IandF CP11 202309 Examiner Report
IandF CP11 202309 Examiner Report
` September 2023
CP1-1 - Actuarial Practice - Core Practices September 2023 - Examiners’ report
Introduction
The Examiners’ Report is written by the Chief Examiner with the aim of helping candidates,
both those who are sitting the examination for the first time and using past papers as a
revision aid and also those who have previously failed the subject.
The Examiners are charged by Council with examining the published syllabus. The
Examiners have access to the Core Reading, which is designed to interpret the syllabus, and
will generally base questions around it but are not required to examine the content of Core
Reading specifically or exclusively.
For numerical questions the Examiners’ preferred approach to the solution is reproduced in
this report; other valid approaches are given appropriate credit. For essay-style questions,
particularly the open-ended questions in the later subjects, the report may contain more points
than the Examiners will expect from a solution that scores full marks.
For some candidates, this may be their first attempt at answering an examination using open
books and online. The Examiners expect all candidates to have a good level of knowledge
and understanding of the topics and therefore candidates should not be overly dependent on
open book materials. In our experience, candidates that spend too long researching answers
in their materials will not be successful either because of time management issues or because
they do not properly answer the questions.
Many candidates rely on past exam papers and examiner reports. Great caution must be
exercised in doing so because each exam question is unique. As with all professional
examinations, it is insufficient to repeat points of principle, formula or other text book works.
The examinations are designed to test “higher order” thinking including candidates’ ability to
apply their knowledge to the facts presented in detail, synthesise and analyse their findings,
and present conclusions or advice. Successful candidates concentrate on answering the
questions asked rather than repeating their knowledge without application.
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.
Sarah Hutchinson
November 2023
The aim of the Actuarial Practice subject is to use the technical and business skills learnt
in the Actuarial Statistics, Actuarial Mathematics, Actuarial Modelling and Business
subjects, combining them with new material on how the skills are applied to solve real
world problems.
The subject provides the essential knowledge of risk management techniques and
processes required by all actuaries and is an essential introduction to Enterprise Risk
Management, subject SP9 and the Chartered Enterprise Risk Actuary qualification.
The subject also underpins the SP and SA subjects, covering essential background
material that is common to a number of specialisms.
This subject examines applications in practical situations of the core actuarial techniques
and concepts. To perform well in this subject requires good general business awareness
and the ability to use common sense in the situations posed, as much as learning the
content of the core reading. The candidates who perform best learn, understand, and apply
the principles rather than memorising the core reading.
The examiners set questions that look for candidates to apply the principles specific to the
situation set out in the questions, having read the question carefully. Candidates gain few
marks by writing around the subject matter of the question in a more general fashion.
Detailed specialist knowledge is not required and nor is very detailed development of
particular points.
Good candidates demonstrate that they have spent time in the exam on understanding
the breadth of the question asked and on planning their answers ‑ planning is a big
advantage in making points clearly and without repetition. This also enables candidates to
use the later parts of questions to generate ideas for answers to the earlier parts.
Time management is important so that candidates give answers to all questions that are
roughly proportionate to the number of marks available.
The comments that follow the questions concentrate on areas where candidates could
have improved their performance. Candidates approaching the subject for the first time
are advised to use these points to aid their revision.
Candidates who give well-reasoned points, not in the marking schedule, are awarded
marks for doing so.
Paper 1 and Paper 2 had similar average marks which is slightly unusual where normally
Paper 1 scores slightly higher. It is also worth noting that the stronger candidates used the
information provided in the questions to tailor their answers to the question and scored
better.
C. Pass Mark
Q1
The first stage in a risk-based capital assessment for a provider is to produce an
economic balance sheet [½]
This balance sheet shows the market values of a provider’s assets (MVA) [½]
the market values of a provider’s annuity liabilities (MVL) [½]
and the provider’s available capital [½]
which is defined as the difference between the MVA and the MVL [½]
The available capital is then compared with the economic capital requirement to
assess the provider’s solvency status [1]
Use of any capital buffer to support business [1]
Market values of most assets are usually easily and instantly available from the
financial markets [½]
An alternative approach would be needed to cover any illiquid assets or other assets
where market values are not easily available [½]
This could be from internal models validated by the regulator or using external
sources [½]
Or consider capital levels in prior years [½]
The determination of a market value for a provider’s annuities liabilities is not so
easy [½]
and a high level of judgement is required to determine market-consistent liability
values [½]
One approach is to determine the expected value of the unpaid annuities [½]
stated on a present value best estimate basis and to add a risk margin [½]
The insurer will need appropriate assumptions to come up with the best estimate
basis - for annuities this will need longevity assumptions, inflation assumptions,
expense assumptions [1]
The value of using an economic balance sheet for capital requirement assessment is
that it starts with assets and liabilities both being assessed on the same, market
consistent, basis [1]
The assumptions made will need to be tested to ensure the capital is appropriate for
the annuity company [½]
Needs to consider whether an internal model or standard model will be most
appropriate for the annuity liabilities to ensure capital is appropriate for the business [1]
[Marks available 11½, maximum 6]
Stronger candidates showed how the requirement would be assessed against the
economic balance sheet rather than just focusing on the economic capital
requirement and therefore picked up more of the available marks.
Q2
(i)
Bonds typically pay a stream of income [½]
Plus a lump redemption lump sum at the end of the term [½]
Therefore they can be a good match for investors liabilities [1]
The bond may give inflation linkage which would match the index linked liabilities [½]
For example, pension funds who need to pay out regular outgo (or similar example) [½]
Corporate bonds could provide a better overall return than other types of assets such
as cash or government bonds [½]
Greater security than equity of same company [½]
Company may have a good credit rating - so has a low chance of default [½]
Could give diversification benefits compared to investors other assets [½]
Being private the returns could be better than listed companies due to possible
illiquid nature of the bond [½]
Company may be offering an attractive return for investors relative to other
equivalent company bonds [½]
A way of gaining exposure to the sector [½]
Exploit any tax advantages [½]
[Marks available 7, maximum 2]
(ii)
However, these are corporate bonds, and there is a risk of default [½]
Meaning that the company could fail to pay out interest payment or the principal [½]
leading either to a lower return than expected or a loss of capital [½]
Due to the bond coming from a private company the asset could be illiquid and as
such could be hard to sell [1]
There could be changes in the tax rules of private assets which could adversely
impact the return achieved by the investor [½]
Risk from downgrade [½]
Exposed to regulatory or government changes [½]
Inflation erosion if not index linked [½]
Currency risk [½]
political risk (or reasonable example) [½]
[Marks available 5½, maximum 2]
(iii)
Index linked
Advantages:
Index linked bonds could be attractive for the investor. [½]
Particularly if they have index linked liabilities [½]
Disadvantages:
May be more expensive due to demand pressures [½]
Fixed
Advantage:
Fixed interest may be less risky [½]
and can match fixed liabilities [½]
varying term can help with this [½]
Disadvantage:
May be less attractive to investor [½]
Other forms of bonds e.g., convertibles may be attractive to investor (or reasonable
example) [½]
[Marks available 4, maximum 3]
[Total 7]
Most candidates scored highly on parts (i) and (ii) - although some candidates did write
more than was required for full marks and therefore used up time in the exam which
could have been used to gain marks elsewhere in the paper.
Part (iii) was answered less well with those that failed to draw out the need to separate
into fixed interest and index linked bonds scoring less well compared to those that did.
There needed to be more depth to some solutions.
Q3
(i)
Because it will be a big asset of theirs/large financial importance to them [½]
Considering a transfer value [½]
Because the scheme member will want to know that the pension scheme is
Solvent and their pension benefits are not in danger [½]
To understand whether there are likely to be discretionary increases on their pension
benefits. [½]
So member can understand how the employer is funding any deficits. [½]
Member may want to see employer is paying contributions as they have promised. [½]
To understand if members will be asked to change their contributions [½]
To understand what investment returns/strategy are for the scheme [½]
Assess benevolence/generosity of their employer (e.g., worth within an overall
benefits package) [½]
To understand whether there is any risk that there could be material changes in the
structure of the scheme and their pension benefits [½]
Such as
full/partial wind up or buyout or takeover [½]
conversion to dc/reduction in accruals [½]
Increase members confidence in the scheme trustees [½]
To assess whether different member categories are treated fairly. [½]
To increase members confidence that the pension scheme has proper financial
control e.g., audit report [½]
[Marks available 7½, maximum 4]
(ii)
The member may not fully understand the main messages from the report.
Particularly if they do not fully understand the technical terms or jargon in the
report. [1]
The report may make it difficult for the individual to interpret in practice. [½]
For example:
The report could be too long or too short [½]
Too much information or too little information could hamper the ability of members
Part (i) was fairly well answered, with the stronger candidates ensuring sufficient
number of points were made given the number of marks on offer.
Part (ii) was less well answered with few candidates scoring more than half the
marks on offer - this was mainly down to candidates not making sufficient points for
the number of marks on offer.
Q4
(i)
The premium could be calculated such that:
Value of premium = Value of benefit + value of expenses + contribution to profit [1]
(ii)
Claims:
Claims underwriting to minimise high claims [½]
Could consider introducing or raising any excess on claims. [½]
Could also consider introducing co-payments where the policyholder pays a
percentage of every claim. [½]
Could introduce or extend the waiting period before any claim can be made. [½]
Could introduce or reduce the maximum claim amount - per individual claim, per
year or over the term of the policy. [1]
Ensure pre-existing conditions are excluded (if this is not already the case). [½]
Introduce checks to ensure that claims are not being made for any pre-existing
conditions. [½]
Could also include a wider range of pre-existing conditions. [½]
Introduce checks on the details of any vet bills to ensure any claim is valid. [½]
Less scrutiny for approved vets [½]
Could pay the vet directly reducing the risk of fraudulent or inflated claims. [½]
Expenses:
ActPet will need to ensure that the costs of managing the claim are not
disproportionate to the claim amount. [½]
This will include reviewing staffing levels and the efficiency of staff, e.g., automation.
(½ mark credit for examples up to 1 mark).
Could aim to reduce the contracts that do not renew. [½]
Could consider outsourcing the claims. [½]
Would need to compare costs to ensure this was likely to be effective. [½]
Consider outsourcing administration [½]
[Marks available 9½, maximum 6]
[Total 12]
Part (i) was answered well but less well than the examiners expected - candidates that
thought about the question being asked and then answered in depth did well but those that
focused solely on risk factors did less well.
Part (ii) - the admin expenses side was answered really well but the claims part was
answered less well leading to candidates scoring less well than expected.
Q5
(i)
The target is a fixed monetary amount so would seek assets that are fixed in nature [½]
Would expect the policy to target domestic university fees, so would seek assets that
are denominated in the domestic currency and not invest overseas [½]
The lump sum is payable in 18 years’ time so would seek medium and long-term
assets to generate returns [1]
What if inflation increases university fees? [½]
Any restrictions laid down by the government on how the fund may be invested [½]
e.g., forced to hold a portion in government bonds [½]
As the policy is for the whole country, the size of the fund could become very large [½]
making more investment opportunities available. [½]
Overall size of the fund will make it easier to diversify between different asset
classes [½]
and possibly within the same asset type [½]
and so reduce systematic risk [½]
Need to keep a portion of the funds in liquid form, to pay the lump sum once
citizens turn 18 [½]
Prefer low income yielding investments [½]
to avoid the expenses and uncertainty of reinvesting income [½]
As it’s part of a government policy, may come under pressure to integrate ESG
considerations. [½]
Government’s Risk Appetite - risk v’s return that government is willing to accept
may impact choice of assets. [½]
Consider the pattern of cashflows from the fund. Will need to invest in assets of
appropriate average duration to meet outgoes as they fall due. [½]
Regularly check that the lump sum invested plus investment return continues to be
sufficient to meet the cost of domestic university fees. May need to change
investment strategy if higher investment return required. [½]
[Marks available 9½, maximum 5]
(ii)
Lack of knowledge and experience means the families may make sub-optimal
decisions [1]
e.g., invest in cash over the long-term is likely to produce lower returns than
investing in assets such as equities [½]
Some families could invest in unsuitable investments possibly leading to poor returns
Some families could take overly cautious investment approach leading to poor long
term investment returns. [½]
The risk of individuals being exposed to poor sales practices leading to investment
in inappropriate investments. [½]
The risk of fraud could be higher for individual families. [½]
May choose products with very high charges, commission rates etc which could
adversely affect the returns achieved [½]
Any shortfall between the returns and the fees would either have to be met by the
child e.g. through a job, or the family e.g. take a loan out [1]
Government may refuse to make good any shortfall [½]
Family may spend the lump sum, rather than investing. [½]
Risk to the family that the child at [1]8 just spends the money, [½]
rather than using to pay fees [½]
Monitoring performance may become onerous. [½]
May result in investing in default-style funds that do not perform as well. [½]
Potential to panic over short-term volatility [½]
If each individual family invests rather than the government then economies of scale
will be lost. Leading to higher effective charges and expenses of investing. [½]
[Marks available 8½, maximum 4]
(iii)
Boost economic growth [½]
Job opportunities/reduce unemployment [½]
Attract overseas investment into the sector [½]
Give citizens more responsibility for their own provisions [½]
creating a savings culture and reduce dependency on the government [½]
Encourage other aspects of savings and investment to develop [½]
e.g. private pension provision [½]
Retail savings market may have suffered a downturn and loss of confidence e.g. mis-
selling scandal. [½]
This initiative will resolve this as citizens are forced to select a provider [½]
Higher revenue for the provider may mean extra tax revenue for the government [½]
Sense of paternalism from government to ensure its citizens have sufficient savings. [½]
Make good on election manifesto commitment to boost local savings industry. [½]
[Marks available 6, maximum 4]
[Total 13]
Part (i) - candidates tended to discuss suitable types of investments rather than
considering the wider factors that might influence the general investment strategy,
meaning this question was answered less well.
For part (ii) most candidates picked up the more obvious marks but only the stronger
candidates went into enough depth to score highly.
Part (iii) was answered well with the stronger candidates answering more widely than
just macro-economic aspects.
Q6
(i)
Climate risks arise from adverse changes in the physical environment and secondary
impacts on the economy. [½]
Physical and transition risks related to climate change could affect both the assets
and liabilities of pension schemes. [1]
Climate change increases uncertainty for the pension scheme. [½]
Climate change could lead to an increase in the frequency and severity of short-term
climate-change weather events [½]
as well as longer term climate related changes. [½]
Climate change impact on economies could affect interest rates and inflation [½]
which will impact scheme liabilities [½]
For example:
infrastructure investments could be adversely impacted by the physical impacts of
climate change such as a flood. [½]
Equity investments could be adversely impacted by costs of transitioning to a lower
carbon economy. [½]
There may be additional investment opportunities available relating to mitigating the
effect of climate change and these may provide good returns. [½]
Regulation:
Climate risk is likely to give rise to new regulations. [½]
This could impact the types of assets that can be held by the pension scheme. [½]
They are likely to need to consider climate risks in all their decision making and
incorporate ESG factors into their investment management decisions. [½]
Increased climate related regulation (and government policy actions) could add to
additional costs for the pension scheme to comply with these regulations. [½]
Liabilities:
Climate changes may also have an effect on the demographics of any defined
benefit scheme. [½]
Depending on the location this may affect the mortality experience of defined benefit
scheme members and so could impact the liabilities of the pension scheme. [½]
e.g. an adverse physical climate event could adversely impact the mortality
experience of the pension scheme [½]
Sponsoring Employer:
Climate risks may also affect the business of the underlying company. [½]
This could affect the profitability of the company which may mean that the current
level of employer contributions is no longer affordable. [½]
This may also affect the sponsor covenant for any defined benefit schemes, which
could impact the security of members benefits. [½]
[Marks available 15½, maximum 7]
(ii)
Scenario analysis will look at the financial impact of a plausible set of events or
sequences of events relating to climate change [1]
It is a deterministic method of evaluating risk. It is useful for assessing emerging
risks and so could be used to assess the possible impacts of climate change [1]
Will need to start by grouping risk exposures into broad categories [½]
For each group of risks a plausible adverse scenario will need to be developed. [½]
This scenario will be deemed to be representative of all the risks in the group [½]
For each scenario, will need to translate the scenario into assumptions for various
risk factors in the model [½]
The consequences of the risk event occurring can then be calculated [½]
The total costs are taken as the financial costs of all risks represented by the chosen
scenario [½]
Scenario analysis can only quantify the severity of a scenario [½]
It gives no information on the probability of it occurring [½]
The results of the scenario analysis could be used when considering appropriate
investments to be held [½]
Could also be used to aid trustee decisions for a defined benefit scheme. [½]
Stress testing would be performed by considering the impact of varying an individual
parameter relating to climate change on the pension fund [1]
The parameters varied would be tailored to reveal weaknesses and so should focus
on the risk factors they are most exposed to [½]
Could consider problems caused by a delay to action being taken relating to climate
change which means that more drastic action would be needed at a later stage [½]
Stochastic modelling will have variables incorporated as probability distributions and
dynamic interactions between variables specified [½]
This is extremely complex [½]
will be difficult for climate related risks as these are new [½]
Therefore, there will be limited data available to calibrate models accurately [½]
This is particularly difficult and subject to model tail events such as extreme climate
events [½]
Could consider limiting the number of risk variables that are modelled stochastically
and use deterministic approaches for other risk variables [1]
[Marks available 12½, maximum 6]
(iii)
Communication of the results to the client will need care due to the uncertainties in
the underlying assumptions [1]
These assumptions will need to be made clear. The variability of the results will
also need to be made clear [1]
This is particularly important as the client may not fully understand the modelling
process [½]
They client may not understand what the results mean either, and how they should
impact the scheme [½]
The results could be used to influence investment and other decisions so it is very
important that the client fully understands them [1]
[Marks available 4, maximum 3]
[Total 16]
Part (i) was answered very well, with the stronger candidates laying out their answer
in a logical way such that it was clear they understood the question.
Part (ii) had a wider range in marks scored with the stronger candidates contrasting
scenario analysis and stress testing well. However very few candidates considered
applying stochastic models to climate related risks.
Part (iii) was not answered well with insufficient reference to the need for clear
communication in the light of the various uncertainties.
Q7
(i)
Temporary initial selection [½]
Initial selection occurs at the time lives enter the contract [½]
via underwriting [½]
For a temporary period, the lives recently underwritten are expected to exhibit lower
mortality than corresponding lives that were underwritten years ago [1]
(ii)
Specify problem:
Needs to understand the risks, and profitability of the product line, to do this need to also
understand the interests of stakeholder and in particular the needs of prospective
annuitants
Monitor experience:
Feedback on how experience compares with assumptions [½]
Update annuity profitability expectations based on experience. [½]
More general application, e.g., considering how different risks of life business
interact [½]
Could offset those of annuity business (i.e., potential mortality hedge) [1]
Risk management, continual process of monitoring the whole business [1]
Consider wider commercial environment, e.g., what are trends in life assurance
purchases? [½]
Professionalism/regulations [½]
[Marks available 7½, maximum 3]
(iii)
Reinsurer [½]
Bodies such as the IFOA (CMIB in particular) [½]
Competitors
Industry data [½]
International experience in similar countries [½]
Government [½]
National Statistics [½]
or any reasonable example [½]
[Marks available 3½, maximum 3]
(iv)
The customers will come from very different target markets, in particular [½]
e.g., term & life assurance policyholders likely to be younger [½]
And employed [½]
No spouse data from term assurance business [½]
Whereas annuitants older, and retiring [½]
So mortality improvements might be more relevant for (life) assurance [½]
Sales channels might have been different [½]
So different demographics e.g., location/socioeconomic group [½]
Underwriting may have excluded impaired lives from assurance [½]
But might want to offer these lives impaired annuities [½]
Impact of selection customers v different for term assurance and annuity customers.
E.g., people may buy annuity as they have optimistic expectations about their own
mortality relative to the general population. Opposite could be true of individuals
buying term assurance. [1]
[Marks available 6, maximum 3]
[Total 17]
Part (i) was answered very well with many candidates scoring most marks, often
with good illustrations of the two types of assurances involved.
Part (ii) was also answered well with those who related to the ACC to the new
product line involved. However, few considered the potential mortality hedge with
the existing business.
Part (iii) was also answered well but those that answered appropriately to the
command verb were probably more efficient in their use of time.
Part (iv) was answered reasonably well although those that tailored their solution to
the question scored more highly.
Q8
(i)
Advantages:
Long term real returns [½]
So good hedge against inflation [½]
Higher expected return than bonds [½]
Due to illiquidity premium [½]
Predictable income stream from tenants [½]
And possibility of long-term capital growth [½]
Land is indestructible, so minimal risk of total capital loss unlike equities or even
bonds [1]
Suitable for large investments [½]
Advantage for advancing government policy e.g., council houses [½]
Disadvantages:
Illiquid [½]
costs of advice e.g., estate agents transactional costs
But the fund is a long-term investor so this may not be a problem [½]
Risk of voids and so loss of income and costs of sale [1]
But again, we have a long-time horizon [½]
And no immediate cash needs to pay short-term liabilities [½]
So perhaps not a problem as we don’t need perfect matching for liabilities [½]
Hard to value [½]
and valuations are infrequent [½]
But long-term fund so don’t need to know value on a day-to-day basis [½]
Could be mitigated by property shares rather than direct investment [½]
[Marks available 11, maximum 4]
(ii)
Advantages of overseas:
Potentially higher expected returns from overseas investments [½]
Particularly emerging markets [½]
Diversification [½]
By both currency and potential different industrial bases [1]
Could achieve at a lower level of risk by indirect overseas investment (e.g. buying
domestic companies who do a lot of overseas business [1]
Advantages of domestic:
Avoid currency risk [½]
Particularly if the scheme’s liabilities are purely domestic (e.g. it is expected to be
used to pay state pensions) [1]
More expertise needed for overseas [½]
But the fund is big enough to buy this [½]
Liquidity [½]
But less important as we have a long-time horizon [½]
Avoid exposure to Adverse political developments overseas [½]
(iii)
Firstly, set the strategic benchmark [½]
By reference to the liabilities of the fund [½]
Which will depend what the government intends to spend it on [½]
e.g., pensions, capital investment, healthcare [1]
This may be a mix of equities, property and fixed interest investment [1]
With perhaps smaller allocations to niche investments such as green industries, or
derivatives [1]
Benchmark should reflect the long-term plan [½]
But in reality, the fund may take tactical allocation decisions which move away from
This [½]
So assessment should be carried out over a moderate timescale, e.g. 3-5 years [1]
The benchmark should consider fees [½]
And allow for income correctly - is income paid out or reinvested? [1]
[Marks available 8, maximum 4]
(iv)
Opportunities:
Expect long term returns from cashflows generated once airport is up and running [1]
Fund is capital rich and may be able to wait for good long-term returns [½]
Diversification of returns for the fund [½]
Risks:
Infrastructure investments such as airports have high development costs but may not
return profits for a long time [1]
Trends such as increased environmental awareness may reduce demand for flights [½]
Compared to the projections underlying the proposal [½]
Or increased video conferencing leading to less business traffic than assumed [½]
Risk of higher-than-expected ongoing operational costs [½]
Too much investment in the domestic market by this fund could increase inflation [1]
Illiquidity of investment if fund needs money back more quickly than expected [½]
[Marks available 9½, maximum 4]
[Total 18]
Part (i) was answered reasonably well with the advantages handled very well but
noting only a few candidates considered the usual disadvantages were not relevant
in this context.
Part (ii) was not answered as well with few candidates considering the command
verb and then looking at the situation from different angles.
Part (iii) was answered poorly with few candidates scoring well. Only the stronger
candidates considered an objective figure that the government is trying to beat.
Part (iv) was also answered less well with only the stronger candidates
appreciating the long term tie in of the funds before any return was even possible.
The risks were handled slightly better than the opportunities.
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