CM1(2) SMM065 - Contingencies exam for summer 2022

Question 1

A life office is considering issuing a special whole of life with-profit endowment assurance
policy to a life aged exactly 55.
The basic sum assured of £75,000 plus previously declared bonus is payable at the end of
the year of death.
In addition, at the end of each complete year that the policyholder survives, an amount of
£1,500 is paid to the policyholder.
Premiums are payable monthly in advance until age 65 only, ceasing on earlier death.
Using the following basis, calculate the level monthly premium payable.
Mortality: AM92 (select)
Interest: 4% p.a.
Initial expenses: £300 plus 40% of the first monthly premium
Renewal expenses: 4% of the second and subsequent monthly premiums
Bonuses: Simple reversionary bonus of 3% p.a. added at the end of each
policy year
[9 Marks]
Question 2
On 1st January 2006, a life office issued a large number of special whole of life immediate
annuities to lives then age 68.
The main benefit under each contract is £15,000 per annum payable annually in arrears,
ceasing on death. In addition, a lump sum of £50,000 is payable at the end of the year of
death.
The benefits were purchased by means of a single premium payable at the outset.
On 1st January 2022, 699 such policies remained in force and 35 policyholders had died
during 2021.
(i) Using the following basis, calculate the mortality profit or loss for 2021 in respect of this
portfolio of business:
Mortality: PFA92C20
Interest: 4% per annum
Expenses: none
[8]
(ii) Explain why this profit (or loss) has arisen.
[2]
[Total 10]
Question 3

An insurance company issues a 3-year temporary annuity to a life of exact age 65.
The annuity payments to be made annually in arrears, provided the life is alive to receive
them, are £10,000, £13,000 and £15,500.
The policyholder purchases the annuity with a single premium of £33,000.
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 (Females) mortality and 7% p.a. interest:

(i) 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]
(ii) Hence, or otherwise, calculate the mean and standard deviation of the present value of
the profit earned by the company.
[4]
(iii) Comment on your answers to (ii)
[2]
[Total 10]
Question 4

A life office is proposing to offer a new non-profit term assurance contract.

The benefit is payable immediately on death, and premiums are payable annually in
advance for the duration of the contract, ceasing on death.

However, the company has proposed that, rather than charging level premiums throughout
the term, the premium should increase by £250 with effect from the 11th premium.

Using the following basis, calculate the initial annual premium, P , for a life of exact age 40
purchasing a 30-year term assurance contract with a death benefit of £300,000.

Mortality: AM92 (ultimate)

Interest: 4% p.a.

Initial expenses: £200 plus 15% of the first premium

Renewal expenses: 3% of the second and subsequent premiums

[7]
(ii) Using the premium basis above, calculate the gross premium prospective reserve at
duration 12 years (immediately before payment of the premium then due).
[5]
(iii) Using the premium basis above, calculate the gross premium retrospective reserve at
duration 12 years.
[5]
(iv) Comment on your answer.
[2]
[Total 19]
Question 5

A pension scheme uses the following multiple state model:

Active σx Retired

µx νx

Dead

The pension scheme provides a benefit of £50,000 payable immediately on death or

retirement from the “Active” state, provided that the individual has been in the scheme for
at least 2 years.

(i) Write down an integral to value this benefit for an “Active” life currently aged 65.
[2]
(ii) Calculate the value in (i) using the following basis.

Basis:
i = 3% per annum
µx = 0.005 at all ages
σx = 0.012 at all ages
νx = 0.004 at all ages
[5]

(iii) Explain how your answer to (ii) would alter if νx had been greater than 0.004 at all ages.
[1]
[8 marks]
Question 6

The employees of an engineering company are subject to two modes of decrement,

mortality and withdrawal from employment.

The independent forces of mortality and withdrawal for employees aged 55 and 56 are
given in the following table:
x µ dx µ wx
55 0.0012 0.13
56 0.0016 0.15

(i) Showing all your workings, construct the multiple decrement table assuming the radix of
the table is 100,000 lives. State any assumptions that you make. [5]

(ii) Calculate the probability that an employee aged exactly 55 will still be working for the
company at age 57. [1]

(iii) The company pays £10,000 at the end of the year of death and £2,000 at the end of the
year of withdrawal.

Calculate, using a rate of interest of 7% per annum, the expected present value of the
benefits payable over the next 2 years in respect of an employee who is age 55 exact. [3]
[Total 9]

Question 7

A pair of twins, X and Y, aged exactly 50 purchase a special whole life policy from an
insurance company.

A sum assured of £200,000 is paid at the end of the year of death of X, but only if X dies
before Y. Nothing is paid if Y dies first.

Level premiums are payable annually in advance while the two lives are alive.

(i) Using the basis below, calculate the annual premium payable. [6]

(ii) Discuss the underwriting implications of the policy. [2]

Basis:

Mortality: PMA92C20 (for both lives)

Interest: 4% pa
Expenses: Initial - £150 plus 20% of the first premium
Renewal – 3% of the second and subsequent premiums
Claim expense: £500

[Total 8 marks]
Question 8

A husband and wife, both of exact age 57, purchase a special 3-year pure endowment
contract from a life insurance company.
If both lives survive until age 60, a benefit of £150,000 is payable.
If either life dies before age 60, the 25% of the premiums paid up to the date of death are
returned without interest immediately on death.
Level annual premiums are payable annually in advance during the term, ceasing on death
on the first death.

Calculate the level annual premium using the following premium basis:
Mortality: PMA92base and PFA92base
Interest: 5% per annum
Expenses: Initial – £100 plus 5% of first year’s premium
Renewal – 3% of second and third year’s premium
[12 marks]
Question 9

A life aged 56 exact takes out a five-year unit linked life insurance policy. It has the following
vector of initial expected cash flows emerging from its sterling fund:

Year Expected emerging costs

1 50

2 −20

3 30

4 −50

5 20

(i) Calculate the sterling provisions required to zeroise any negative cash flows after the
first policy year, assuming that mortality is in accordance with PMA92C20 and that
the sterling fund earns interest at 7% per annum.

Calculate also the modified in force expected profits for each policy year.

[10 marks]

(ii) Assuming that the risk discount rate is 11% per annum, determine the percentage
change in the discounted present value of the profits after zeroisation, when
compared to the discounted present value of the profits before zeroisation.

[3 marks]

(iii) Without carrying out any further calculations, explain what the percentage change
described in (ii) would be if the risk discount rate used were 7% per annum.

[2 marks]

[Total 15 marks]