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Bayes Business School

MSc Actuarial Science

Module Code Exam Title

SMM065 Contingencies (CM1) (2)

(For subject (CM1) (2) of the Institute and Faculty of Actuaries Examinations)

Date Length
April 2023 3hrs - 00mins
Division of Marks:
The number of marks allocated is shown at the end of each question.
Where marks have been quoted for parts of questions, these are intended to be a helpful guide to
candidates.

Instructions to students:
Candidates should answer ALL of the questions.
Candidates should begin each question on a new sheet of paper.

This paper contains EIGHT questions and comprises NINE pages including the title page

Number of answer books to be provided: One

Calculators are permitted: Yes:

Casio FX-83 GTX, Casio FX-85 GTX, Casio FX-83 GT+, Casio FX-85 GT+
Casio FX-83 MS, Casio FX-85 MS, Casio FX-83 ES, Casio FX-85 ES

Dictionaries are NOT permitted

Additional materials or tables to be provided: Actuarial Tables
Exam paper can be removed from the exam room: No

Internal Examiner: Professor Ben Rickayzen

External Examiner: Dr Andrew Maclaren
Question 1

A policy with a term of 25 years provides a sum assured of £50,000 if the life survives to the end of the
term.
In addition, a death benefit of £30,000 is payable immediately on death if the life dies before the end of
the term.
Level premiums are payable annually in advance for a maximum of 15 years, but cease on earlier death.

(i) Write down an expression for the present value of the benefits under this policy in terms of Tx , the
complete future lifetime of a life aged x.
[1]
(ii) Write down an expression for the expected present value of the benefits under this policy.
[2]
(iii) Write down an expression for the present value of the premiums under this policy in terms of K x ,
the curtate future lifetime of a life aged x.
[2]
(iv) Write down an expression for the expected present value of the premiums under this policy.
[1]
(v) Calculate the net premium for this policy for a policyholder aged 35 using AM92 Ultimate
mortality and 6% interest p.a.
[5]
[Total 11]

Page 2 of 9
Question 2

On 1 January 2009 a life office issued a number of annual premium policies to a group of lives each of
whom was then aged exactly 40. Premiums are payable throughout the terms of the policies, all of which
are for a term of 25 years, and have a sum assured of £30,000.

The policy types were as follows:

(a) Term assurances where the death benefit is payable at the end of the year of death.

(b) Pure endowments with no death benefit.

The following information is known:

Type of policy Number of policies in force on Number of deaths during 2022

1st January 2022
Term assurance 1900 7
Pure endowment 900 6

Provisions are calculated on a net premium basis.

(i) Calculate the profit or loss from mortality for 2022 in respect of each of the types of policy.
[9]
Basis: Mortality: AM92 Ultimate
Interest: 4% per annum

(ii) For each policy type, comment on your answer to part (i).
[3]
[Total 12]

Page 3 of 9
Question 3

An insurance company issues a 2-year joint-life term assurance to a married couple, both of exact age 60.
The sum assured of £100,000 is payable at the end of the year of the first death.
Premiums of £6,000 are payable annually in advance throughout the term of the contract, ceasing on the
first death.
The present value of the profit earned by the company from the contract is a random variable given by:

P = PV of premium income − PV of benefit outgo

Using ELT No. 15 (Males) mortality for the male life, ELT No. 15 (Females) mortality for the female life
and 6% p.a. interest:

(a) Obtain the distribution function of the random variable P (i.e. find all possible values of the
random variable and the probability that the random variable takes each value).
[4]
(b) Calculate the mean and standard deviation of the present value of the profit earned by the
company.
[4]
[Total 8]

Page 4 of 9
Question 4
On retirement at exact age 68, a male life uses his accumulated pension fund of £300,000 to purchase a
whole of life immediate annuity from a life insurance company.
Level instalments are payable monthly in advance, and the annuity is guaranteed to be paid for the first
five years (even if the policyholder dies during this period).
(i) Comment briefly on why it is common for such annuities to have a guaranteed minimum payment
period such as this.
[2]
(ii) Calculate the amount of the level monthly instalment using the following basis:
Mortality: AM92 select
Interest: 4% per annum
Expenses: Initial: £200
Regular: 0.5% of each annuity payment
[5]
(iii) Without doing any further calculations, explain (with reasons) how the amount of the level
monthly instalment calculated in part (ii) above would change if:
(a) the life office used AM92 ultimate mortality rather than AM92 select;
(b) the life office used a rate of interest of 6% per annum rather than 4% per annum;
(c) the five-year guarantee period was removed; and
(d) the life delayed his retirement until age 70.
Note: You should consider each of these changes separately.
[4]
[Total 11]

Page 5 of 9
Question 5
A life of exact age 45 is considering purchasing a 25-year endowment assurance contract from a life
insurance company.
There are two different types of contract available: non-profit and with-profit.
In each case, level annual premiums are payable in advance during the term of the contract, ceasing on
earlier death.
(i) For the non-profit contract, a sum assured of £100,000 is payable at the end of the year of death or
at maturity.

Calculate the level annual premium using the following basis:

Mortality: AM92 select

Interest: 6% per annum
Expenses: None
[7]

(ii) For the with-profit contract, the initial sum assured is also £100,000 and the sum assured plus
previously declared bonus is payable at the end of the year of death or at maturity.
Calculate the level annual premium using the same basis as for the non-profit contract in (i) above
and, in addition, assume that compound reversionary bonus of 1.9231% per annum will be
declared at the end of each policy year.
[6]

(iii) From the point of view of the policyholder, discuss the main advantages and disadvantages of
purchasing the with-profit endowment assurance contract rather than the non-profit contract.
[3]
[Total 16]

Page 6 of 9
Question 6
A unit-linked endowment policy with a term of three years is sold to a life of exact age 55.
The premium is £1,500 payable annually in advance.
90% of the premium in the first year and 102% of the premium in the second and third years is allocated
to purchase units at the offer price. The units are subject to a bid-offer spread of 4% and an annual
management charge of 2.25% of the bid value of the units is deducted at the end of each year.
The death benefit, which is payable at the end of the year of death provided that this occurs during the
three-year term, is £3,000 or the bid value of the units if greater. The maturity value is equal to the bid
value of the units.
The initial commission is 20% of the first year’s premium, and the renewal commission is 2% of the
second and subsequent years’ premiums. Additional expenses are incurred at the start of each policy year,
increasing in line with price inflation. The amount of the additional expense at the start of the first year is
£20.

The life office uses the following pricing assumptions:

Mortality: AM92 ultimate
Rate of growth of assets in unit fund: 8% per annum
Rate of interest earned on non-unit cash flows: 5% per annum
Rate of price inflation: 3% per annum

Calculate the profit signature and the expected present value of the profits using a risk discount rate of
10% per annum.
[13]

Page 7 of 9
Question 7
A military training program lasts for two years.
New recruits start the program at age 18 and are subject to two decrements, death (d) and disability (i).
You are given the following information regarding the single decrement transition forces:

age, x µ xd µ xi

18 0.02 0.10
19 0.04 0.15

Also, you are told that on reaching the end of the second year, 35% of the remaining recruits are not
offered a position as a full-time soldier.
(i) Assuming that the single decrement transition forces are constant between integer ages, construct
the corresponding multiple decrement table starting with a radix of (al)18 = 1,000,000.
(ii) Hence or otherwise, calculate the probability that a new recruit joining at exact age 18 will be
offered a position as a full-time soldier at age 20.
[7]

The following compensation is paid to recruits who do not successfully completed the program:
• in the event of death, a lump sum of £30,000 is paid immediately;
• in the event of disability in the first year, a lump sum of £2,500 is payable at the end of the year;
• in the event of disability in the second year, a lump sum of £5,000 is payable at the end of the year;
and
• in the event of reaching the end of the two-year program but not being offered a position as a full-
time soldier, a lump sum of £6,000 is payable immediately.

(iii) Using a rate of interest of 5% per annum, calculate the total expected present value of these
compensation benefits.
[6]
[Total 13]

Page 8 of 9
Question 8

A life office issues a deferred whole of life annuity contract to a life of exact age 50.

A level annuity of £10,000 p.a. is payable monthly in advance from age 65.

Level annual premiums are payable during the deferred period only, ceasing on death.

(i) Calculate the gross annual premium for the contract, using the premium basis set out below.
[7]

(ii) Calculate the prospective gross premium reserve at duration 15, using the policy valuation basis.
[3]

(iii) Calculate the retrospective gross premium reserve at duration 15, using the policy valuation basis.
[4]

(iv) Explain why the prospective and retrospective gross premium reserves are not necessarily equal to
one another.
[2]

Premium basis:

Interest: 4% per annum

Mortality before age 65: AM92 Ultimate
Mortality after age 65: PMA92C20
Expenses:
Initial expenses: £200 + 35% of the first premium
Renewal expenses: 2% of each premium, excluding the first.
Annuity expenses: £3 per annuity payment.

Valuation basis:

Interest: 6% per annum

Mortality: AM92 Ultimate
Expenses: same as premium basis.
[Total 16]

Page 9 of 9