with the elements of the premium
basis that are relevant.
Assume bonuses declared follow the assumptions stated in the premium basis.
[3]
On 31 December 2012, and just after the 10th bonus has been declared, the life wishes
to surrender the policy. The insurance company calculates a surrender value equal to
the gross prospective policy reserve, using the premium basis above.
(iii) Calculate the surrender value payable by the insurance company given that the
total actual past bonus additions to the policy have followed the assumptions
stated in the premium basis (including the bonus just vested).
. [6]
[Total 17]
END OF PAPER
CT5 A20147
EXAMINERS REPORT

Core Technical
Introduction
D C Bowie
June 2014

The general performance was similar this session to previous ones. Questions that were done
less well were Q3, Q5, Q8, Q11 part (iii) and Q13 part (ii). The examiners hope that the
detailed solutions given below will assist students with further revision.
Students should note that for long questions some credit is given if they can describe the right
procedures although to score well reasonably accurate numerical calculation is necessary.
Page 2
1 Each group is specified by a category or class of a particular characteristic of the

population. The stochastic models (life tables) are different for each class. There are
no common features to the models, they are different for all ages. This is termed class
selection.
Examples are:
Gender differences
Distinction of Smoker and Non-Smoker status
Occupation
Other examples credited.
Generally well done with no significant issues.
l45 20 (4)
2 (a) a25:20
(4)
= a25
(4)
v a45
l25
3 l 3
= a25 45 v 20 a45
8 l25 8
9801.3123 0.45639
= (22.520 0.375) (18.823 0.375)
9953.6144
= 22.145 (0.4494 18.448)
= 13.854
l
(b) 1
( IA) 25:20 = (1.04)1/ 2 ( IA) 25 45 v 20 (( IA) 45 + 20 A45 ))
l25
= 1.0198 (6.33195 0.4494 (8.33628 + 20 0.27605))
= 0.10656
Generally well done with no significant issues. The main error involved the accuracy of the
formula in line 1 of part (b) above.
l0e0.15( x +t )
3 t px = 0.15 x
= e0.15t
l0e
Therefore:
4
1 ((1.05) 1 e0.15 )5 1 0.37011
a3:5 = (1.05) t e0.15t = 1 0.15
=
0 1 ((1.05) e ) 1 0.81972
= 3.4940
Page 3
Hence:
.05
A3:5 = 1 3.4940
1.05
= 0.83362
This question was poorly done. From the solution above it will be seen that the answer is
very straightforward if premium conversion is used. Most students failed to realise this and
attempted the question the longer direct way which involves a much more arduous
calculation (full credit was given if this produced the correct answer).
4 Cash flow techniques promote understanding and clarity of thought
Cash flow techniques are more easily presented to non-actuaries
Cash flow techniques can be helpful when an office wishes to design an appropriate
investment strategy to cope with expected future cash flows.
Cash flow techniques allow much more flexibility e.g.
Premium basis with varying or stochastic interest rates
Complex policy designs e.g. varying benefits or options
Sensitivity analysis can be easy to do on a computer once the model has been set
up
Multiple state models (e.g. PHI) can be dealt with, which is not possible using
commutation functions
Allowance can be made for negative values.
Generally done reasonably well. Each distinct point mentioned above gained a mark up to
the maximum for the question. Other valid points not contained above were also credited.
5 At 65 the member would have completed 20 + 16 = 36 years service so the maximum

of 2/3 applies in this case.
z ra
2 C65
Value = 40, 000
3 s44 D45
2 45, 467
= 40, 000
3 8.375 2329
= 62,160
Page 4
This very simple question was very poorly done. The question makes it clear that age
retirement takes place at age 65 only. A large proportion of students tried to apply Past and
Future Service values directly from the Tables which includes all other age retirement
possibilities. This is not only arduous given the service limit but is invalid in this case.
6 (a) The method of approximation based on the assumption of a constant force of

mortality assumes that for integer x and 0 t < 1, we have:
x+t = = constant.
Then the appropriate relationship is:
t
t px = exp x + s ds = e
t
From this can be derived.
(b) From the relationship in (a) we can derive:
t p x = ( 1 p x )t
Therefore:
2.75 p85.5 = 0.5 p85.5 p86 p87 0.25 p88
= ( p85 )0.5 p86 p87 p880.25

= (1 0.14372) (1 0.15585) (1 0.16848) (1 0.18061)0.25
0.5
= 0.92534 0.84415 0.83152 0.95142

= 0.61797 so 2.75 q85.5 = (1 0.61797)
= 0.38203
Generally well done. Part (a) above is a detailed explanation and lesser detail gained full
credit.
7 The annuity is equivalent to:
6,000 p.a. whilst at least one life survives
An additional 1,500 p.a. if the female is surviving
A further amount of 2,500 p.a. if both lives survive.
Page 5
The expected present value is:
(4) (4) (4)

= 2500a65:62 + 1500a62 + 6000a65:62
= 2500(a65:62 0.625) + 1500(a62 0.625) + 6000(a65 + a62 a65:62 0.625)

= 6000a65 + 7500a62 3500a65:62 6250
= (6000 13.666) + (7500 15.963) (3500 12.427) 6250
= 151974
Other approaches were acceptable. Well prepared students coped well with this question but
others found difficulties in analysing the contingencies.
8 (i) l x+t = l x t 5d x t px = 1 t 5qx for 0 t 1
( t px )
Thus = 5t 4 qx
t
( t px ) x + r dr
t
Also = t p x x +t for 0 t 1 (from t p x = e 0 )
t
Therefore t px x+t = 5t 4 qx as required
1
(ii) ( aq )x = px t px x +t dt
0t
1
= px (5t 4 qx )dt from (i) above
0t
1
= (1 t 3qx )(5t 4 qx )dt
0
1
= 5qx t 4 (1 t 3qx )dt
0
1
t 5 t 8 qx
= 5qx
5 8
0
5
= qx 1 qx as required
8
This question was poorly done. Part (i) was essentially just the combining together of two
bookwork formulae. Part (ii) could have been easily attempted just using the result of part (i)
but a majority of students did not seem to really understand how to start this question.
Page 6
20
9 EPV = Ax1:20 = 0.03 e .05t e .03t dt
0
0.03 20
= e .08t
0.08 0
= 0.375 (1 e 1.6 )
= 0.375 0.79810
= 0.29929
For the Variance:
20
2
Ax1:20 = 0.03 e.1t e.03t dt
0
0.03 20
= e .13t
0.13 0
0.03
= (1 e2.6 )
0.13
= 0.23077 0.92573
= 0.21363
Hence
Variance = 2 Ax1:20 ( Ax1:20 ) 2

= 0.21363 (0.29929) 2
= 0.12406
= (0.35221) 2
Generally well done. The question in essence should have been technically posed in random
variable form as the Ax1:20 function is already the expected value and strictly in those
circumstances the variance could be argued as zero. However virtually all students
produced the solution above and were not concerned with this point so no difficulties
emerged. Anybody pointing out the anomaly gained full credit.
10 (i) (a) Crude mortality rate is the ratio of the total number of deaths in a
category to the total exposed to risk in the same category.
(b) Directly standardised mortality rate is the mortality rate of a category

weighted according to a standard population.
(c) Indirectly standardised mortality rate is an approximation to the

directly standardised mortality rate being the crude rate for the
standard population multiplied by the ratio of actual to expected deaths
for the region.
Page 7
(d) The Area comparability factor is a measure of the crude mortality rate
for the standard population divided by what the crude mortality rate is
for the region being studied, assuming the mortality rates are the same
as for the standard population..
(ii) Crude death rate: Occupational Group = 284/46000 = 0.006174
The Directly Standardised Mortality Rate is:
67 92 125
(1000000 20000 ) + (1500000 15000 ) + (700000 11000 )

3200000

3350 + 9200 + 7954.55

=
3200000
= 0.00641
The Indirectly Standardised Mortality Rate can be calculated as follow:
Expected Deaths for Occupation:
20000 3500 15000 7800 11000 8000

+ +
1000000 1500000 700000
= 70 + 78 + 125.71 = 273.71
So the Indirectly Standardised Mortality Rate is:
0.006031 284
= 0.00626
273.71
Generally well done. In part (i) students who put the formulae into words were given full
credit.
11 (i) Let P be the annual premium for the policy.
Then (functions at 4%) equation of value gives:
Pa[40]:20 = 1, 000 A[40]:20 + 0.54 P + 0.06 Pa[40]:20
1, 000 0.46423
P= = 36.98
0.94 13.930 0.54
Page 8
(ii) On 31 December 2012, the gross premium prospective reserve per 1,000 sum
assured is given by:
V = 1, 000 A45:15 0.94 36.98 a45:15

5
5V = 1, 000 0.56206 0.94 36.98 11.386

= 562.06 395.79 = 166.27
(iii) If we consider the total portfolio of non-profit endowment policies during

2013, we have:
Reserve on 31 December 2012 = 15,500 166.27 = 2,577,185
Premiums (P) paid on 1 January 2013 = 15,500 36.98 = 573,190
Expenses (E) incurred on 1 January 2013 = 76,500
Interest (I) earned during 2013 = 0.035 (2,577,185 + 573,190 76,500)

= 107,585.6
Death claims (D) during 2013 = 295,000
On 31 December 2013, the gross premium prospective reserve per 1,000 sum
assured is given by:
V = 1, 000 A46:14 0.94 36.98 a46:14

6
6V = 1, 000 0.58393 0.94 36.98 10.818

= 583.93 376.05 = 207.88
Total surrender values paid (S) during 2013

= 625 0.85 207.88 = 110,436.3
Total sum assured in force at 31 December 2013

= 15,500,000 295,000 625,000 = 14,580,000
Reserve on policies in force at 31 December 2013

= 14,580 207.88 = 3,030,890.4
Total Profit for 2013 =
= 5V + P E + I D S 6V
= 2, 577,185 + 573,190 76, 500 +107, 585.6 295, 000 110, 436.3 3, 030,890.4
= 254,866.1
i.e. an experience loss of 254,866
Parts (i) and (ii) were generally well done. Part (iii) was less well done. Many students
successfully obtained the mortality profit but were unable to quantify others as shown above.
In particular identifying surrenders caused difficulties.
Page 9
12 (i) Decrement table
age qx px px
t 1
65 0.006032 0.993968 1.000000

66 0.007147 0.992853 0.993968
67 0.008439 0.991561 0.986864
(ii) Cash flows for policy:
(a) With reserves
Year Opening Premium Initial Interest Annuity Annuity Closing Profit

reserve expense claim expense reserve vector
1 0.00 42000.00 770.00 2061.50 14909.52 56.31 29819.04 1493.37
2 30000.00 0.00 0.00 1500.00 14892.80 57.93 14892.80 1656.47
3 15000.00 0.00 0.00 750.00 14873.42 59.59 0.00 816.99
Year Profit Profit Discount PVFNP

vector signature factor
1 1493.37 1493.37 0.934579 1395.67
2 1656.47 1646.48 0.873439 1438.10
3 816.99 806.26 0.816298 658.15
Total PVFNP = 700.58
(b) Without reserves
Year Opening Premium Initial Interest Annuity Annuity Closing Profit

reserve expense claim expense reserve vector
1 0.00 42000.00 770.00 2061.50 14909.52 56.31 0.00 28325.67
2 0.00 0.00 0.00 0.00 14892.80 57.93 0.00 14950.73
3 0.00 0.00 0.00 0.00 14873.42 59.59 0.00 14933.01
Year Profit Profit Discount PVFNP

vector signature factor
1 28325.67 28325.67 0.934579 26472.59
2 14950.73 14860.54 0.873439 12979.78
3 14933.01 14736.85 0.816298 12029.66
(ii) The net present value is smaller when reserves are set up because we are tying
up money in the reserves which are subject to a lower rate of interest (5%)
than the risk discount rate (7%) c.f. 700.58 compared to 1463.15.
(iii) With reserves, the net present value of the expected profit will increase if the
risk discount rate is reduced from 7% per annum to 4% per annum because the
Page 10
positive profit signature in year 2 and 3 become more significant (note: NPV
increases from 700.58 to 803.10).
Without reserves, the net present value of the expected profit will fall if the
risk discount rate is reduced from 7% per annum to 4% per annum because the
negative profit signature in year 2 and 3 become more significant (note: NPV
decreases from 1463.16 to 395.81).
The net present value of expected profits without reserves would now be less
than the net present value of expected profits with reserves. This is because the
reserves are now subject to a higher rate of interest (5%) than the risk discount
rate (4%) (note: 803.10 compared to 395.81).
Many well prepared students answered this question well. Other than accuracy of the
numbers the main omission was the detail expected in part (iii). Note that in part (i) a
general understanding of the methods needed to solve the problem earned proportionate
credit even if the numerical accuracy was not always apparent.
13 (i) Let P be the annual premium for the contract. Then:
EPV of premiums is:
6%
Pa30:35 = 15.150 P
EPV of benefits:
1
(1.06 ) A30:35
0.5 1
60, 000 + v 35 35 p 30 @ 4%
1.0192308
= 60, 000 [ 0.04176 + 0.22523] = 16, 019.40
where
A30:35 = 0.26657
8821.2612
v35 35 p 30 = 0.25342 = 0.22523
9925.2094
1
A30:35 = A30:35 v35 35 p 30 = 0.04134
EPV of expenses:
250 + 0.575 P + 0.025 Pa30:35

6%
= 250 + 0.95375 P
Page 11
Equation of value gives
15.15P = 16,019.40 + 250 + 0.95375P

P = 1146.04
(ii) Gross future loss random variable
= PV future benefit payment + PV future expenses PV of future premiums
= G ( K30+t ) + 0.025 1146.04amin 1146.04amin

[ K30+t +1,35t ] [ K30+t +1,35t ]
where
G ( K30+t ) = 60, 000 (1.0192308)t + K30+t v.06

T30 + t
if K30+t < 35 t
or
35t
G ( K30+t ) = 60, 000 (1.0192308)35 v.06 if K30+t 35 t
(iii) Sum assured and attaching bonuses at 31 December 2012
= 60, 000 (1.0192308 )

10
= 72,589.97
gross prospective reserve at the end of the 10th policy year is given by:
1
(1.06 ) A40:25
0.5
10V = 72,589.97 1
+ v 25 25 p 40 @ 4% 0.975 1146.04a40:25
6%
1.0192308
where
A40:25 = 0.38907
8821.2612
v 25 25 p 40 = 0.37512 = 0.33573
9856.2863
1
A40:25 = A40:25 v 25 25 p 40 = 0.05334
6%
a40:25 = 13.288
Page 12
10V = 72,589.97 [ 0.05388 + 0.33573] 0.975 1146.04 13.288

= 28, 281.78 14,847.87 = 13, 433.91
Part (i) was generally well done. Part (ii) was poorly done which is often the case for these
types of question. Part (iii) gave more difficulties but was generally completed successfully
by well prepared students.
Page 13
EXAMINATION
1 October 2014 (am)

Core Technical
booklet.
supervisor.
4. Attempt all 14 questions, beginning your answer to each question on a new page.
question paper.

1 Define Time Selection giving a distinct example. [2]
2 With respect to life assurance contracts, discuss the possible effects of policy lapses
on subsequent mortality experience.
[3]
3 Calculate 2.5 q75.75 using the method of Uniform Distribution of Deaths.
Basis: Mortality PMA92C20 [4]
1
4 Calculate 5|3 q40:40 .
Basis: Mortality AM92 [4]
5 (i) Define in words and give a formula for the area comparability factor F. [2]
(ii) Mortality levels for a certain country have been studied at national and
regional level.
Explain the circumstances under which a particular region may have an Area
Comparability Factor of 1.5. [2]
[Total 4]
6 A pension scheme provides an ill-health retirement pension of 1/80 of Final

Pensionable Salary for each year of company service limited to a maximum of 50% of
Final Pensionable Salary, with fractions of a year to count proportionately.
Retirement due to ill-health may take place at any time before age 65 the normal
retirement age.
Final Pensionable Salary is defined as the average annual salary over the three-year
period preceding retirement.
Calculate the present expected value of past and future service ill-health benefits for a
male now aged 30 exact who has a current salary of 30,000 per annum and has
10 years past service. His salary will increase in 1 years time.
Basis:
PEN Tables in the Formulae and Tables for Actuarial Examinations Interest 4% per
annum
[4]
CT5 S20142
7 A life aged 40 exact purchases an endowment assurance policy whereby the sum
assured on survival at age 60 exact is 20,000 and the benefit payable on death during
the term is 10,000. Death benefits are payable at the end of the year of death.
Calculate the expected present value and variance of the benefits under this policy.
Basis: Mortality AM92 Select

Expenses Ignore
[6]
8 (i) In the context of random variables define Tx and Kx. [2]
(ii) State the random variable for the following expected values:
(a) Ax
(b) ax
(c) A[ x ]:n
(d) x
5| a
[5]
[Total 7]
9 A life aged 60 exact purchases a special deferred term assurance policy for an overall
term of 20 years.
Under this policy a sum assured of 100,000 is paid on death but only on death from
age 65 exact up to the end of the term. On death between age 60 and 65 the benefit is
equal to the total premiums paid without interest.
All payments on death are made at the end of the year of death. An annual premium
paid in advance is payable for the full 20 year term.
Calculate the annual premium payable. [7]
Basis:

Expenses Ignore

10 A life insurance company issues a non-profit assurance policy for a term of n years to
a life aged x exact.
For t = 1, 2,......, n:
The level annual premium payable at the start of year t is P.
The expense at the start of policy year t is Et.
The benefits payable at the end of the tth policy year on death, surrender and
survival are Dt, Bt and St respectively.
The rate of interest earned on net cash flows during the tth policy year is it.
The dependent rates of mortality and surrender at age x+t are (aq )dx +t and ( aq ) wx+t
respectively.
Assume that the insurance company does not set up a reserve for the policy.
(i) Write down an expression for (CF)t, the accumulation to the end of the tth
policy year of the expected net cash flow arising during the tth policy year per
policy in force at the start of that year. [2]
(ii) Derive an expression which could be used to calculate the level annual
premium that the company should charge if the company requires the expected
net present value of profit on the policy to be zero assuming a risk discount
rate of j% per annum defining any notation used. [3]
Assume that the insurance company does set up a reserve t1V for the policy at the
start of the tth policy year.
(iii) Write down an expression for the expected profit at the end of the tth policy
year for each policy in force at the start of that year. [2]
[Total 7]
CT5 S20144
11 A life assurance company has issued whole of life assurance policies over a number
of years. Premiums on these policies are payable annually in advance and the sums
assured are payable at the end of the year of death.
You are given the following information relating to a group of policies within the
portfolio of whole of life assurance policies:
Age exact on Sums assured in force on Reserves held on

1 January 2013 1 January 2013 31 December 2013
for policies in force at that date
69 740,000 371,000
During 2013, there was 1 death claim (on a policy which was issued on 1 January
2000 for a sum assured of 15,000) arising from this group of policies.
(i) Calculate the mortality profit or loss for 2013 to the company in respect of this
group of policies assuming net premiums are held on the following basis:

[5]
(ii) Calculate the amount of expected death claims in 2013 for this group of
policies. [1]
(iii) Compare your answer in part (ii) with the amount of actual claims and
comment on your answer with reference to your answer in part (i) above.
[2]
[Total 8]
12 (i) Calculate the probability that a life now aged 30 exact will die between the
ages of 55 and 65 both exact.
Basis: Mortality ELT15 (Males)

[2]
(ii) Calculate the above probability again assuming the basis below
Basis: Mortality x = 0.005e0.09( x 20) for 20 x 70

[7]
[Total 9]

13 A life insurance company issues 3-year policies to lives aged 55 exact who are
employees of a manufacturer. These policies offer the following benefits during the
term of the policy:
On death whilst still an employee, 200,000 paid at the end of year of death.
On ill-health retirement, 100,000 paid at the end of the year of retirement.
On leaving their employer other than on death or ill-health retirement, a return of

all premiums paid accumulated with interest at a rate of 2% per annum payable at
the end of the year of leaving.
On survival as an employee at the end of 3 years, 10,000 is payable.
The company uses the following basis to calculate annual premiums for this policy:
Independent rate of mortality 110% of AM92 Ultimate

Interest earned on cash flows 5% per annum
Renewal expenses 25 at the start of the second and third policy year
Reserves None held
In addition, you are given the following independent rates of ill-health retirement and
withdrawal. You can assume that the decrements operate uniformly over each year of
age in each single decrement table.
Age Ill-health Withdrawal

retirement
55 0.04 0.10
56 0.05 0.08
57 0.06 0.06
(i) Calculate the dependent rates of mortality, ill-health retirement and

withdrawal for each policy year. [3]
The company sets premiums so that the net present value of the profit for the policy is
5% of the annual premium, using a risk discount rate of 5% per annum.
(ii) Calculate the level premium payable annually in advance for this policy. [9]
(iii) Discuss briefly whether the life insurance company needs to hold reserves at
the beginning and end of each policy year for this policy. [2]
Assume that the company does hold reserves at the beginning and end of each policy
year for this policy and that reserves earn interest at 5% per annum.
(iv) Explain, without doing further calculations, whether the premium would be
higher, the same or lower than that calculated in part (ii) above.
[2]
[Total 16]
CT5 S20146
14 A life insurance company, is proposing to launch a Low Start unit-linked
endowment policy for a term of 3 years under which premiums increase by a fixed
monetary amount each year and are payable yearly in advance throughout the term of
the policy or until earlier death. The premium payable and the amount of premium
allocated to units in each policy year are as follows:
Policy Year Premium Payable Allocation Rate

%
1 1500 50
2 2250 105
3 3000 115
If the policyholder dies during the term of the policy, the death benefit of 6,750
(i.e. the total amount of premiums due to be paid on the policy if held to maturity) or
the bid value of the units, whichever is higher, is payable at the end of the policy year
of death. The policyholder may surrender the policy only at the end of each policy
year. On surrender or on survival to the end of the term, the bid value of the units is
payable at the end of the policy year of exit.
The units are subject to a bid-offer spread of 6% and an annual management charge of
1% of the bid value of units is deducted at the end of each policy year. Management
charges are deducted from the unit fund before death, surrender and maturity benefits
are paid.
You should use the following assumptions in carrying out profit tests of this policy:
Rate of growth on assets

in the unit fund 4.5% per annum
Rate of interest on non-unit
fund cash flows 2.5% per annum
Mortality 90% AM92 Ultimate
Surrender 7.5% of policies in force at the end of year 1 and 2.5%
of policies in force at the end of year 2 then surrender
Renewal expenses 55 per annum on the second and third premium dates
Renewal commission 2.5% of the second and third years premiums
Claim expense 75 (payable only on death and surrender)
(i) Calculate the profit margin for the policy issued to a life aged 61 exact on the
assumption that the company does not set up sterling reserves for this policy.
[13]
(ii) Explain why a life insurance company might need to set up non-unit reserves
in respect of a unit-linked life assurance policy. [2]
(iii) Calculate the profit margin for the policy on the assumption that the company
does set up reserves for this policy. [4]
[Total 19]
END OF PAPER
CT5 S20147
EXAMINERS REPORT

Core Technical
Introduction
The report is written based on the legislative and regulatory context at the date the
examination was set. Candidates should take into account the possibility that circumstances
may have changed if using these reports for revision.
F Layton
November 2014

The general performance was similar this session to previous ones although it was felt that
this paper was possibly a little harder than some previous ones. Questions that were done less
well were 4, 5(ii), 7 (variance), 11, 12(ii) and 14(iii). The examiners hope that the detailed
solutions given below will assist students with further revision.
Students should note that for long questions reasonable credit is given if they can describe the
right procedures although to score high marks reasonable accurate numerical calculation is
necessary.
Page 2
1 Within a population mortality (or morbidity) varies with calendar time. This effect is
usually observed at all ages. The usual pattern is for mortality rates to become lighter
(improve) over time, although there can be exceptions, due, for example, to the
increasing effect of AIDS in some countries.
For example a separate model or table will be produced for different calendar periods
e.g. English Life Table No 14 198082 and English Life Table No 15 199092. The
difference between the tables is termed time selection. [2]
This question was generally well done. Other valid examples were credited.
2
Withdrawal often acts as a selective decrement in respect of mortality. Those
withdrawing tend to have lighter mortality than those who keep their policies in
force.
This selective effect results in mortality rates which increase markedly with policy
duration and resembles temporary initial selection.
[3]
Generally well done. The main omission was mentioning the worsening mortality of those
who did not lapse.
3 2.5 q75.75 (1 2.5 p75.75 ) 1 ( 0.25 p 75.75 ) p76 p77 0.25 p78
p76 1 q76 0.967821
p77 1 q77 0.963304
0.25 p78 1 0.25 q78 0.989575
0.25q75
0.25 p 75.75 1 0.992818
1 0.75q75
2.5 q75.75 1 (0.992818 0.967821 0.963304 0.989575)
0.08404 [4]
Generally well done.
Page 3
l45 l45 1
4 1
5|3 q40:40 3 q45:45
l40 l40 2
2
l
0.5 45 (1 3 p45:45 )
l40
2
l l l
0.5 45 1 48 48
l40 l45 l45
2
9801.3123 9753.4714 9753.4714
0.5 1
9856.2863 9801.3123 9801.3123
0.00482 [4]
This question caused many students problems. The main issue missed was the relationship
between the first of 2 equal ages to die and the joint mortality function.
s Exc,t s mx,t Exc,t s mx,t

5 (i) F x x
s
Exc,t Exc,t
x x
F is called the area comparability factor and is a measure of the crude

mortality rate for the standard population divided by what the crude mortality
rate is for the region being studied, assuming the mortality rates are the same
as for the standard population. [2]
(ii) If its age/sex profile is such that if it experienced the same age/sex specific
mortality rates as the country, then its crude death rate would be 2/3 of that of
the country, i.e. the region has either a younger age structure or a higher
female proportion (or both) than the country. [2]
[Total 4]
The first part was straight bookwork. Part (ii) was generally poorly explained and the two-
thirds relationship was not appreciated.
Page 4
6 Past Service
10 z M 30ia
10 64061
30000 s 30000 5781
80 D30 80 41558
For future service note that maximum ill-health pension will accrue by age 60
1 z R30
ia
z R60
ia
1 1502811 35570
30000 s
30000 13240 [4]
80 D30 80 41558
Well prepared students did this question well. Many others did not allow for the age
limitation properly just setting out the standard formula which was not credited.
l
7 EPV 10000 A[40]:20 v 20 60
l[40]

9287.2164
10000 0.46423 0.45639
9854.3036
8943.6
For the variance we need the second moment which can be found as:
l l
(10000) 2 2 A[40] (v 20 ) 2 60 2 A60 (20000) 2 (v 20 ) 2 60
l[40] l[40]

9287.2164 9287.2164
= (10000) 2 0.06775 0.20829 0.23723 4 0.20829
9854.3036 9854.3036
= (10000)2 (0.06775 0.04657 0.78521)
= (10000)2 0.80639
Hence Variance is:
(10000)2 0.80639 (10000)2 (0.89436)2
= (10000)2 0.00651
= (807)2 [6]
The mean was generally easily calculated but many students struggled with the variance not
coping properly with the double payment on survival.
Page 5
8 (i) Tx is the total future lifetime of an ultimate life aged x [2]

K x is the curtate future lifetime of an ultimate life aged x
(ii) (a) vTx
(b) aK
x
min[ K[ x ] 1,n ]
(c) v
(d) v5 aK if K x 5
x 4
0 otherwise
[5]
[Total 7]
Very straightforward quick question which well prepared students did well. Main omission
was inaccuracies in (ii)(d).
9 The annual premium is found from
l65
Pa60:20 P( IA)160:5 100, 000 v5 A65:15
1
l60
l80 5266.4604
a60:20 a60 v 20 a80 14.134 0.45639 6.818 12.369
l60 9287.2164
l65 8821.2612
( IA)160:5 ( IA)60 v5 (( IA)65 5 A65 ) 8.36234 0.82193 (7.89442 5 0.52786)
l60 9287.2164
0.13874
l80 5266.4604
1
A65:15 A65 v15 A80 0.52786 0.55526 0.73775 0.28330
l65 8821.2612
Hence:
8821.2612
12.369 P 0.13874 P 100000 0.82193 0.28330
9287.2164
12.230 P 22117.02
P 1808 to nearer [7]
Generally done well by well prepared students. Main error related to the treatment of the
return of premiums in the first 5 years.
Page 6
10 (i) The accumulated net cash flow at end of t th policy year per policy in force at
the start of that year is given by:
CF t P Et 1 it aq xt 1 Dt aq x t 1 Bt
d w

1 aq xt 1 aq xt 1 St
d w
[2]
(ii) We need to set the expected present value of the profit signature of the policy
equal to zero using a risk discount rate of j% per annum. Hence, if

t 1
ap xk 1 aq xk aq xk t ap x ap
d w
k 0 xk
then the level annual premium P is derived from the following equation:
n
CF t t 1 ap x vtj % 0 [3]
t 1
(iii) Expected profit at the end of the t th policy year for each policy in force at the
start of that year
t 1V 1 it CF t ap xt 1 tV [2]
[Total 7]
Generally done well although students struggled to explain part (ii). Credit was given for
reasonable alternative explanations.
11 (i) The reserve for the death claim at 31 December 2013 was
a 10.375
14V 15, 000 1 70 15, 000 1 4,983.59
a56 15.537
Total death strain at risk (DSAR) at 31 December 2013:
DSAR 740, 000 371, 000 4,983.59 364, 016.41
Expected death strain (EDS) =

q69 DSAR 0.022226 364, 016.41 8, 090.63
Actual death strain (ADS) = 15, 000 4,983.59 10, 016.41

Mortality profit = EDS ADS = 8,090.63 10,016.41 = 1,925.78 i.e. a loss
[5]
Page 7
(ii) Expected claims = q69 740, 000 16, 447.24 [1]
(iii) Actual claims = 15,000
Actual claims were lower than expected although the company made a
mortality loss. This was due to the DSAR (expressed as a % of the sum
assured) on the one death claim policy being significantly higher than for the
group of policies on average. [2]
[Total 8]
This question was not done well overall. Many students failed to understand how to derive
the reserve using premium conversion techniques and basically ignored it. This led to totally
the wrong conclusions.
12 (i) The probability is:
l55 l65
25 p 30 35 p 30
l30 l30
91217 79293
0.12212 [2]
97645
25
30t dt
(ii) 25 p 30 exp
0
exp 0.005e0.09(30t 20) dt

25
exp 0.005 e0.9 e0.09t dt

25
0.09t 25
0.9 e
exp 0.005 e
.09 0

e 2.25 1
exp 0.005 e0.9
0.09

exp(1.159803)
0.313548
Page 8
Similarly:
exp 30t dt
35
35 p 30
0
exp 0.005e0.09(30t 20) dt

35
exp 0.005 e0.9 e0.09t dt

35
e0.09t
35
exp 0.005 e
0.9

.09 0

e3.15 1
exp 0.005 e0.9

0.09
exp(3.052103)
0.047259
Hence required probability
25 p 30 35 p30 0.313548 0.047259 0.266289 [7]

[Total 9]
Part (i) was straightforward and well done. Part (ii)was generally poorly done although in
essence it was a simple subtraction of 2 similar integrals.
13 (i) Multiple decrement table
qxd q xw q ix (aq) dx (aq ) wx ( aq )ix ( ap ) x t 1 ( ap ) x

55 0.004916 0.100 0.040 0.00458 0.09776 0.03791 0.85975 1.00000
56 0.005528 0.080 0.050 0.00518 0.07779 0.04787 0.86917 0.85975
57 0.006215 0.060 0.060 0.00585 0.05802 0.05802 0.87811 0.74727
[3]
Page 9
(ii) Cash flows for the policy
Let P be the level annual premium for the policy, then
Yr Prm Exp Interest Death Surrender Ill-health Mat Profit vector

claim claim claim claim
1 P 150.00 0.05P7.50 916.00 0.09972P 3791.00 0.00 0.95028P4864.50
2 P 25.00 0.05P1.25 1036.00 0.16028P 4787.00 0.00 0.88972P5849.25
3 P 25.00 0.05P1.25 1170.00 0.18112P 5802.00 8781.10 0.86888P15779.25
Yr Profit vector t 1 ( ap x ) Profit signature Discount PVFNP

factor
1 0.95028P4864.50 1.00000 0.95028P4864.50 0.952381 0.90503P4632.86
2 0.88972P5849.25 0.85975 0.76494P5028.89 0.907029 0.69382P4561.35
3 0.86888P15779.25 0.74727 0.64929P11791.36 0.863838 0.56088P10185.82
Total PVFNP = 2.15973P 19380.03 = 0.05P
19380.03
=> P = 9186.02 [9]
2.10973
(iii) The cash flows show that for this policy, the expected profit vector is positive
for policy years 1 and 2 but negative (significantly) for the last policy year
(which is expected due to the survival amount being paid at the end of the
term of the policy). Unless the company builds up reserves over the period of
the policy, it may not have sufficient funds available to pay claims in policy
year 3. Therefore, it would be prudent for the company to hold reserves at the
beginning and end of each policy year. Indeed, regulations may force the
company to do so. [2]
(iv) As the discount rate and the interest rate earned on cash flows items (including
reserves) is the same at 5% per annum, holding reserves will not change the
premium required for this policy. [2]
[Total 16]
This question was generally well done by students who had prepared well. Other approaches
were credited especially where a non tabular approach was adopted.
Credit was also given if the student could demonstrate how the problem might be approached
without getting all the arithmetic entirely accurate.
Page 10
14 (i) Multiple decrement table:
x q xd q xs
61 0.009009 0.075
62 0.010112 0.025
63 0.011344 0.000
x (aq ) dx ( aq ) sx (ap) t 1 ( ap )
61 0.008108 0.07439 0.917500 1.000000
62 0.009101 0.02477 0.966127 0.917500
63 0.010210 0.00000 0.989790 0.886421
yr 1 yr 2 yr 3
value of units
at start of year 0.00 729.36 3052.03
allocation 750.00 2362.50 3450.00
B/O spread 45.00 141.75 207.00
interest 31.73 132.75 283.28
management
charge 7.37 30.83 65.78
value of units
at year end 729.36 3052.03 6512.53
yr 1 yr 2 yr 3
unallocated
premium 750.00 112.50 450.00
B/O spread 45.00 141.75 207.00
expenses 275.00 111.25 130.00
interest 13.00 2.05 9.32
man charge 7.37 30.83 65.78
extra death 48.82 33.65 2.42
benefit
claim expense 6.19 2.54 0.77
profit vector 485.36 89.41 319.73
probability in 1 0.917500 0.886421
force
profit signature 485.36 82.03 283.42
discount factor 0.938967 0.881659 0.827849
PVFNP 455.74 72.33 234.63
Page 11
yr 1 yr 2 yr 3
premium
signature 1500.000 1938.38 2344.57
Total PV of premiums = 7197.448
Total PV of premiums = 5782.95
148.78
Profit margin = 2.57% [13]
5782.95
(ii) Reserves might be required to eliminate/zeroise expected negative cash flows

in the future so that the company does not expect to have to input further
capital in the future. [2]
(iii) The profit vector for the policy is (485.36, 89.41, 319.73)
In order to set up reserves to zeroise future expected negative cash flows, we

require:
319.73
V
2 311.93
1.025
V 1.025 ( ap )62 2V 89.41 1V 381.24

1
revised cash flow in year 1 485.36 (ap )61 1V 135.57
and PVFNP = 135.57/1.065 = 127.30
127.30
Profit margin = 2.20% [4]
5782.95
[Total 19]
Again well prepared students scored good marks on this question and credit was given if a
good understanding of the process was demonstrated even if the result was not entirely
arithmetically accurate.
The main difficulty here was the interpretation of zeroising the result in part (iii).
Page 12

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Faculty of Actuaries Institute of Actuaries

26 April 2010 (am)

Subject CT5 Contingencies

Time allowed: Three hours

INSTRUCTIONS TO THE CANDIDATE

3. Mark allocations are shown in brackets.

5. Candidates should show calculations where this is appropriate.

Graph paper is NOT required for this paper.

AT THE END OF THE EXAMINATION

2 Define spurious selection, giving two distinct examples. [3]

Standard Population Urbania

Rate of interest 4% per annum

5 A population is subject to the force of mortality x = e0.0002x1.

Calculate the probability that a life now aged 20 exact:

(i) survives to age 70 exact [2]

(ii) dies between ages 60 exact and 70 exact [3]

Calculate 0.75p50.5 using two different methods. [5]

(ii) Calculate the contribution required to fund this benefit as a percentage of

Rate of interest 4% per annum

CT5 A20103 PLEASE TURN OVER

Active(A) Retired (R)

Age (x) Number of employees Deaths Withdrawals

(ii) Explain this result by general reasoning. [3]

Mortality AM92 Select

(ii) (a) Give an explanation of your numerical answer to (i) above.

(b) Describe the main disadvantage to the insurance company of issuing

CT5 A20105 PLEASE TURN OVER

(i) Calculate the profit margin for the policy. [13]

Mortality: AM92 Select

Policy reserving basis:

Mortality: AM92 Ultimate

April 2010 Examinations

Subject CT5 Contingencies

These are given in italics at the end of each question.

Question generally answered well.

Another example might be in a company pension scheme which might be showing a

Actual number of deaths for Urbania = 130+145+173 = 448

Mortality rates in standard population are:

Age 60: 26,170 / 2,500,000 = 0.0104680

Expected number of deaths for Urbania

= 0.010468 10,000 + 0.0123046 12,000 + 0.0147918 11,000 = 415

SMR = 448/415 = 107.95%

Question generally answered well.

= 9,900( A[50] v5 5 p[50] A55 ) + 100(( IA)[50] v5 5 p[50] (5 A55 + ( IA)55 ))

Probability = 40 p20 (1 10 p60 )

e0.0002 x 60 e0.0002 x 20 e0.0002 x 70 e0.0002 x 60

= 0.725 x(1 0.8773)

6 p50 = 97,702 / 99,813 = 0.978850

Uniform distribution of deaths

p50 0.25 p51 p50 (1 0.25(1 p51 )) 0.978850 * (1 0.25* (1 0.972815))

Constant force of mortality

7 (i) Age retirement benefit

1 (20 *128,026 + 963,869)

Therefore K = 173,584 / 261,868 i.e. 66.3%

(ii) Let annuity be P per week. Then EPV of annuity at 66 is

52 P ( a10 + 2 * v10 10 p66 .a76 )

Therefore pension is given by

9 (i) We are looking to derive (aq) rx in terms of x and x

Use the Kolmogorov equations (assuming the transition intensities are

+ = log(1 ((aq) rx + (aq) dx ))

this can be rearranged to show

With this assumption, deaths occur on average at age x + , so:

(ad ) rx + 12 (ad ) dx qxr (aq) rx

= P + 250 + 0.025 4 Pa[35]:30