Advanced Long-Term Actuarial Mathematics

Sample Questions

The sample questions in this Study Note are designed to help candidates in their preparation for
the Advanced Long-Term Actuarial Mathematics exam. Many of these questions are taken from
the written answer sections of past MLC or LTAM exams.

Versions:
Feb. 26, 2023 Original set of 56 sample questions published for the ALTAM exam
Feb. 6, 2024 Added two sample Excel questions (Questions 57-58)
Jan. 20, 2025 Added one sample Excel question (Question 59) and two sample questions
(Questions 60-61)
Mar. 9, 2025 Changed Question 60 to a sample Excel question and updated the solution
of Questions 50 and 61

Current Version Dated March 9, 2025

Page 1
Question 1
(8 points) A long-term care provider offers three care levels. Transitions are modeled as a
Markov multiple-state model. Transitions and states are shown in the following diagram:

Level 0 Care Level 1 Care Level 2 Care

0 1 2

Dead
3

(a) (1 point) Write down Kolmogorov’s forward differential equations with the associated
boundary conditions for this model for:

(i) t p 10x

(ii) t p 11
x

10
(b) (3 points) Estimate 1 p 80 using Euler’s forward method, a step size of h = 1
3 , and the
transition intensities and probabilities in the table below:

t t
11
p 80 µ 8001+t µ 8003+t µ 8010+t µ 8012+t µ 8013+t µ 8023+t
0 1.00000 0.10000 0.02981 0.08000 0.15000 0.05962 0.11924
1
3 0.90346 0.10000 0.03082 0.08000 0.15000 0.06164 0.12328
2
3 0.81652 0.10000 0.03186 0.08000 0.15000 0.06373 0.12746
1 -- 0.10000 0.03294 0.08000 0.15000 0.06589 0.13178

Page 2
Question 1 (Continued)
(c) (4 points) You are given the following annuity values at 5%:

x a x00 a x01 a x02 a x11 a x10 a x12 a x22

80 5.5793 1.3813 0.6109 3.0936 1.6719 1.7206 4.4712
85 4.8066 1.0396 0.3403 2.6723 0.8834 1.0883 3.2367

You are also given:

• 5 p 8000 0.53880
= = 01
5 p 80 0.17327
= 02
5 p 80 0.06956

• i = 0.05

• Residents pay a service fee of 8000 per year continuously while in Level 0 or
Level 1 Care.

• Level 2 Care costs are paid at a continuous rate of 30,000 per year for lives age 80
to 85, and 40,000 per year for lives older than 85.

A person, who is age 80, is currently in Level 0 Care.

(i) Calculate the expected present value of the person’s future Level 0 and
Level 1 service fees.

(ii) Calculate the expected present value of the person’s future Level 2 Care
costs.

(MLC, Fall 2014, Question 4.)

Page 3
Question 2
(6 points) You are given the following excerpt from a triple decrement table:

x lx(τ ) d x(1) d x(2) d x(3)

60 1000 d 60(1) 60 45
    

You are also given the following information about the decrements:

• µ60(1)+t = 1.2t for 0 ≤ t ≤ 1

• Decrement 2 happens exactly halfway through the year.

• Decrement 3 happens at the end of the year.

(a) (2 points) Calculate q60

′ (2) .

(b) (2 points) Calculate d 60(1) .

Now suppose instead that Decrement 2 occurs at the start of the year, and that each q60
′ ( i ) remains
unchanged.

(c) (2 points) State with reasons the effect (increase, decrease, no change, cannot be
determined) that this change would have on the following probabilities:

(i) q60(1)

(ii) q60(2)

(iii) q60(3)

(MLC, Spring 2015, Question 2.)

Page 4
Question 3
(10 points) For a special fully discrete two-year term insurance on an individual, age 60, you are
given:

(i) The death benefit is 1000 plus the return of gross premiums paid with interest at
6%.

(ii) The following double decrement table, where decrement (d) is death and
decrement (w) is withdrawal:

x qx( d ) qx( w)
60 0.06 0.04
61 0.12 0.00

(iii) There are no withdrawal benefits.

(iv) i = 0.06

(v) G denotes the annual gross premium.

(vi) L 0 denotes the insurer’s loss at issue random variable for the individual’s policy.

(a) (4 points) Calculate the values in the following table. Express L 0 in terms of G where
appropriate:

Value of L 0 , Given Probability

Event
that the Event Occurred of Event
Death in year 1
Withdrawal in year 1
Death in year 2
Neither death or withdrawal

Page 5
Question 3 (Continued)
(b) (4 points)

(i) Show that E  L 0 = a − b G , where a is 150 to the nearest 10 and b is 1.58 to the
nearest 0.01. You should calculate a to the nearest 1 and b to the nearest 0.001.

(ii) Show that Var ( L 0 ) = c G 2 + d G + e, where c is 0.5 to the nearest 0.1,

d is 480 to the nearest 10, and e is 116,000 to the nearest 1000. You should
calculate c to the nearest 0.01, d to the nearest 1, and e to the nearest 100.

(c) (2 points) The insurer expects to issue 200 such policies to insureds with independent
future lifetimes. The premium for each policy is G = 130.

Let L agg denote the insurer’s aggregate future loss random variable at issue for these 200
policies.

Calculate Pr ( L agg > 0 ) using the normal approximation without continuity correction.

(MLC, Fall 2015, Question 4.)

Page 6
Question 4
(10 points) A life insurer issues a 5-year term insurance, with premiums payable half-yearly, to a
person who is age 60. The death benefit of 100,000 is paid at the end of the half-year of death.

You are given:

(i) Expenses are 10% of each semi-annual premium.

(ii) i = 0.05
(iii) Mortality follows the Standard Ultimate Life Table; the force of mortality of the
Standard Ultimate Life Table is:
µ x +t = 2.2 × 10−4 , B =
A + Bc x +t , where A = 2.7 × 10−6 , c =
1.124

(iv) The gross premium is 270 per half-year.

(a) (3 points)

(i) Show that 100, 000 0.5 q64 = 260 to the nearest 10. You should calculate the value
to the nearest 1.
(ii) Show that the gross premium policy value at time 4 is 30 to the nearest 10. You
should calculate the policy value to the nearest 0.1.

In the final year of the policy, the insurer decides to re-evaluate the gross premium policy value
due to a virus that is spreading through the community. The insurer uses the following multiple
state model.

Healthy At Risk
0 1

Dead Sick
3 2

Page 7
Question 4 (Continued)
A Healthy person will move to State 1, At Risk, if exposed to the virus. Every person moving
into the At Risk state will be tested for the virus. If the result of the test is positive, the person
moves to State 2, Sick; otherwise, the person will move back to the Healthy state.

The transition intensities for all x are:

µ x01 = 0.06
µ x03 is the force of mortality of the Standard Ultimate Life Table, as in (iii) above.
=µ 10
x 0.0; µ 12
2= x 80.0
=µ x20 4.0;
= µ x23 5µ x03

You are also given that the insured is Healthy at time 4, and that premiums are payable
conditional on being in State 0, 1, or 2.

(b) (2 points) Calculate the probability that the insured will remain in the Healthy state
00
throughout the final year of the policy, 1 p64 .

(c) (3 points) The insurer re-evaluates the gross premium policy value at time 4 using the
model above, with the same interest rate and expense assumptions as in part (a).

You are given the following probabilities:

00 01 02 03 13 px23
x 0.5 p x 0.5 p x 0.5 p x 0.5 p x 0.5 p x
0.5

64.0 0.98661 0.00059 0.01016 0.00264 0.00605 0.00700

64.5 0.98646 0.00059 0.01016 0.00279 0.00640 0.00740

Calculate the revised gross premium policy value for the insured’s policy at time 4.

(d) (2 points) Calculate the expected time, in days, of each sojourn in the At Risk state.

(LTAM, Spring 2021, Question 1)

(Part (a) is covered by the FAM-L exam.)

Page 8
Question 5
(9 points) You are analyzing costs associated with a medical condition. You model the
progression of the condition after a new diagnosis using the following 4-state model.

Diagnosed Severe symptoms Remission

State 0 State 1 State 2

Surgery
State 3

You are given the following information. Time t is measured in years from the date of diagnosis.

(i) µt01= a + bect where=a 0.4,

= b 2.0, and c = 0.7;
(ii)=µt12 0.2;
= µt21 0.4;
= µt13 0.1
(iii) δ = 0.04
(iv) a001 = 2.930; A001 = 1.5185

(a) (3 points)

A003
(i) Show that, in this case, 01
= µ013 .
a0

(ii) Calculate the value of at11 .

11
(iii) State with reasons whether at11 is bigger, smaller or the same as at .

Page 9
Question 5 (Continued)
(b) (4 points) The cost of nursing care in State 1 is 12,000 per year, incurred continuously.
The cost of surgery is 22,000. There are no nursing care costs in State 0 or State 2.

(i) Calculate the expected present value of the cost of surgery for a newly diagnosed
patient.
(ii) Calculate the expected present value of the nursing care costs for a newly
diagnosed patient.
(iii) COVID-19 precautions result in additional costs at a rate of 8,000 per year for the
first 4 months of each period in State 1.
Write down an integral expression for the additional expected present value, using
continuous sojourn annuities.

(c) (2 points) As a result of reorganization, the value of µt13 is increased to 0.2. All other
transition intensities stay the same.

(i) State with reasons whether the expected present value of the cost of nursing care
will increase, decrease, or stay the same.

(ii) State with reasons whether the expected present value of the cost of surgery will
increase, decrease, or stay the same.

(LTAM, Fall 2021 Form A, Question 3)

Page 10
Question 6
(9 points) You are analyzing waiting times and expenses associated with optometric procedures.
The analysis is based on the multiple state model illustrated below.

An individual who is diagnosed with a specific eye condition moves into State 1, where they are
Monitored. When the condition progresses, they move onto a Wait List for surgery (State 2).
Surgery (State 3) is performed once their name reaches the top of the wait list. The time spent on
the wait list is random, depending on the progression of the disease and the availability of
surgical resources.

Healthy Monitored Wait List Surgery

State 0 State 1 State 2 State 3

You are given the following information:

(i) µ x01+t= a + bec ( x +t ) where

= a 0.004,
= b 0.015, and c = 0.005;

(ii)=µ 12
x +t 0.2;
= µ x23+t 0.4.

(iii) δ = 0.05

(a) (2 points) Calculate the probability that a Healthy life age 60 will be diagnosed with the
eye condition before age 65.

(b) (1 point) Show that = 12

t px (e −0.2 t
− e −0.4t ) .

(c) (1 point) Calculate the probability that a life currently being Monitored (State 1) will
have Surgery (State 3) within 5 years.

(d) (2 points)
(i) Show that ax11:5 = 2.85 to the nearest 0.01. You should calculate the value to the
nearest 0.001.
(ii) Show that ax12:5 = 0.87 to the nearest 0.01. You should calculate the value to the
nearest 0.001.
(iii) Show algebraically that ax11:5 + ax1:52 + ax1:35 =
a5

Page 11
Question 6 (Continued)

(e) (3 points) The health authority is considering two alternatives for improving care for
those diagnosed with the eye condition. One criterion for deciding which course of
action to choose is based on a quality of life (QL) index, as follows:

• In State 1, QL = 0.5 per year.

• In State 2, QL = 0.2 per year
• In State 3, QL = 1.0 per year.

The authority will choose one of the following options:

Option A: Open a new surgical center. This would increase µ x23 to 1.0 without changing
any other transition intensities.

Option B: Improve care for those in States 1 and 2. This would improve the QL index to
0.55 in State 1, and to 0.3 in State 2.

Calculate whether the health authority should select Option A or Option B, based on the
increase in the expected present value of the 5-year QL of lives currently in State 1, using
a force of interest of δ = 0.05 .

(LTAM, Fall 2021 Form B, Question 3)

Page 12
Question 7
(7 points) An actuarial student in your department is using the following 3-state Markov model
to price a one-year consumer warranty for a television.

Working µ t01 Under Repair

0 µ t10 1

µ t12

Broken Beyond
Repair
2

The product has the following features:

(i) The warranty is sold at the time that a consumer purchases the television and pays
a replacement cost of 1000 at the end of the half-year during which the television
becomes Broken Beyond Repair.

(ii) Premiums are payable at the beginning of each half-year, but are waived if the
television is not Working at the time a premium is due.

(iii) All televisions are in the Working state at time of purchase.

(a) (2 points) Write down the Kolmogorov forward differential equations with associated
boundary conditions (initial conditions) for t p 000 , t p 001 , and t p 002 under this model.

The forces of transition in this model for a television purchased t years ago are:

µ=
t
01
0.5 + 0.6t
µ t10 = 0.2
µ t12 = 2 t

The student has applied the Forward Euler approximation to the Kolmogorov forward
differential equations with a step size of h = 0.5 to calculate probabilities for this model. You
have verified that, using this approach, 0. 5 p 000 = 0.75.

Page 13
Question 7 (Continued)

(b) (2 points) Using the student’s approach:

(i) Calculate 0.5 p 001 .

(ii) Show that the probability that a television will become Broken Beyond Repair
within a year of purchase is 0.18 to the nearest 0.01. You should calculate the
probability to the nearest 0.001.

(c) (2 points) Using the probabilities from the student’s approach and i (2) = 8% :

(i) Calculate the actuarial present value at issue of the replacement cost payments for
this policy.

(ii) Calculate the semi-annual net premium for this policy.

(d) (1 point) Suggest a change to the student’s approach that would improve the accuracy of
the probability calculations.

(MLC, Spring 2014, Question 2)

Page 14
Question 8
(9 points) You are using the following 3-state Markov model to price a 10-year disability
insurance product.

Healthy Temporarily Disabled

0 1

Dead

2
(a) (2 points) Show that for this model, ∑a j =0
0j
x :10
= a10 .

The product has the following features:

• The product is issued to individuals age x who are in the Healthy state.

• The product pays a continuous disability benefit at a rate of 1000 per year while the
insured is in the Temporarily Disabled state.

• The product pays a death benefit of 10,000 at the moment of death.

• Net premiums are payable continuously while the insured is in the Healthy state.

You are also given the following information:

δ = 0.1 a x00:10 = 4.49 a x02:10 = 1.36 A x02:10 = 0.3871

µ x01+t = 0.04 µ x02+t = 0.02t µ 10
x + t = 0.05 µ 12
x + t = 0.04t

(b) (2 points) Show that the net premium rate for this policy is 970 per year to the nearest
10. You should calculate the rate to the nearest 1.

Let tV (i ) denote the net premium policy value for a policy in state i at time t. You are given:
3V (0) = 1304.54 3V (1) = 7530.09

d
(c) (2 points) Calculate tV
(0)
at t = 3.
dt

Page 15
Page 16
Question 8 (Continued)
(d) (3 points) Your company is considering adding an additional feature to this product.
Under this additional feature, the insurer would return the sum of the premiums paid at
the end of 10 years without interest if no benefits were paid during the life of the policy.

Calculate the increase in the net premium rate payable continuously for the product as a
result of including this feature.

(MLC, Spring 2015, Question 1)

Page 17
Question 9
(7 points) On 1/1/2009, a person purchased a 10-year hybrid long term care and life insurance
product. The product has the following features:
(i) The product uses a reimbursement approach where the caregiver is reimbursed up to a
maximum rate of 2000 per month when the insured requires assistance to perform 2 or
more activities of daily living (ADLs), of the 6 commonly used ADLs.
(ii) The product has a 3 month waiting period and a 6 month off period.
(iii) The sum insured for the life insurance portion of the product is 100,000.
(iv) Premiums are payable at a continuous rate of 150 per month while the insured is active
(able to perform at least 5 of 6 ADLs).
The insured’s experience during the term of this policy was as follows:
• From 1/1/2012 to 6/30/2012, the insured was only able to perform 4 ADLs, and required
outpatient care costing 1000 per month.
• From 3/31/2013 to 11/30/2013, the insured was only able to perform 3 ADLs, and
required inpatient care costing 2500 per month.
• For the remainder of the time from 1/1/2009 through 6/30/2018, the insured was able to
perform at least 5 ADLs.
• The insured died on 7/1/2018.

(a) (1 point) List the six ADLs in common use for long term care products.
(b) (2 points) Draw a sketch of a Markov model that could be used to model this hybrid
insurance product.
(c) (2 points) Calculate the amount of the death benefit payable upon the insured’s death,
assuming:
(i) The long term care and life insurance benefits are combined using the “return of
premium” approach.
(ii) The long term care and life insurance benefits are combined using the
“accelerated benefit” approach.
Now suppose that instead of using a 6 month off period, the insurer uses a 12 month off period.
(d) (2 points) Calculate the change in total benefits paid as a result of this change, assuming:
(i) The long term care and life insurance benefits are combined using the “return of
premium” approach.
(ii) The long term care and life insurance benefits are combined using the
“accelerated benefit” approach.

Page 18
Question 10
(10 points) You are using the following multiple state Markov model to analyze a long term care
product which provides coverage until the death of the insured. Assume all relevant transition
intensities exist.

Active Mildly impaired Severely impaired

³ 5 ADLs 4 ADLs £ 3 ADLs
State 0 State 1 State 2

Dead Cognitive
Impairment
State 4 State 3

You are given the following information:

(i) The insurance pays a benefit of 3000 per year, payable continuously, while the
policyholder is in State 2.
(ii) Policyholders may opt to have benefits start immediately on transition into State 2
or, for a lower premium, may select a 6-month waiting period before benefits
begin.
(iii) Benefits are valued at a force of interest of δ = 0.05
(iv) Transition intensities for all ages x ≥ 90 are
=µ 12
x 0.10
= µ 13
x 0.04
= µ 14
x 0.10
=µ x23 0.04
= µ x24 0.30
= µ x34 0.20

(a) (2 points) Derive the Kolmogorov forward differential equation for t p12
x
.

(b) (1 point) Show that = 12

t p90 e −0.24t − e −0.34t

(c) (2 points) Calculate the expected present value of the LTC benefit in State 2 for a life
currently age 90 and in State 1, assuming benefits begin immediately on transition.

Question 10 (Continued)

Page 19
 22 22
(d) (1 point) a90: 0.5
= 0.45 to the nearest 0.01. Calculate a90: 0.5
to the nearest 0.001.

(e) (2 points) Calculate the expected present value of the LTC benefit in State 2 for a life
currently age 90 and in State 1, assuming a waiting period of 6 months between transition
to State 2 and the start of the benefit payments.
(f) (2 points) Suggest two reasons why an insurer uses waiting periods in long term health
products.

Page 20
Question 11
(12 points) An individual, who is now 65 years old, is entering a Continuing Care Retirement
Community (CCRC) under a full life care (Type A) contract. The individual will move into an
Independent Living Unit (ILU). The individual pays a one-time fee of F immediately on entry
and a level monthly fee of M at the start of each month that she is in the CCRC, including the
first.
You are given:
(i) The entry fee, F, is equal to 25% of the expected present value of all future costs.
(ii) The CCRC operates three types of accommodation; they are listed here, with the
monthly costs incurred at the beginning of the month by the CCRC for each
resident in each category:
Independent Living Unit (ILU): 3,000
Assisted Living Unit (ALU): 7,500
Specialized Nursing Facility (SNF): 15,000
(iii) i = 0.05
(iv) The monthly fee M is determined so that the expected present value of the
monthly costs at entry is equal to the expected present value of the fees at entry,
including the entry fee.
(v) The CCRC uses the following multiple state model to determine the fee structure.

ILU ALU SNF

State 0 State 1 State 2

Dead
State 3

(vi) The following actuarial functions have been evaluated for the model at i = 0.05
x ax(12) 00 ax(12) 01 ax(12)02 ax(12)11 ax(12)12 ax(12) 22 Ax(12) 03

65 11.4106 1.3570 0.3745 11.8352 0.7979 10.6905 0.3601

70 9.5210 1.7037 0.4942 10.1754 0.9960 9.1961 0.4294

Page 21
 Question 11 (Continued)
(a) (3 points)
(i) You are given that F is 150,000 to the nearest 1000. Calculate F to the nearest 10.
(ii) Calculate M.
(b) (3 points)
(i) Calculate 5V (0) , the policy value five years after entry, assuming the insured is in
state 0.
(ii) Calculate 5V (1) , the policy value five years after entry, assuming the insured is in
state 1.

(c) (2 points) You are given that

00 01 02
=1 p
69
11 0.94937
= 1 p
69
11 0.00906
= 1 p
69
11 0.00003
12 12 12 12 12 12

Calculate V (0) .
412
11

The CCRC introduces an option under which 50% of the initial fee is refunded at the end of the
month of death. The revised entry fee, F, will be equal to 25% of the expected present value of
all future costs plus the refund. The revised monthly fee M is determined so that the expected
present value of the monthly costs plus the expected present value of the refund benefit are equal
to the expected present value of M plus the expected present value of F .
(d) (4 points)
(i) Calculate the revised entry fee assuming the individual selects the refund option.
(ii) Calculate the revised monthly fee assuming the individual selects this option.
(iii) State with reasons whether 5V (0) will increase, decrease or stay the same under
the 50% refund contract.

Page 22
Question 12
(10 points) Person G, who is age 45, has recently suffered a disabling injury on the job. G’s
prognosis is uncertain. His annual salary before the accident was 100,000

Person G receives a structured settlement from MRH Insurance. The settlement is a life annuity,
starting immediately, and payable continuously at a rate of 90,000 per year while G is disabled.
An additional annuity of 20,000 per year is payable continuously while G’s prognosis is
uncertain for up to two years, to offset medical expenses.

(a) (1 point) State two reasons why structured settlements often use an annuity format rather
than a lump sum.

(b) (1 point) State two possible reasons why the long term annuity would replace less than
100% of G’s pre-injury earnings.

MRH uses the following multiple state model:

Disabled; Recovered
prognosis uncertain
State 1
State 0

Permanently disabled Dead

State 2 State 3

You are given:

(i) MRH calculates policy values equal to the expected present value of future benefits.

(ii) i = 0.04

You have calculated the following table of annuity values and transition probabilities:

x ax00 ax01 ax02 ax11 ax22 2 px00 2 px01 2 px02

45 0.559 5.540 7.161 19.948 10.703 0.0301 0.2766 0.6164
47 0.559 5.420 7.104 19.528 10.623 0.0301 0.2766 0.6162

Page 23
Question 12 (Continued)
(c) (2 points) Show that the expected present value of future benefits at t = 0 , the start date
for the annuity payments, is 705,700 to the nearest 100. You should calculate the value to
the nearest 1.

(d) (4 points)

(0)
(i) Show that 2V , the policy value at t = 2 if G is in State 0 at that time, is 689,700
to the nearest 100. You should calculate the value to the nearest 1.
(2)
(ii) Calculate 2V , the policy value at t = 2 if G is in State 2 at that time.

(iii) Show that the expected present value at t = 0 of the policy value at t = 2 is 564,000 to
the nearest 1,000. You should calculate the value to the nearest 10.
(iv) Calculate the expected present value at t = 0 of the payments during the first two
years.

The chief actuary of MRH reviews your assumptions. The chief actuary asks you to redo your
calculations, increasing µ45
01
+t
by 0.01 for all t, with no other changes.

(e) (2 points)
(2)
(i) State with reasons whether the value of 2V will increase, decrease, or stay the
same as a result of this change.
(ii) State with reasons whether the expected present value, at age 45, of the policy
value at the end of two years will increase, decrease or stay the same as a
result of this change.

(LTAM, Spring 2019, Question 2)

Page 24
Question 13
(9 points) An insurer issues a whole life insurance of 50,000 to (55), with a waiver of premium
on disability. You are evaluating this policy using the following model:

Active Disabled
State 0 State 1

Dead
State 2

You are given:

(i) The gross premium G is paid at the start of each year if the insured is Active.

(ii) The death benefit is payable at the end of the month of death.

(iii) Commissions are 5% of each premium paid. There are no other expenses.

(iv) i = 0.05

(v)
02 12
x Ax(12) Ax(12) ax00
55 0.480 0.531 8.832
65 0.634 0.681 5.416

(vi) 0 Lg denotes the present value of the gross loss-at-issue random variable.

(vii) t V ( j ) denotes the gross premium policy value at time t, for a life then in State j.

(2 points) The gross premium is determined such that E[0 L ] = − 0.1G . Show that
g
(a)
G = 2,900 to the nearest 100. You should calculate G to the nearest 1.

(0)
(b) (2 points) Show that 10 V is 16,800 to the nearest 100. You should calculate the policy
value to the nearest 1.

Page 25
Page 26
Question 13 (Continued)
You are also given:

(i) 1
10 12
V (1) = 34,110

(ii) 2
10 12
V (1) = 34,170

(iii) The following probabilities:

x 1 px01 1 px02 1 p12

x
12 12 12

65 0.00461 0.00293 0.00493

65 121 0.00467 0.00295 0.00497

(c) (3 points)

(i) Show that 1

10 12
V (0) = 19,500 to the nearest 100. You should calculate the value to
the nearest 1.

(ii) Calculate V (0) .

2
10 12

(d) (2 points) To increase sales, the insurance company raises its commission rate to 15% of
the first premium and 8% of each renewal premium paid. The gross premium is not
changed.

(i) Without further calculation, state with reasons whether the value of 2
10 12
V (0) will
increase, decrease or stay the same as a result of these changes.

(ii) Without further calculation, state with reasons whether the value of V (1) will
10 122

increase, decrease or stay the same as a result of these changes.

(LTAM, Fall 2019, Question 2)

Page 27
Question 14
(10 points) For a fully discrete three-year term insurance of 100,000 on a person, age 40, you are
given:

(i) The person’s future mortality follows a double decrement model, where:
• Decrement 1 is death from Disease 1
• Decrement 2 is death from any cause except Disease 1
(ii) µ40(1)+t =
A + Bc 40+t for all t ≥ 0, where A = 1.075 ×10−5 , c =
0.0001, B = 1.12

=
(iii) µ40(2)+t 3µ40(1)+t , for all t ≥ 0 .
(iv) i = 0.05

(a) (2 points) Show that p40

(τ )
= 0.995 to the nearest 0.001. You should calculate the value
to the nearest 0.0001.

You are also given that 2 p40

(τ )
= 0.99027 and 3 p40
(τ )
= 0.98462.

(b) (2 points)

(i) Show that the expected present value at issue of the person’s death benefits is
1400 to the nearest 100. You should calculate the value to the nearest 1.

(ii) Show that the net annual premium for the person’s insurance is 490 to the nearest
10. You should calculate the premium to the nearest 0.1.

The person purchases a policy rider that pays an additional 50,000 at the end of the year of death,
if death is due to Disease 1.

(c) (4 points)
(1)
(i) Write down an integral expression for t q40 , in terms of the dependent survival
(τ )
probabilities, s p40 , and the force of mortality from Disease 1, µ 40+ s .
(1)

1 ( τ)
(ii) Using your expression from part (c) (i), prove that t q40
(1)
= t q40 .
4
(iii) Show that the net premium for the Disease 1 rider is 60 to the nearest 10. You
should calculate the premium to the nearest 0.1.

(d) (2 points) Calculate the net premium policy value at time 1 for the policy, including the
Disease 1 rider.

Page 28
Question 15
(9 points) You are using the following model to price a 10-year Disability Income Insurance
policy issued to (x).

Healthy Sick
0 1

Dead
2

The product has the following features.

(i) Policyholders are healthy at the issue date.

(ii) A benefit of 20,000 is payable immediately on death within 10 years.
(iii) A continuous benefit of 1000 per year is paid while the policyholder is in the Sick
state, during the 10-year term.
(iv) Premiums are payable continuously while the life is in the Healthy state.
(v) Maintenance expenses are paid at a continuous rate of 60 per year while the
insured is alive.
(vi) Commissions are payable continuously at a rate of 5% of gross premium.
(vii) No benefits, premiums or expenses are payable beyond 10 years.

You are also given:

=
(viii) µ x01+t 0.03;
= µ x02+t 0.02;
= µ 10x +t 0.01;
= µ 12x +t 0.05, for t > 0
(ix) δ =0.07.
(x)
= ax00:10 5.844;
= ax01:10 0.684;
= Ax01:10 0.175; Ax02:10 = 0.151.

Page 29
Question 15 (Continued)
(a) (2 points) Show that the gross premium rate, calculated using the equivalence principle,
is 738 to the nearest 1. You should calculate the value to the nearest 0.1.

(b) (2 points) Calculate the probability that the life dies without becoming sick, within the
10-year term.

The insurer offers a new product with the following features:

• For any period of sickness that starts within the 10-year term, the benefit of 1000 per
year is paid until death or recovery, even if that occurs after the 10-year term.
• There is an elimination period of 1 year.
• All other policy features and assumptions are the same as given above.

(c) (1 point) Define the term elimination period in the context of a disability income
insurance product.

(d) (2 points) Show that the expected present value of a 1-year continuous sojourn annuity in
State 1 is ax11:1 = 0.94 to the nearest 0.01. You should calculate the value to the nearest
0.0001.

(e) (2 points) Calculate the premium for this new policy, using the model and parameters
given above.

(LTAM, Spring 2020, Question 4)

Page 30
Question 16
(10 points) An insurer issues a 20-year term insurance to (50) which pays a death benefit of
500,000, and an additional 100,000 on diagnosis of a critical illness (CI).

The insurer uses the Markov model illustrated below to value the CI benefit.

Healthy Critically Ill

0 1

Dead
2

You are given the following information:

(i) Premiums are payable continuously while the policyholder is healthy.

(ii) The annual net premium rate is 4,850.
(iii) Death and CI benefits are payable immediately on transition.
(iv) i = 0.05.

(v) t V ( j ) denotes the net premium policy value at time t, conditional on being in State
j at that time.
(vi) The following values from the model illustrated above:

x a x00 Ax01 Ax02 Ax12 10 p x00 10 p x01 10 p11

x

60 10.1729 0.34249 0.39077 0.47904 0.75055 0.13135 0.75283

70 6.5690 0.49594 0.54335 0.62237

Page 31
Question 16 (Continued)
(a) (3 points)

(i) Show that A60:10

02
= 0.0902 to the nearest 0.0001. You should calculate the value
to the nearest 0.00001.

(ii) Show that 10 V (0) = 21,850 to the nearest 50. You should calculate the value to the
nearest 1.

(iii) Show that 10 V (1) = 95, 700 to the nearest 10. You should calculate the value to the
nearest 1.

(b) =
(3 points) You are given that µ 60
01
0.00818;
= µ 6002 0.00724;
= µ 60
12
0.01811.
d
(i) Calculate tV
(0)
at t = 10.
dt
d
(ii) Calculate tV
(1)
at t = 10.
dt

(iii) Explain why t V (1) is decreasing while t V (0) is increasing at t = 10.

The policy terms are revised for new policies such that the CI benefit is paid six months after
diagnosis, conditional on the policyholder surviving to that time, and conditional on the
diagnosis occurring within the 20-year term.

(c) (2 points) Write down an integral expression for the expected present value at issue of
the revised CI benefit.

(d) (2 points) One reason for the change is that mortality is very high in the first year after a
CI diagnosis.
(i) Define the Markov property.
(ii) Explain whether high mortality in the period immediately after a CI diagnosis is
consistent with the Markov property.

(LTAM, Spring 2022, Question 2)

Page 32
Question 17
(6 points) For (x) and (y) with independent future lifetimes, you are given that qx = 0.2 and
q y = 0.1 .

(a) (1 point) Explain in words the meaning of the probability described by the symbol q xy .

You are also given that mortality within integral ages follows a uniform distribution of deaths
assumption for each of (x) and (y) individually.

(b) (2 points) Sketch the graph of s p x as a function of s for 0 ≤ s ≤ 1. You should mark
numerical values on each axis.

(c) q xy sq xy + g ( s ) qxy for 0 ≤ s ≤ 1, where g ( s ) is a function of s

(3 points) Show that s =
that you should specify.

(MLC, Fall 2014, Question 3)

Page 33
Question 18
(11 points) The mortality of a couple, (x) and (y), is modeled using the Markov multiple-state
model described in the following diagram:

(x) alive (x) dead

(y) alive (y) alive
0 1

(x) alive (x) dead

(y) dead (y) dead
2 3

You are given:

• µ x01+t: y +t =
A + Bc x +t µ x02+t: y +t =
A + Bc y +t µ y13+t =
D + Bc y +t µ x23+t =
E + Bc x +t
−5
• A 0.0001
= = B 10
= c 1.12
= D 0.00015
= E 0.0002

(a) (1 point) State with reasons whether (x) and (y) have independent future lifetimes under
this model.

(b) (3 points)

00
(i) Write down the Kolmogorov forward differential equation for t p xy , and give the
associated boundary condition.

(ii) Starting from the equation in (i), prove that

 t 01 
t p exp  − ∫ ( µ x + r : y + r + µ x02+ r : y + r ) dr  .
00
=
xy
 0 

A couple, who are ages x = 50 and y = 55, purchases a special single premium, deferred joint
and last survivor annuity. The annuity will pay 50,000 per year while both are alive, and will
pay 30,000 per year while only one is alive. Payments are continuous, and begin 10 years after
the annuity purchase.

If neither life survives the deferred period, then a sum of 3 times the single premium is paid
immediately on the second death.

There are no other benefits.

Page 34
Question 18 (Continued)
You are given:

00 01 02
=
(i) 10 p50:55 0.86041
= 10 p50:55 0.04835
= 10 p50:55 0.08628

(ii) 03
A50:55:10 = 0.003421

00 01 02
=
(iii) a 60:65 8.8219
= a 60:65 1.3768
= a 60:65 3.0175

=
(iv) a 6511 10.1948
= a 6022 11.8302

(v) i = 0.05

(c) (3 points)

(i) Show that the expected present value of the future benefits at time 10, if both lives
survive to time 10, is 573,000 to the nearest 1000. You should calculate the value
to the nearest 100.

(ii) Calculate the single net premium for the policy.

(d) (4 points)

(i) Determine 10V (0) , 10V (1) and 10V (2) for the policy.

(ii) Write down Thiele’s differential equation for the policy value at t , t ≥ 10 ,
assuming both lives survive to t.

(iii) Using Euler’s forward method, with a step size of h = 0.5, calculate the policy
value required at 10.5 assuming both lives are alive at that time.

(MLC, Fall 2015, Question 2)

Page 35
Question 19
(11 points) Person P and Person R, each age 40, buy a fully discrete, last survivor insurance with
a sum insured of 100,000

You are given:

(i) Premiums are payable while at least one life is alive, for a maximum of 20 years.

(ii) Mortality of each follows the Standard Ultimate Life Table (SULT).

(iii) i = 0.05

(iv) With independent future lifetimes, a40:40:20 = 12.9028 .

(a) (2 points) Show that the annual net premium assuming that the future lifetimes are
independent is 620 to the nearest 10. You should calculate the value to the nearest 1.

(b) (1 point) State two reasons why couples may have dependent future lifetimes.

The insurer decides that premiums and policy values for this policy will be determined using a
mortality model incorporating dependency.

You are given the following information about this model:

(i) The future lifetimes for the first 20 years are not independent.

(ii) If both lives survive 20 years, it is assumed that the future lifetimes from that time
will be independent, and will follow the Standard Ultimate Life Table.

(iii) The mortality of each of P and R, individually, follows the Standard Ultimate Life
Table, whether the other is alive or dead.

(iv) 8.0703; a40:40:20 12.9254;

a40:40:10 == = 20 E40:40 0.35912;
= 100 E50:50 0.59290.

(v) A50:50 = 0.13441

=
(vi) 10 p40:40 0.9866,
= 10 p40:40 0.9980

Page 36
Question 19 (Continued)
Use the dependent mortality model for the rest of this question.

(c) (3 points)

(i) Show that A40:40 = 0.158 to the nearest 0.001. You should calculate the value to
the nearest 0.0001.

(ii) Show that 10 E40:40 = 0.606 to the nearest 0.01. You should calculate the value to
the nearest 0.0001.

(iii) Show that a50:50:10 = 8.02 to the nearest 0.01. You should calculate the value to
the nearest 0.0001.

(d) (1 point) Show that the annual net premium is 645 to the nearest 5. You should calculate
the value to the nearest 0.1.

(e) (3 points) Let k L denote the net future loss random variable at time k for the insurance.

(i) Calculate E [ 10 L ] given that only P is alive at time 10.

(ii) Calculate E [ 10 L ] given that both P and R are alive at time 10.

(iii) Calculate E [ 10 L ] given that at least one of P and R is alive at time 10.

(f) (1 point) Because the insurer is not informed of the first death for these policies, the
actuary decides that they should hold the same reserve for all policies in force. Explain
which, if any, of the policy values in part (e) would be a suitable value for the time 10
reserve for each in-force policy.

(LTAM, Spring 2019, Question 4)

(This is Question 4 from the Spring 2019 Written Answer exam.)

Page 37
Question 20
(10 points) An insurer uses the following model for joint life policies.

( x ) dead ( x ) alive ( x ) alive

( y ) dead ( y ) alive ( y ) dead
4 0 1

( x ) dead ( x ) dead
( y ) alive ( y ) dead
2 3

You are given the following additional information

(i) µ w* is the force of mortality for a life age w under the Standard Ultimate Life
Table.
(ii) µ x01+t: y +t =
µ *y +t − 0.0005; µ x02+t: y +t =
µ x*+t − 0.0005; µ x04+t: y +t =
0.0005

=
(iii) µ 1x3+t: y +t 1.2
= µ x*+t ; µ x2+3t: y +t 1.05µ *y +t
(iv) i = 0.05
(v) =
For x 40
= and y 50, ax00: y:10 = 7.8487 and=
Ax03:y:10 0.00789

(a) (2 points) Describe two ways that dependency is incorporated in this model.
(b) (3 points)
(i) Calculate 10
23
p50 .

(ii) Calculate 10 px00:=

y for x 40
= and y 50.
(c) (3 points) A couple, (x) who is age 40 and (y) who is age 50, buys a special 10-year
joint life insurance policy with the following features:

• Level premiums are payable continuously while in State 0.

• A death benefit of 100,000 is payable immediately on the second death.
• If the deaths are simultaneous, the death benefit is increased to 300,000.

Calculate the annual net premium rate.

Page 38
Question 20 (Continued)
(d) (2 points) State with reasons whether each of the following would be higher, lower or
stay the same if µ x23+ t : y + t is increased to 1.15µ *y +t , assuming all other transition intensities
are as given above.

(i) ax00:y: 10

(ii) Ax03:y:10

(iii) a x| y

(iv) The annual net premium for the contract in (c).

(This is Question 3 from the Fall 2019 Written Answer exam.)

Page 39
Question 21
(10 points) A fully discrete, joint life 10-year endowment insurance policy, with sum insured
100,000, is issued to two independent lives, both aged 70. Premiums are payable annually until
the earlier of the first death or the contract maturity.

You are given:

(i) Acquisition expenses are 400 plus 50% of the first year’s premium.

(ii) Renewal expenses are 2% of each subsequent premium.

(iii) Mortality follows Standard Ultimate Life Table.

(iv) i = 0.05

(v) The gross premium is G = 10 , 658 .

(vi) L0 is the gross loss at issue random variable.

(a) (1 point) Calculate the probability that both lives survive to the end of the contract.

(b) (2 points) Show that the expected loss at issue for the policy is −4, 470 to the nearest 10.
You should calculate the value to the nearest 1.

(c) (3 points)

(i) Show that 2 A70:70:10 = 0.44 to the nearest 0.01. You should calculate the value to
the nearest 0.001.

(ii) Show that the standard deviation of L0 is 30,000 to the nearest 10,000. You
should calculate the value to the nearest 10.

Page 40
Question 21 (Continued)
(d) (2 points) Now consider a portfolio of 100 identical, independent policies issued to
couples both aged 70, with independent future lifetimes. Calculate the probability that
the aggregate loss at issue is positive, using the Normal approximation to the aggregate
loss distribution.

(e) (2 points) In a sub-portfolio of 10 identical, independent policies issued to couples with

lives both age 70, the age at death of the 10 couples’ lives turned out to be the following:

Policy Number
1 2 3 4 5 6 7 8 9 10
Age at death
75.2 78.5 80.5 82.1 83.5 83.8 83.9 91.3 91.5 95.8
of first to die
Age at death
of second to 77.2 93.1 81.7 90.1 92.3 95.0 96.3 91.7 94.2 100.8
die

Without further calculation, state whether the value of the total profit realized in this sub-
portfolio will be greater or less than the expected value of the profit for the sub-portfolio.
Justify your answer.

(This is Question 1 from the Spring 2020 Written Answer exam.)

Page 41
Question 22
(10 points) D and M are each aged 50, and have independent future lifetimes. They purchase a
fully discrete last survivor whole life insurance of 100,000 . You are given:

(i) Mortality for each life follows the Standard Ultimate Life Table (SULT).

(ii) i = 0.05

(iii) Premiums of G per year are payable until the second death.

(iv) Premiums are payable semi-annually for the first 20 years, then annually
thereafter.

(v) G is calculated using the equivalence principle.

(vi) Commissions are 10% of each premium.

(vii) Other acquisition expenses, payable at issue, are 70% of G.

(viii) The two-term Woolhouse formula is used to value single and joint life annuities.

(a) (1 point) Show that the probability that exactly one of D and M survives 20 years, is 0.14
to the nearest 0.01. You should calculate the probability to the nearest 0.0001.
(b) (2 points) Show that a50:50:20
(2)
is 12.92 to the nearest 0.01. You should calculate the value
to the nearest 0.0001.
(c) (2 points) Show that G is 850 to the nearest 10. You should calculate the value to the
nearest 0.1.
(d) (2 points)

(i) Show that the policy value at time 20, if both lives are alive, is 22,400 to the
nearest 100. You should calculate the value to the nearest 1.
(ii) Calculate the policy value at time 20 if only one of the lives is alive at that time.

(e) (3 points) Calculate the policy value at time 19.5 if both D and M are alive at that time.
Assume a constant force of mortality between ages 69 and 70 for the individual lives.

(This is Question 4 from the Fall 2020 Written Answer exam.)

Page 42
Question 23
(9 points) Assume the following 4-state joint life model of mortality.

µ x01(x)
+ t alive, (y) alive (x) dead, (y) alive
0 1
µ x01+t

µ y02+t µ 13
y +t

µ x23+t
(x) alive, (y) dead (x) dead, (y) dead
2 3

01
(a) (1 point) Describe the annuity that has actuarial value axy .

(b) (2 points) Write down the Kolmogorov forward differential equations, with boundary
conditions, for t pxy
00
and t pxy01.

(c) (3 points) You are given the Euler-Maclaurin-Woolhouse approximation formula

∞ ∞
1 1
∫ g (t )dt ≈ ∑ g (k ) −
0 k =0 2
g (0) + g ′(0) .
12

Use this approximation, with g (t ) = t pxy00 e −δ t , to prove that

1 1 01
axy00 ≈ axy
00
− − ( µx + µ y02 + δ ) .
2 12

Hint: Use the Kolmogorov forward differential equations, and the chain rule.

Page 43
Question 23 (Continued)
(d) (3 points) Z and A are both 70 years old. They purchase a last survivor annuity, with a
level benefit payable continuously.

The single net premium is 1,000,000.

You are given the following information:

(i) The mortality of each life follows the Standard Ultimate Life Table.

(ii) Z and A have independent future lifetimes.

(iii) i = 0.05

(iv) µ70 = 0.009881

(v) a70|70 = 2.0317

Calculate the level annual rate of benefit, using the Euler-Maclaurin-Woolhouse

approximation.

(This is Question 6 from the Spring 2021 Written Answer exam.)

Page 44
Question 24
(7 points) ABC Insurance issues a 10-year endowment insurance policy to Person A who is 60
and Person B who is 50. The sum insured is 200,000 payable at the earliest of the end of the
year of the first death and the end of 10 years. Premiums are paid annually in advance.

You are given:

(i) Mortality follows the Standard Ultimate Life Table.

(ii) i = 0.05

(iii) Person A and Person B have independent future lifetimes.

(iv) Gross premiums are calculated using the equivalence principle.

(a) (1 point) Show that the net premium is 15,780 to the nearest 10. You should calculate
the value to the nearest 1.

(b) (2 points) Show that 2 A50:60:10 = 0.39 to the nearest 0.01. You should calculate the value
to the nearest 0.0001.

(c) (1 point) Calculate the standard deviation of the net Loss at Issue random variable.

(d) (1 point) Expenses are 25% of the first year’s premium plus 10% of all renewal
premiums. Calculate the gross premium using the equivalence principle.

(e) (2 points) Following a major economic upheaval, the interest rate has increased to
10.25% per year. Note that 1.052 = 1.1025 .

(i) Calculate the percentage reduction in the gross premium, as a result of the change
in the interest rate.

(ii) State with reasons whether the percentage reduction in the premium for a 10-year
term joint life insurance on Person A and Person B would be greater or less than
the change in (i) above.

(This is Question 5 from the Fall 2021 Form A Written Answer exam.)

Page 45
Question 25
(8 points) ABC Insurance uses the following model for calculating premiums and policy values
for joint life insurance policies.

(x), (y) alive (x) alive, (y) dead

0 1

(x) dead, (y) alive (x) dead, (y) dead

2 3

The forces of transition are as follows, where µ zs is the force of mortality at age z under the
Standard Ultimate Life Table (SULT).

µ x01: y µ ys − 0.005; µ x02: y =

µ xs ; µ 13
x =µ xs + 0.0025; µ y23 =
µ ys + 0.005

(a) (1 point) State with reasons whether the future lifetimes of (x) and (y) are independent
under this model.

(b) (1 point) Show that t p x00:y = e λt t p xs t p ys , where t pxs and t p ys are from the SULT, and
where λ > 0 is a constant which you should specify.

In the following table, you are given annuity values calculated using SULT mortality, at different
forces of interest, and assuming independent future lifetimes for joint life functions.

δ 3.50% 3.75% 4.00% 4.25% 4.50%

s
a 40:50 19.3199 18.6530 18.0216 17.4235 16.8564
s
a 40 22.4243 21.4880 20.6129 19.7939 19.0268
s
a 50 20.0391 19.3174 18.6358 17.9917 17.3825

(c) (1 point) Determine a x00:y at δ = 4% , for x = 40 and y = 50 , based on the ABC Insurance
model.

Page 46
Question 25 (Continued)
(d) (3 points)

(i) Write down an integral expression for the expected present value of a payment of
1 immediately on the first death of (x) and (y), using the multiple state model
notation.

(ii) Show that, for x = 40 and y = 50 , at δ = 4% , the expected present value of a

payment of 1 immediately on the first death, under the ABC Insurance joint life
mortality model, is 0.227 to the nearest 0.001. You should calculate the value to
the nearest 0.00001.

(e) (1 point) ABC Insurance issues a fully continuous joint life policy of 500,000 on (x),
who is 40, and (y), who is 50.

Calculate the annual rate of net premium for this policy using the ABC Insurance joint
life mortality model, with δ = 4% .

(f) (1 point) Exactly 10 years after issue (y) dies while (x) survives. At that time, (x) uses
the sum insured to provide a continuous annuity paying X per year while she survives.
The annuity amount is determined using the equivalence principle with δ = 4% .

Calculate X.

(This is Question 4 from the Spring 2022 Written Answer exam.)

Page 47
Question 26
(8 points) An insurer issues fully discrete whole life insurance policies to 10,000 lives, each age
45, with independent future lifetimes.

The death benefit for each policy is 100,000. Gross premiums are determined using the
equivalence principle. You are given the following information:

Pricing and Policy Policy Year 1 Policy Year 2

Value Assumptions Actual Experience Actual Experience
Interest 5% 7% Same as pricing
Expense at 75% of premium +
75% of premium +
Start of the 100 per policy in Same as pricing
105 per policy
Year the first year;
10% of premium +
20 per policy
thereafter
Settlement
200 per policy Same as pricing 220 per policy
Expense
Standard Ultimate
Mortality Same as pricing 10 deaths
Life Table

(a) (2 points) Show that the gross premium for each policy is 1020 to the nearest 10. You
should calculate the premium to the nearest 1.

(b) (2 points) Calculate the gross premium policy value for a policy inforce at the end of
policy year 1.

(c) (3 points) For each of interest, expense and mortality, in that order, calculate the gain or
loss by source in policy year 1 on this block of policies.

(d) (1 point) Explain the sources and direction of any gains or losses in policy year 2. Exact
values are not necessary.

(This is a modified version of Question 4 from the Spring 2014 Written Answer exam.)
(Part (a) and part (b) are covered by the FAM-L exam.)

Page 48
Question 27
(11 points) For a special 3-year term life insurance issued to (50) with a premium refund feature,
you are given:

(i) The death benefit is 100,000.

(ii) The premium refund feature refunds the last premium payment, without interest,
at the end of the 3-year term if the insured is still alive.

(iii) The mortality rates are:

x qx
50 0.00592
51 0.00642
52 0.00697

(iv) Pre-contract expenses are 155.

(v) Commissions are 5% of each premium.

(vi) The hurdle rate is 14%.

(vii) The reserves of this policy have been set to:

t t V
0 0
1 400
2 800

(viii) The annual premium for this policy is 1100.

(ix) The earned interest rates are:

Year 1 Year 2 Year 3

0.01 0.02 0.03

(a) (1 point) Show that the expected profit in policy year 2 for a policy in force at the start of
year 2 is 37 to the nearest 1. You should calculate your answer to the nearest 0.01.

(b) (4 points) Calculate the profit vector of this policy.

Page 49
Question 27 (Continued)
(c) (3 points) Calculate the profit signature and Net Present Value (NPV) of this policy.

(d) (3 points) Rank from low to high the Internal Rate of Return (IRR) of the following
products, explaining your order.

Product A: The special 3-year term life insurance described above.

Product B: A 3-year term life insurance policy with the following profit signature:
[ −155, 0, 0, 210]
Product C: The same special 3-year term life insurance as Product A, except that the
reserves of the product have been set to:

t t V
0 0
1 300
2 800

(This is a modified version of Question 5 from the Fall 2014 Written Answer exam.)

Page 50
Question 28
(10 points) You are performing a profit test on a 50,000, fully discrete 10-year term life
insurance policy issued to a healthy life age 60.
The annual premium is waived when the insured is sick.
You are given the following information regarding the policy value basis:

(i) A Markov model with three states: Healthy (0), Sick (1), and Dead (2) is used to
value the policy.

(ii) The annual probability transition matrix for an insured age 60 + k , k =

0,1, ,9 is:

0 1 2
0  0.90 − 0.01k 0.05 0.05 + 0.01k 
 
1  0.70 − 0.01k 0.20 0.10 + 0.01k 
2  0 0 1 
 

(iii) The annual gross premium is 5000 from the start of the third year.

(iv) Premiums in the first two years are lower.

(v) Reserves are gross premium policy values.

(vi) Issue expenses are 300 per policy.

(vii) Maintenance expenses are 150 incurred at the start of each year, including the
first, for all policies in force.

(viii) i = 6%

(ix) The following actuarial present value functions, calculated at i = 6% :

k 02
A60 + k :10− k
12
A60 + k :10− k
a 00
60 + k :10− k
a 01
60 + k :10− k
a 10
60 + k :10− k
a 11
60 + k :10− k

      
2 0.46667 0.49680 4.7328 0.2533 3.3340 1.4060
      

Page 51
Question 28 (Continued)
(a) (2 points) Calculate 2 p60
01
.

(j)
kV is the gross premium policy value at the end of year k, for a policy then in state j.

(b) (4 points)

( )0
(i) Show that 2V is 420 to the nearest 10. You should calculate the value to the
nearest 1.

() 1
(ii) Show that 2V is 8880 to the nearest 10. You should calculate the value to the
nearest 1.

( )
0 () 1
(iii) You are given that 3V = 1788. Calculate 3V .

You are given the following additional information regarding the profit test for this policy:
• The earned rate is 5.7%.
• The hurdle rate is 8%.
• Pre-contract expenses are 200.
• Maintenance expenses are 60 at the start of each year, including the first, for all
policies in force.
• Mortality and morbidity are the same as in the policy value basis.
• Reserves are gross premium policy values.
• There are no withdrawals.
• The profit signature values for t = 1, 2 are Π1 = 84.74 and Π 2 = 80.35

(c) (4 points)

(i) Show that Π 3 is 70 to the nearest 10. You should calculate the value to the
nearest 0.1.

(ii) Calculate the Discounted Payback Period.

(This is Question 1 from the Fall 2018 Written Answer exam.)

Page 52
Question 29
(8 points) A 5-year term life insurance policy with a partially accelerated Critical Illness (CI)
rider is sold to a Healthy life age x. The policy is to be profit-tested using the multiple state
model:

State 0 State 1
Healthy CI diagnosed

State 3 State 2
Dead no CI Dead after CI

The policy pays 600,000 at the end of the year of CI diagnosis, if the policyholder is still alive at
the end of that year; 1,000,000 at the end of the year of death, if the policyholder was in State 0
at the start of that year; and 500,000 at the end of the year of death if the policyholder was in
State 1 at the start of that year.
Annual premiums of 30,000 are payable while the policyholder is in State 0.

You are given the following profit test assumptions:

(i) One-year transition probabilities at age x+k, for k=0,1, 2, are:

px01+ k = px02+ k 0.008 + 0.003k ,
0.01 + 0.002k , = px03+ k =
0.004, p12 0.25
x+k =

(ii) The state-dependent reserves are:

t 2 3 4
tV 12,000 9,000 5,000
(0)

tV 280,000 210,000 120,000

(1)

(iii) Pre-contract expenses are 500.

(iv) Commissions are 5% of each premium including the first.

(v) Maintenance expenses in State 1 are 100 at the beginning of the year.

(vi) The insurer earns interest on investments of 6% per year.

(vii) The hurdle rate is 10% per year.

Page 53
Question 29 (Continued)
(a) (3 points) Show that the emerging profit in year 3, conditional on being in State 0 at the
start of the year, is 4,900 to the nearest 100. You should calculate your answer to the
nearest 1.

(b) (2 points) Show that the emerging profit in year 3, conditional on being in State 1 at the
start of the year, is 14,200 to the nearest 100. You should calculate your answer to the
nearest 1.

(c) (2 points) Calculate the profit signature value for year 3, Π 3 .

(d) (1 point) You are given the first three values of the profit signature:

−500 Π1 =
Π0 = −770 Π 2 =
3536

Calculate the partial net present value for the first 3 years, NPV(3).

(This is Question 5 from the Spring 2019 Written Answer exam.)

Page 54
Question 30
(9 points) An insurer issues a 20-year deferred annuity contract to (65). Level annual premiums
will be paid for a maximum of 10 years. On survival to age 85, an annuity of 36,000 per year is
paid annually in advance. If the life dies after 10 years, but before the first annuity payment, the
premiums paid are returned without interest, at the end of the year of death. There is no payment
on death in the first 10 years.

You are given the following premium assumptions:

(i) Mortality follows the Standard Ultimate Life Table.

(ii) Initial expenses are 1000 plus 30% of the premium.

(iii) Expenses of 5% of the premium are payable with the second and subsequent
premiums.

(iv) Renewal expenses of 100 per year are payable annually in advance throughout the
term of the contract, starting in the second year.

(v) i = 0.05

(vi) Premiums are calculated using the equivalence principle.

(a) (2 points) Show that the premium is 10,260 to the nearest 10. You should calculate the
premium to the nearest 0.1.

The insurer profit tests the policy. You are given the following assumptions for the profit test:

(i) Mortality rates are 90% of the mortality rates in the Standard Ultimate Life Table.

(ii) For the first five years of the contract, 3% of policyholders who survive to each
year end lapse at that time. There are no lapses after the first five years.

(iii) Pre-contract expenses are 7000.

(iv) Maintenance expenses start at 70 at the start of the first year, and increase at a rate
of 2% per year.

(v) Premium expenses are 5% of each premium, including the first.

(vi) The insurer’s funds earn 7% interest each year

Page 55
Question 30 (Continued)
(vii) The hurdle rate is 10%.

(viii) Reserves at times 0, 1, 11, 12, 29 and 30 are

0 V = 500 1V = 10,150
= 11V 143,
= 035 12V 151, 210
=29 V 155,
= 745 30V 146, 275

(b) (4 points) Calculate Prt for t = 0, 1, 12 and 30.

(c) (3 points) The insurer calculates the NPV for each policy issued as 8860.
Calculate the NPV at the start of the second year of future cashflows for each policy in
force at that time.

(This is Question 6 from the Fall 2019 Written Answer exam.) (Part (a) is covered by the FAM-L
exam.)

Page 56
Question 31
(10 points) A life insurer issues a single premium whole life annuity-immediate, payable
annually, with a 10-year guarantee, to B who is age 65.

The basis for calculating the premium and policy values is as follows:

(i) Mortality follows the Standard Ultimate Life Table.

(ii) i = 0.05

(iii) Commission is 2000 at issue.

(iv) Other acquisition expenses are 500.

(v) Maintenance expenses of 25 per year are payable with the annuity payments.

(vi) The premium is determined using the equivalence principle.

The single premium is 100,000.

(a) (2 points) Show that B’s annuity payment is 7550 to the nearest 10. You should
calculate the payment amount to the nearest 0.1.

The insurer conducts a profit test of this contract using the following three states:

State 0: Payments in progress; annuitant alive

State 1: Payments in progress; annuitant dead
State 2: Payments ceased; annuitant dead

You are also given the following assumptions for a profit test of the contract.

• Interest on insurer’s funds: 6%

• All other assumptions follow the premium and policy value basis.
• Reserves are gross premium policy values.

Page 57
Question 31 (Continued)
(b) (1 point) Write down values for the following probabilities:

01
(i) p73

02
(ii) p73

12
(iii) p73

(c) (2 points) Show that the reserve at time 8 for a policy in State 0 is 8V (0) = 76,100 to the
nearest 100. You should calculate the value to the nearest 1.

(1)
(d) (1 point) Show that the reserve at time 8 for a policy in State 1 is 8V = 14,100 to the
nearest 100. You should calculate the value to the nearest 1.

(e) (4 points)

(0)
(i) Show that Pr9 = 760 to the nearest 10. You should calculate the value to the
nearest 0.1.

(1)
(ii) Show that Pr9 = 140 to the nearest 10. You should calculate the value to the
nearest 0.1.

(iii) Calculate Π 9 .

(This is Question 5 from the Spring 2020 Written Answer exam.) (Part (a) is covered by the
FAM-L exam.)

Page 58
Question 32
(10 points) NED Life issues a fully discrete whole life insurance of 100,000 on (50) with a
return of premium benefit subject to the following conditions:

• If death occurs in the first 10 years, no premiums are returned.

• If death occurs after 10 years, all premiums, including the first 10, are returned
without interest at the end of the year of death.

You are given:

(i) The gross premium is 2,000.

(ii) Premium expenses, payable at the beginning of the year, are 80% of the first
year’s premium and 5% of premium in subsequent years.

(iii) Termination expenses of 1,000 are paid at the end of the year of death.

(iv) Mortality follows the Standard Ultimate Life Table.

(v) i = 0.05

(vi) Lg is the gross loss at issue random variable.

(vii) ( IA)60 = 6.63303

g
(viii) kV denotes the gross premium policy value at the end of year k.

(a) (1 point) Show that if T50 = 11.8, then Lg is 53,420 to the nearest 10. You should
calculate the value to the nearest 1.

(b) (2 points) Calculate E[Lg].

(c) (2 points) Show that 10Vg is 20,070 to the nearest 10. You should calculate the value to
the nearest 1.

Page 59
Question 32 (Continued)
NED Life had 1000 such policies in force at the end of 15 years. You are given:

(i) 15 V g = 34,333.78 and 16V g = 37, 480.51

(ii) During year 16:

• There were 7 deaths.

• i = 0.052
• Premium expenses were 4% of premium.
• Termination expenses were 2,000 per death.

(d) (4 points)

(i) Calculate the total gain in the 16th year.

(ii) Calculate the gain by source in the following order: expenses (E), interest (I) and
mortality (M).

(e) (1 point) An actuary at NED Life was asked to calculate the gain by source. He wasn’t
sure which order to use, so he calculated the gain based on all six possible orders.
Referring to the sources of gain in order by their first letters, the order you did in part (d)
was EIM.

Without further calculation, state, using the three-letter ids, which, if any, of the other 5
orders had the same gain from interest as EIM. Justify your response.

(This is Question 1 from the Fall 2021 Form A Written Answer exam.)
(Part (a), (b) and (c) are covered by the FAM-L exam.)

Page 60
Question 33
(10 points) A whole life insurance policy on (50) has an initial sum insured of 200,000 payable
at the end of the year of death. At the beginning of each policy year after the first, the sum
insured will increase by 5,000. The insured will pay level annual premiums payable for at most
20 years.

You are given:

(i) Mortality follows the Standard Ultimate Life Table

(ii) i = 0.05

(a) (2 points)

(i) Show that ( IA)=

x Ax + v px ( IA) x +1

(ii) Use this relationship to show that if ( IA)50 = 5.8255 , then ( IA)51 = 5.9 rounded to
the nearest 0.1. You should calculate the value to the nearest 0.001.

Annual gross premiums are calculated using the equivalence principle based on expenses of:

• 1000 on the payment of the death benefit.

• 15% of the first premium.
• 5% of all other premiums.

(b) (2 points) Show that the annual gross premium is 5,500 to the nearest 100. You should
calculate the value to the nearest 1.

(c) (2 points) Show that the gross premium policy value at the end of the second policy year
is 10,080 to the nearest 10. You should calculate the value to the nearest 1.

Page 61
Question 33 (Continued)
(d) (4 points) You are given:

• The gross premium policy values at times 10 and 11 are 10V g = 63, 208 and
V g = 71, 217 .
11

• At the start of the 11th policy year, at time t = 10 , there were 1000 identical,
independent policies in force.
• During the 11th year, the experience was as follows:
o The interest rate earned was 6%.
o There were six deaths.
o Expenses of 6% of premiums, plus 1100 for each death benefit, were
incurred.

(i) Show that the surplus earned on the portfolio in the 11th policy year, per policy in
force at the start of the year, was 160 to the nearest 10. You should calculate the
value to the nearest 1.

(ii) Calculate the gain by source, in the order: (1) Interest; (2) Mortality; (3)
Expenses.

(This is Question 1 from the Fall 2021 Form B Written Answer exam.)
(Part (a), (b) and (c) are covered by the FAM-L exam.)

Page 62
Question 34
(10 points) XYZ Insurance Company sells two year term policies to lives age x. The death
benefit of 1,000,000 is payable at the end of the year of death. Premiums are payable annually.

The insurer holds reserves of 0 for this policy at time t = 0 and at time t = 1 .

The assumptions used for profit testing this policy are:

(i) Precontract underwriting expenses are 3,000 per policy.

(ii) Commissions are 20% of premium in year 1 and 5% of premiums each year
thereafter. The extra 15% of premium commissions in the first year is treated as a
pre-contract cash flow for profit testing purposes.

(iii) Maintenance expense is 100 per policy at the beginning of every year including
the first year.

(iv) The earned interest rate is 7%.

(v) 0.05 + 0.05t for t =

Mortality is qx +t = 0,1, 2

(vi) At the end of the first year 10% of the surviving policyholders withdraw.

(vii) There are no cash values.

(viii) Pr1 = 31, 213 .

XYZ uses a gross premium of 80,000 in its first profit test for this two year term policy.

(a) (1 point) Determine Pr0 .

(b) (2 points) Determine Pr2 .

(c) (1 point) Determine the profit signature for this policy.

(d) (1 point) The NPV for this policy using a risk discount rate of 20% is negative.
Calculate the NPV to the nearest 1.

(e) (1 point) Calculate the internal rate of return for this policy.

Page 63
Question 34 (Continued)
(f) (1 point) Your boss questions how you can have a positive IRR but a negative NPV.
Explain how this is possible.

(g) (2 points) Calculate the NPV if the lapse rate increases to 15%.

(h) (1 point) Policies where profits increase as the lapse rate increases are called lapse
supported policies. Explain why such policies are risky to the insurance company.

(This is Question 2 from the Fall 2021 Form A Written Answer exam.)

Page 64
Question 35
(10 points) XYZ Insurance Company sells three-year term policies with a death benefit of
1,000,000 payable at the end of the year of death, to lives age x. Premiums are payable annually.

The insurer holds reserves for the policy equal to net premium policy values, based on an interest
rate i = 0.05 and mortality of q=
x +t 0.10 + 0.10t for t = 0,1, 2 .

The net premium for this policy is 177,313.20. The net premium policy value at the end of the
first year, 1V n , is 95,754.

The assumptions used for profit testing this policy are:

(i) The pre-contract underwriting expense is 4,000 per policy.

(ii) Commissions are 20% of premium in year 1 and 5% of premium each year
thereafter. The extra 15% of premium in commissions in the first year is treated
as a pre-contract cash flow for profit testing purposes.

(iii) Maintenance expense is 100 per policy at the beginning of every year including
the first year.

(iv) The earned interest rate is 7%.

(v) Mortality is equal to the policy value mortality.

(vi) At the end of each of the first two years, 10% of the surviving policyholders
withdraw.

(vii) There are no cash values.

(a) (1 point) List four ways that profit tests are applied in practice.

(b) (1 point) Show that the net premium policy value at the end of the second year is
108,400 to the nearest 10. You should calculate the value to the nearest 1.

Page 65
Question 35 (Continued)
XYZ uses a gross premium of 210,000 in its first profit test for this three-year term policy.
Using this premium, Pr2 = 37, 766 and Pr3 = 29,347 .

(c) (2 points)

(i) Determine Pr0 .

(ii) Determine Pr1 .

(d) (3 points)

(i) Determine the profit signature for this policy.

(ii) Calculate the NPV for this policy using a risk discount rate of 12%.

(iii) Calculate the profit margin for this policy.

(e) (3 points) XYZ wants to achieve a profit margin of 10% on this policy. Calculate the
gross premium that XYZ should charge to meet that objective.

(This is Question 2 from the Fall 2021 Form B Written Answer exam.)

Page 66
Question 36
(8 points) An insurer offers “immediate needs annuities” (INAs) to lives age 80 or older who
are moving permanently into long term care facilities (LTCFs). The annuity may be purchased
as a single premium annuity-due, or as a single premium deferred annuity-due, with a 2-year
deferral period. The annuity payments are paid directly to the care home to cover the resident’s
costs.

(a) (2 points) You are given the following excerpt from a select and ultimate mortality table
used to price the INA. The selection age is the age at which the life moves into an LTCF.
The selection period is 1 year.

[x] l[ x ] l x +1 x +1

94 1200 700 95

95 1000 550 96

96 750 385 97

97 450 195 98

98 220 50 99

99 75 0 100

(i) Calculate the 1-year mortality probability for (95) assuming that she moved into
an LTCF at age 95.

(ii) Calculate the 1-year mortality probability for (95) assuming that she moved into
an LTCF at age 94.

(iii) Describe how the selection effect in this model differs from that of typical select
and ultimate tables used for pricing life insurance.

Page 67
Question 36 (Continued)
(b) (4 points) You are given the following additional information for a profit test of an
annuity-due contract issued to a 95-year old who is just moving into an LTCF.

• For a single premium of 110,000 the annuity payment is 50,000 at the start of
each year including the first, conditional on survival.
• Pre-contract expenses are 300.
• Expenses of 100 are incurred with each annuity payment. There are no other
expenses.
• =
Reserves for the first two years are: 0V 0;= 1V 105,000;=2V 80,000
• The insurer earns 7% per year.
• The hurdle rate is 12% per year.

You are also given the following partially completed profit test table, which is missing
the entries for the first two policy years:

Expected
t t-1V Premium Annuity Expenses Interest End-year Prt
reserve
0 -- --
1 -- -- -- -- -- -- --
2 -- -- -- -- -- -- --
3 80,000 0 50,000 100 2,093 31,656 337
4 62,500 0 50,000 100 868 12,846 422
5 50,100 0 50,000 100 0 0 0

(i) Determine the missing entries for the first three rows of the table (missing entries
are indicated by --).

(ii) Show that the net present value of the contract, is 6,710 to the nearest 10. You
should calculate the value to the nearest 1.

(iii) Show that the profit margin is 6.1% to the nearest 1%. You should calculate the
profit margin to the nearest 0.001%.

Page 68
Question 36 (Continued)
(c) (3 points) The deferred annuity contract is identical to the annuity-due contract, but with
no payment in the first two years, and with a lower single premium payable at issue. The
time 1 reserve for the deferred annuity contract is 1V = 54,900. All other reserves and
expenses are identical to the annuity-due contract.

Calculate the premium required under the deferred annuity contract that generates the
same profit margin as the annuity-due.

(d) (1 point) The insurer offers the deferred annuity at a single premium of 28,500. Describe
one advantage and one disadvantage of the deferred annuity, compared with the annuity-
due, from the perspective of the purchaser of the annuity.

(This is Question 6 from the Spring 2022 Written Answer exam.)

(Part (a) and (d) are covered by the FAM-L exam.)

Page 69
Question 37
(7 points)

(a) (1 point) List three reasons why employers sponsor pensions for their employees.

A benefit plan provides a retirement benefit if the employee lives to age 65, and a death benefit if
the employee dies prior to age 65.

• The retirement benefit is an annual whole life annuity-due of 3% of the final 3-year
average salary for each year of service.

• The death benefit is a lump sum payable at the end of the year of death equal to two
times the employee’s annual salary in the year of death.

You are given:

• A person started the employment on January1, 1990 at exact age 38 with a starting
salary of 50,000.

• The company gives salary increases of 3% on January 1 each year.

• Employees can terminate employment only by retirement at 65 or death.

You are given the following:

• q 62
= +k 0.08 + 0.01k for k = 0,1, 2,3

• The expected present value on January 1, 2017 of an annuity-due of 1 per year payable
annually to the person, if they survive, will be 4.7491.

• i = 0.04

(b) (3 points) Calculate the actuarial present value on January 1, 2014 of the person’s death
benefit.

(c) (3 points) Calculate the actuarial present value on January 1, 2014 of the person’s
retirement benefit.

(This is a modified version of Question 7 from the Spring 2014 Written Answer exam.)

Page 70
Question 38
(9 points) A company sponsors a defined benefit pension plan. Key attributes of the pension
plan are:

• Benefits are payable as a single life annuity, paid at the beginning of each month.

• The annual benefit payable at age 65 is calculated as 2% of the final 3-year average
salary up to 100,000 multiplied by years of service, plus 3% of the final 3-year average
salary over 100,000 multiplied by years of service. The monthly benefit is the annual
benefit divided by 12.

• You are given:

(i) i = 5%
(ii) A65(12) = 0.470

An individual joined the company on January 1, 2009 at exact age 40. The individual is
planning to retire on January 1, 2034 at age 65. The salary for 2014 is 80,000 and the individual
receives annual raises of 4% each January 1.

(a) (2 points) Assuming the individual works until age 65, show that the monthly accrued
benefit at age 65 is 8050, to the nearest 10. You should calculate the benefit to the
nearest 1.

(b) (1 point) Calculate the replacement ratio at age 65.

(c) (2 points) Calculate the expected present value of the benefit at age 65.

In addition to accruing a benefit in the defined benefit plan, the individual will contribute a
constant percentage of their annual salary to a defined contribution plan.

You are also given:

(iii) Contributions are made at the start of each year, beginning on January 1, 2014.

(iv) Contributions earn an investment return of 7% per year.

(v) The contribution balance is converted to a monthly life annuity using assumptions
(i) and (ii) above.

(d) (4 points) Calculate the percentage of each year’s salary that the individual needs to
contribute so that their total replacement ratio is 80% at age 65.

(This is Question 2 from the Fall 2014 Written Answer exam.)

Page 71
Question 39
(6 points) A person begins work at age 40 at ABC Life on January 1, 2014, with a starting salary
of 30,000. The person will switch jobs to XYZ Re at some time before age 55 at the then-current
salary and will remain at XYZ Re until retirement.

• Both companies offer 2% annual salary raises on January 1 of each year.

• The annual retirement benefit at ABC Life is 900 per year of service.

• The annual retirement benefit at XYZ Re is 3% of the final 3-year average salary for each
year of service.

The person will retire on the 65th birthday, and will receive retirement benefits from both
companies.

(a) (2 points) Assume the person stays at ABC Life for 9.5 years and then switches to XYZ
Re. Show that the replacement ratio would be 63% to the nearest 1%. You should
calculate the replacement ratio to the nearest 0.1%.

(b) (1 point) Calculate the maximum length of time that the person can remain at ABC Life
and still attain a replacement ratio of at least 65%.

The person switches to XYZ Re after seven years on January 1, 2021 (and gets the annual raise).
Later, on January 1, 2029, XYZ Re decides to stop all benefit accruals. No further benefits
accrue after this date. On retirement, the benefit in respect of service before 2029 will be based
on the final average salary as at January 1 2029.

On January 1, 2029, the person purchases a 10-year deferred whole life annuity due, with
premiums payable annually during the deferred period. The annuity payments, combined with
the accrued retirement benefits, will give the person a replacement ratio of 65%.

You are given:

• The person’s mortality follows the Standard Ultimate Life Table

• i = 5%

(c) (3 points) Calculate the annual net premium for the annuity.

(This is a modified version of Question 7 from the Spring 2015 Written Answer exam.)

Page 72
Question 40
(8 points) On December 31, 2015, an individual, who is age 55, has 25 years of service. The
individual’s salary in 2015 was 50,000.
The annual accrued benefit as of any date is 1.6% of the three-year final average salary as of that
date, multiplied by years of service as of that date. The pension is payable only to retired
participants as a monthly single life annuity, with the first payment due at retirement.
The valuation assumptions are as follows:
• There are no benefits paid upon death.
• There are no benefits paid upon disability prior to age 60.
• Exits from employment follow the Standard Service Table, except that all lives surviving
in employment to age 61 retire at that time.
• There are retirements at age 60 that occur at exact age 60 while other decrements at age
60 occur throughout the year after the retirement at exact age 60 and prior to exact age
61. Those that retire or become disabled between exact age 60 and exact age 61 are
assumed to retire at exact age 61.
• After retirement, mortality follows the Standard Ultimate Life Table.
• Annuities are valued using the 2-term Woolhouse formula.
• The individual has received a 3% salary increase on January 1 of each year for the last
five years.
• Future salaries are expected to increase by 3% each year on January 1.
• All contributions are paid on January 1 each year.
• i = 0.05

(a) (1 point) A pension plan may be classified as a Defined Contribution plan or a Defined
Benefit plan. State which type of plan the individual has and briefly describe the other type
of plan.

(b) (3 points)

(i) Show that the actuarial accrued liability for the individual at December 31, 2015
using the Projected Unit Credit (PUC) funding method is 220,000 to the nearest 1000.
Calculate the actuarial accrued liability to the nearest 1.

(ii) Calculate the normal cost for 2016 using PUC.

Page 73
Question 40 (Continued)
(c) (3 points)

(i) Show that the actuarial accrued liability for the individual at December 31, 2015
using the Traditional Unit Credit (TUC) funding method is 186,000 to the nearest
1000. Calculate the actuarial accrued liability to the nearest 1.

(ii) Calculate the normal cost for 2016 using TUC.

(d) (1 point) For the individual, the normal cost during 2016 using PUC is less than the normal
cost during 2016 using TUC. Explain why this will be true for all employees near retirement.

Page 74
Question 41
(10 points) A corporation offers its employees a Final Salary Defined Benefit pension with an
accrual rate of 2% per year of service. The Final Pensionable Salary is the salary earned in the
final year of employment. The pension is paid as a single life monthly annuity-due with a 10-
year guarantee.

Employees contribute 6% of pay at the end of each month throughout their period of
employment.

An employee of the corporation is about to retire at age 65. The employee was hired at age 30
and has worked continuously since then. Their starting salary was 40,000 per year.

You are given the following additional information:

(i) Salaries increase monthly at a rate of 3.6% per year compounded monthly.

(ii) The two term Woolhouse Formula is used for valuing the retirement pension.

(iii) Mortality is assumed to follow the Standard Ultimate Life Table.

(iv) The valuation interest rate is 5%.

(v) Members have the option of taking a lump sum at retirement equal to the expected
present value of their retirement pension, using the valuation assumptions.

(a) (2 points) Show that the employee’s monthly pension is 8050 to the nearest 10. You
should calculate the value to the nearest 0.1.

(b) (2 points) Calculate the expected present value of the employee’s retirement pension at
age 65.

(c) (2 points) Show that the accumulated value of the employee’s contributions at
retirement, assuming interest of 9.6% per year compounded monthly, is 995,500 to the
nearest 100. You should calculate the value to the nearest 10.

(d) (1 point) Assume that the employee takes the lump sum option. State with reasons
whether the internal rate of return (IRR) that the employee has earned on their
contributions is more than or less than 9.6% per year compounded monthly.

Page 75
Question 41 (Continued)
(e) (1 point) Employees have the option to take a higher monthly pension at retirement
without a guarantee period. The revised benefit has the same expected present value at
age 65 as the standard benefit.
Calculate the revised monthly payment.

(f) (2 points)
(i) Define adverse selection.

(ii) Explain how adverse selection might impact the pension plan’s costs based on the
employees’ selection of annuity with guarantee, annuity without guarantee, and
lump sum.

(This is Question 6 from the Fall 2018 Written Answer exam.)

Page 76
Question 42
(8 points) Person D is a member of a pension plan that offers an annual retirement pension of
2% of the member’s career average earnings for each year of service.

At the valuation date, D is exactly 63 years old, has 30 years of service, and their total past
earnings are 2,500,000. D’s salary in the year following the valuation date will be 160,000 if they
work for the full year, and are paid in level monthly payments.

You are given:

(i) The pension is paid as a monthly life annuity-due.

(ii) Members can retire at any time after age 60 without actuarial reduction of
benefits.

(iii) There are no benefits other than the age retirement pension.

(iv) The Traditional Unit Credit approach is used for valuation and funding.

(v) The valuation uses the Standard Service Table.

(vi) All lives retiring before age 65 are assumed to exit exactly half-way through the
year of age.

(vii) Mortality after retirement follows the Standard Ultimate Life Table with Uniform
Distribution of Deaths.

(viii) i = 0.05

(ix)
= (12)
a63.5 13.514,
= (12)
a64.5 (12)
13.231, a65 = 13.086

(a) (2 points) Show that the Actuarial Liability for D is 595,000 to the nearest 1000. You
should calculate the value to the nearest 1.

(b) (3 points) Show that the Normal Contribution for D is 36,000 to the nearest 1000. You
should calculate the value to the nearest 10.

(This is Question 3 from the Spring 2019 Written Answer exam.)

Page 77
Question 43
(8 points) Person X is a member of a defined benefit pension plan which offers an annual
pension of 2% of the final one year’s salary for each year of service. The benefit is a whole life
annuity-due paid monthly. At the valuation date, 1/1/2020, X is 40 years old with 20 years’
service. X’s salary during the 12 months prior to the valuation was 110,000.

You are given:

(i) All members in service at age 65 retire immediately.

(ii) There are no other retirements or withdrawals (other than death).

(iii) Mortality follows the Standard Ultimate Life Table.

(iv) i = 0.05

(v) Salary increases occur annually on 1 January each year.

(vi) Salaries are assumed to increase by 3% each year up to and including age 54, and
by 2.5% each year from age 55.

(vii) Woolhouse’s 2-term formula is used for monthly annuity functions.

(viii) The benefits are funded using the Projected Unit Credit method.

(a) (3 points)

(i) Show that the Actuarial Liability for X’s retirement benefits is 323,000 to the
nearest 1,000. You should calculate the value to the nearest 1.

(ii) Calculate the Normal Contribution rate for X’s retirement benefits.

Page 78
Question 43 (Continued)
The plan proposes the following enhancement:

• A reversionary annuity benefit to the member’s partner at 50% of the member’s

pension benefit, or
• For members who do not have a partner at their retirement dates, the pension would
be increased by 5%.

Assume:

(i) 90% of members have partners at their retirement dates.

(ii) Partners are the same age as the member, for members with partners.

(iii) The mortality of members and their partners follows the Standard Ultimate Life
Table.

(iv) Members and their partners have independent future lifetimes.

(b) (4 points)

(i) Calculate the revised Actuarial Liability for X’s enhanced retirement benefits
(including the partner benefit).

(ii) Calculate the revised Normal Contribution rate for X’s enhanced retirement
benefits.

(c) (1 point) The plan actuary is concerned that couples may have future lifetimes which are
positively correlated. State with reasons whether the expected present value of the
reversionary partner benefits would increase, decrease, or stay the same, in this case.

(This is Question 6 from the Spring 2020 Written Answer exam.)

Page 79
Question 44
(8 points) You act as the valuation actuary for a corporation which sponsors a final average
salary defined benefit pension plan for its employees. The age retirement benefit provisions and
valuation assumptions for the corporation’s plan are described below.

• The accrual rate is 2% per year of service.

• The final average salary is defined as the salary over the final year of employment.
• The Normal Form of pension is a life annuity with no guarantee, paid monthly in
advance.
• The normal retirement age is 65.
• Salaries increase each year on 1 January at a rate of 2.5% per year.
• i = 0.05
• Mortality of active members and retirees follows the Standard Ultimate Life Table.
• There are no exits prior to retirement at age 65, other than death.
• The two-term Woolhouse formula is used for annuities paid more frequently than
annually.
• The plan is funded using the Traditional Unit Credit method.

You are also given the following summary membership data, as of the valuation date,
1 January 2020.

Number of Pension in Salary per Years of service per

Age Status
members payment member in 2019 member

35 20 Active - 45,000 8
60 5 Active - 62,000 25
70 1 Retired 32,000 -- 30

(a) (2 points) Calculate the total actuarial liability for the corporation’s pension plan as of
the valuation date.

(b) (3 points) Calculate the normal cost for 2020, expressed as a percentage of the total
payroll at the valuation date.

Page 80
Question 44 (Continued)
(c) (1 point) The corporation terminated the employment of all the 35-year-old members on
the valuation date.

Calculate the revised normal contribution rate for the corporation, expressed as a
percentage of the total payroll of the remaining plan members.

(d) (2 points) Without further calculation, state whether the change in the normal
contribution rate would be greater or smaller under Projected Unit Credit funding. Justify
your answer.

(This is Question 6 from the Fall 2020 Written Answer exam.)

Page 81
Question 45
(8 points) You are given the following information about D, who is a member of a Career
Average Earnings pension plan.

(i) On the valuation date, 1/1/2021, D is 63 years old.

(ii) D joined the pension plan on 1/1/1998.
(iii) On 1/1/2021 D’s total past earnings are 2,400,000.
(iv) D’s salary in 2021, assuming they stay in employment for the whole year, will be
170,000.
(v) All salaries are set on the 1st of January each year.
(vi) Contributions are paid on the 1st of January each year.
(vii) The accrual rate is 2%.
(viii) The normal pension form is a single life annuity-due payable monthly.
(ix) On death in service, the benefit is a lump sum of 4 times the annual pension that
the member would have received had they retired at the time of their death.
(x) There are no other benefits.

The valuation assumptions are:

• Decrements from active service follow the Standard Service Table.

• Exits before age 65 occur half-way through the year of age.
• i = 0.05
• a63.5
= (12)
13.5139;
= (12)
a64.5 13.2312;
= (12)
a65 13.0870
• The funding method is Traditional Unit Credit.

(a) (4 points)

(i) Calculate the Actuarial Liability for the age retirement pension for D at 1/1/2021.

(ii) Calculate the Normal Contribution for the age retirement pension for D at
1/1/2021.

(b) (4 points)

(i) Calculate the Actuarial Liability for the death in service benefit for D at 1/1/2021.

(ii) Calculate the Normal Contribution for the death in service benefit for D at
1/1/2021.

(This is Question 5 from the Spring 2021 Written Answer exam.)

Page 82
Question 46
(9 points) A person (J), who is 57, is a member of a final average salary defined benefit pension
plan. The person has 35 years service. You are given the following information. The person’s
salary was 100,000 last year and this year.

• The accrual rate is 1.8%

• The pension is payable monthly to the plan member from age 65, with a 100%
survivor pension paid to the member’s partner after the member’s death, provided this
occurs after age 65.
• There is no benefit on death after withdrawal before age 65.
• The final average salary is the average of the final 2-year’s salary before exit.
• Salaries are expected to be frozen for the next year.
• The person’s partner (M) is also 57.

You are also given the following valuation assumptions and information:

(i) Decrements follow the Standard Service Table

(ii) i = 0.05

(iii) Mortality after exit follows the Standard Ultimate Life Table.

(iv) Withdrawals occur ½ way through the year.

(v) J and M have independent future lifetimes.

(vi) a65(12) = 13.0870; a65:65

(12)
= 11.2158

(vii) Uniform distribution of deaths between integer ages for all other fractional age
calculations.

(viii) axw represents the value on withdrawal at age x of an annuity of 1 per year paid
monthly in advance from age 65, including the survivor’s benefit.

w
=
(ix) a58.5 10.5804;
= w
a59.5 11.1456

(x) The valuation uses the traditional unit credit funding method.

Page 83
Question 46 (Continued)
(a) (2 points)

(i) Show that, under the Standard Ultimate Life Table, 7.5 E57.5 : 57.5 = 0.655 to the
nearest 0.001. You should calculate the value to the nearest 0.0001.
Show that a57.5 = 10.05 to the nearest 0.01. You should calculate the value to the
w
(ii)
nearest 0.001.

(b) (3 points) Show that the actuarial liability for the withdrawal benefit is 36,000 to the
nearest 1000. You should calculate the value to the nearest 1.

(c) (2 points) Calculate the normal contribution for the withdrawal benefit.

(d) (2 points) Person J withdraws at age 57.5 and immediately gets divorced. Under the
divorce settlement, Person M will receive a pension of X/3 for life from age 65, and
Person J will receive a pension of X for life from age 65. The value of the settlement is
equal to the value of the joint and last survivor pension payable had the couple not
divorced.

Calculate X.

(This is Question 6 from the Fall 2021 Form A Written Answer exam.)

Page 84
Question 47
(9 points) Person M enrolled in a defined contribution (DC) pension plan at age 35. Person M
and their employer each contribute 6% of Person M’s salary to the pension fund.

M plans for the retirement based on the following assumptions:

• M’s initial salary rate is 50,000 per year.

• Salaries increase continuously at an annual rate of 2%, compounded continuously.
• Contributions are invested continuously to a fund earning a 6% per year force of
interest.
• M intends to retire on their 60th birthday.

(a) (2 points) Show that M’s projected DC account balance as of their 60th birthday is
425,000 to the nearest 1000. You should calculate the value to the nearest 1.

(b) (2 points) Assume first that, on retirement, M elects to receive a monthly life annuity
with a 10-year guarantee. Annuities are priced using the equivalence principle, based on
the following assumptions:

• Mortality follows the Standard Ultimate Life Table.

• The annual effective interest rate is i = 0.05 .
• Woolhouse’s two term formula.

(i) Calculate M’s projected monthly income in retirement.

(ii) Estimate M’s projected Replacement Ratio.

M’s spouse, C, is also 60. M and C have independent future lifetimes. When they reach age 60,
M’s DC account has accumulated to 750,000, after several years of high investment returns.

(c) (2 points) Assume that M elects to receive a monthly pension payable while both M and
C survive, with a 2/3 survivor’s benefit payable after the first death, with no guarantee
period. Show that the monthly benefit is 4,200 rounded to the nearest 100. You should
calculate the value to the nearest 1.

Page 85
Question 47 (Continued)
(d) (1 point) Person M is also eligible for a Government Pension Plan (GPP) which will
provide a benefit of 1000 per month starting at age 65, payable during M’s lifetime and
with a 50% benefit payable to C after M’s death.
Calculate the monthly benefit payable from M’s entitlements from both the DC pension
plan and GPP eight years after M’s retirement under each of the following states:

(i) M and C survive.

(ii) Only M survives.

(iii) Only C survives.

(e) (2 points) M elects to receive an integrated pension which will start at X per month at age
60 and will reduce to X−1000 per month at age 65, so as to provide a level benefit before
and after the start of M’s GPP benefit, assuming M survives to age 65.

Calculate X, assuming the 2/3 survivor pension option.

(This is Question 6 from the Fall 2021 Form B Written Answer exam.)

Page 86
Question 48
(9 points) B is the sole member of a final average salary pension plan which is being valued on
January 1, 2022. At the valuation date B is 63 years old and has 12 years of service. B’s salary
at the valuation date is 72,100. B’s salary in 2021 was 70,000.

The pension plan benefits are as follows:

• The annual benefit is 1.6% of final average salary times years of service.
• Final average salary is the salary earned during the 12 months preceding retirement.
• Benefits are reduced by 0.4% for each month retirement precedes age 65.

The valuation at January 1, 2022 uses the projected unit cost (PUC) method with the following
assumptions:

(i) Salaries increase by 3% each January 1.

(ii) Retirements before 65 occur in the middle of the year of age.

(iii) Decrements before retirement follow the Standard Service Table.

(iv) i = 0.05

(12)
(v) Under post-retirement mortality a63.5 = 13.5139.

(a) (3 points)

(i) Show that if B retires on July 1, 2022, the expected present value of B’s
retirement benefits at that time would be 178,200 to the nearest 50. You should
calculate the value to the nearest 1.

(ii) Show that the expected cost of mid-year retirement decrements in 2022 is 16,500
to the nearest 50. You should calculate the value to the nearest 1.

Page 87
Question 48 (Continued)
You are also given that the projected accrued liability for B’s retirement benefits on January 1,
2023, assuming that B is employed then, is 191,309.

(b) (2 points)

(i) Show that the actuarial liability of B’s retirement benefits at January 1, 2022 is
167,150 to the nearest 10. You should calculate the value to the nearest 1.

(ii) Calculate the normal cost for B’s retirement benefits as of January 1, 2022.

The pension trustees are considering changing to the traditional unit credit (TUC) funding
method.

(c) (2 points)

(i) State with reasons whether the actuarial liability as of January 1, 2022, under the
TUC funding method will be bigger or smaller than the actuarial liability as of
January 1, 2022 under the PUC funding method.

(ii) State with reasons whether the normal cost for 2022 under the TUC funding
method will be bigger or smaller than the normal cost for 2022 under the PUC
funding method.

(d) (2 points) You are given the following additional information

• The plan is 100% funded at January 1 2022, under the PUC funding method.
• B retires on January 1, 2023.
• The earned interest rate during 2022 was 5.1%.
• The valuation as of January 1, 2023 uses the PUC funding method, based on
the same assumptions as the previous year.
• The normal cost for 2022 was paid in full on January 1, 2022.
(12)
• a64 = 13.3735 .

Calculate the gain or loss to the pension plan during 2022.

(This is Question 5 from the Spring 2022 Written Answer exam.)

Page 88
Question 49
(8 points) A life insurance company issues a Type B universal life policy with an Additional
Death Benefit of 150,000 to a life age 35.
You are given:
Annual
Cost of Account
% Insurance Credited Value at
Policy Annual Premium Rate Per Interest End of Surrender
Year Premium Charge Thousand Rate Year Charge
1 4800 20% 2.31 4% 3647 2500
2 4800 5% 2.46 4% 8166 1500
3 4800 5% 2.62 4% - 0

(a) (2 points) Show that the total death benefit at the end of the third year is 162,800 to the
nearest 100. You should calculate the value to the nearest 1.

Now the company wants to carry out a profit test of this contract using the following
assumptions:
(i) At the end of the first year, 10% of the in-force policyholders surrender.

(ii) At the end of the second year, 20% of the in-force policyholders surrender.

(iii) At the end of the third year, all remaining in-force policyholders surrender.

(iv) There are no reserves held other than the account value.

(v) The interest earned on all insurer’s funds is 8% per year.

(vi) Mortality experience is q35+t = 0.0015 for t = 0,1 and 2.

(vii) Pre-contract expenses are 800.

(viii) Percent of premium expenses are 25% in the first year and 7% for years 2 and 3.

(ix) Expenses on death are 500.

(x) The hurdle rate is 10% per year.

Question 49 (Continued)
(b) (3 points) Calculate the profit vector.

(c) (2 points) Calculate the NPV.

Page 89
(d) (1 point) Calculate the profit margin.

(This is Question 2 from the Fall 2017 Written Answer exam.)

Page 90
Question 50
(8 points) An insurer issues a Type A universal life policy with a face amount of 100,000 and an
annual premium of 50,000.
You are given:

Percent Annual Annual

Annual COI Rate
Policy of Discount Credited Corridor
Expense per 1 of
Year Premium Rate for Interest Factor
Charge Insurance
Charge COI Rate
1 20% 75 0.025 4.5% 6.50% 1.5
2 8% 75 0.030 4.5% 5.75% 1.4

(a) (3 points) Show that the account value at the end of two years is 91,000 to the nearest
1000. You should calculate the account value to the nearest 1.

The policyholder surrenders the policy at the end of the second year, when she is age 60. The
policy does not have a surrender charge. She uses the surrender value as a net single premium to
purchase a special last-survivor life annuity-due with her husband, who is 10 years older than the
policyholder.

This annuity provides the following payments at the beginning of each quarter:
• For the first ten years, a guaranteed payment of Q
• After the first ten years, a payment of Q if the policyholder is alive
• After the first ten years, a payment of 0.6Q if the policyholder is dead, but her
husband is alive.

You are given that the net single premium and reserves for this annuity are calculated based on
the following information and assumptions.
(i) The future lifetimes of the couple are independent.

(ii) Mortality follows the Standard Ultimate Life Table.

(iii) i = 0.05

(iv) The two-term Woolhouse formula

(b) (3 points) Show that Q is 1630 to the nearest 10. You should calculate Q to the nearest
1.

Page 91
Question 50 (Continued)
You are given that the policyholder’s husband dies during the first 10 years of the annuity.

(c) (1 point) Calculate the net premium reserve immediately prior to the payment of Q at
the start of the eleventh year.

In the eleventh year, Person S decides that they no longer needs the annuity and asks the
company to pay the reserve. The insurance company refuses to pay the full reserve.

(d) (1 point) Explain why the insurance company would not agree to S’s request.

(This is Question 3 from the Spring 2017 Written Answer exam.)

Page 92
Question 51
(10 points) Person D buys a Type B universal life contract of 100,000. You are given:
(i)
Annual Cost
Policy Percent of Annual
Annual of Insurance Surrender
Year Premium Expense
Premium Rate per 1000 Charge
k Charge Charge
of Insurance
1 1000 −− 60% −− −−
2 P2 2 10% 10 200
3 P3 3 10% 10 100
k≥4 Pk k 5% 10 0

(ii) The credited interest rate is i = 0.06.

(iii) D’s account value at the end of year 1 is 165.

(iv) Except as indicated, there are no deaths or surrenders.

(a) (2 points) Show that if P2 were 1000 , D’s account value at the end of year 2 would be
920 to the nearest 10. You should calculate the account value to the nearest 1.

(b) (2 points) D’s account value at the end of year 3 can be expressed as aP2 + bP3 + c.
Calculate a, b, and c.

Page 93
Question 51 (Continued)
(c) (4 points) In year 2, D pays a premium of 1000 with probability 0.6, or 200 with
probability 0.4.

If D paid 1000 in year 2, then in year 3 D will pay either 1000 with probability 0.6, or
200 with probability 0.4.

If D paid 200 in year 2, then in year 3 D will pay either 1000 with probability 0.2, or 200
with probability 0.8

(i) Calculate the expected death benefit payable at the end of year 3, if D dies then.

(ii) Calculate the expected surrender benefit payable at the end of year 3, if D
surrenders the contract then.

(d) (2 points) D’s identical twin, M, buys a contract identical to D’s. If M pays 1000 every
year, M’s account value at the end of year 10 will be 5114.

M will pay premiums of 1000 in 9 of the first 10 years. M will pay no premium in one
year, with the year of no premium equally likely to be year 3 or year 10.

Calculate M’s expected surrender value at the end of year 10.

(This is Question 5 from the Fall 2015 Written Answer exam.)

Page 94
Question 52
(9 points) For universal life insurance policies with a death benefit of 100,000 plus the account
value issued to independent lives age 50, you are given:
(i)
Percent of Annual Cost Annual
Policy Annual Surrender
Premium of Insurance Expense
Year Premium Charge
Charge Rate per 1000 Charge
1 2500 5% 5.00 30 0.8* AV1

(ii) The credited interest rate is i = 0.06.

(a) (2 points) Show that the cash value at the end of policy year 1 is 400 to the nearest 10.
You should calculate the value to the nearest 1.

You are also given the following information for profit-testing these policies:

(i) The expenses for each policy are:

• Pre-contract expenses of 200

• Annual maintenance expenses of 120 at the beginning of each year including
the first year
• Surrender benefit expenses of 100
• Death benefit expenses of 200

(ii) q 50 = 0.004

(iii) Death benefits are payable at the end of the year of death.

(iv) At the end of the first year, 10% of the policyholders in force are expected to
surrender.

(v) The earned rate is 11%.

(vi) The hurdle rate is 14%.

Page 95
Question 52 (Continued)
(b) (3 points) Show that the expected profit emerging at the end of year 1 is 400 to the
nearest 10. You should calculate the value to the nearest 1.

(c) (1 point) Calculate NPV(1), the actuarial present value of expected profits through year
1.

You have calculated that the Net Present Value (NPV) for the policy is 2000. Your supervisor
suggests that the 10% surrender assumption is too low. He recommends assuming 20% of the
policies in force surrender at the end of year 1.

(d) (3 points) Calculate the revised NPV using the new surrender assumption.

(This is Question 6 from the Spring 2015 Written Answer exam.)

Page 96
Question 53
(10 points) For a Type A universal life policy issued to (50), you are given:
(i) The face amount is 100,000.

(ii) All cash flows occur at policy anniversaries.

(iii) The policyholder pays an initial premium of 15,000.

(iv) The cost of insurance (COI) is calculated based on 120% of the mortality in the
Standard Ultimate Life Table. The interest rate for discounting the net amount at
risk, i q , is 0.04.

(v) The expense charge is 1% of premium.

(vi) The credited interest rate for policy year 1 is 5%.

(vii) The corridor factor in year 1 is 2.2.

(viii) The surrender charge in policy year 1 is 5% of the premium paid.

(a) (1 point) Explain why the corridor factor requirement exists for universal life insurance.

(b) (5 points)

(i) Calculate the COI in policy year 1 assuming there is no corridor factor
requirement.

(ii) Calculate the COI in policy year 1 based only on the corridor factor (as if the face
amount were 0).

(iii) Determine the COI in policy year 1.

Page 97
Question 53 (Continued)
(c) (2 points) Calculate the account value, additional death benefit, and cash value at the end
of policy year 1.

(d) (2 points) The policy contains a no-lapse guarantee providing term insurance of 100,000
until age 90.

If the expected present value of the guaranteed insurance coverage is greater than the
account value, the company holds a reserve for the no-lapse guarantee equal to the
difference. The expected present value is based on the Standard Ultimate Life Table at
5% interest with no expenses.

The account value at the end of policy year 20 is 20,000.

Calculate the reserve for the no-lapse guarantee at the end of year 20.

(This is an edited version of Question 6 from the Fall 2014 Written Answer exam.)

Page 98
Question 54
(10 points) For Type B universal life insurances with additional death benefit 100,000 on lives
age 60, you are given the following policy details:

Annual
Percent of
Credited Annual Cost of
Policy Annual Premium Surrender
Interest Expense Insurance
Year k Premium Expense Charge
Rate Charge Rate per
Charge
1000
1 5000 5% 60% 200 6.00 600
2 1000 5% 10% 50 7.47 200
3 − − − − − 0

You are also given the following profit testing assumptions:

Dependent Probabilities Commissions

Policy Earned Other
as Percent of
Year k q (d )
q ( w) Interest Rate Expenses
60 + k −1 60 + k −1 Premium
1 0.004 0.100 6% 90% 100
2-10 0.003 + 0.001k 0.050 6% 5% 10

Expenses are incurred at the start of each policy year. Your company uses account values as
reserves. The account value at the end of year 2, for a policy in force, is 1500.

(a) (2 points) Show that the account value at the end of year 1, for a policy in force, is
1300 to the nearest 100. You should calculate the account value to the
nearest 1.

Your company discounts expected profits at 12%. The expected profits for the first three years
are:

Policy Expected profits at the end of the year

Year k for a policy in force at the start of the year
1 −1206
2 374
3 400

(b) (3 points) Calculate the partial Net Present Value up, to time 3, NPV (3) .

Page 99
Question 54 (Continued)
(c) Your company’s pricing actuary asks you to redo the profit test using the end of year
cash values as reserves, with no other changes.

(i) (3 points) Calculate the revised expected profit for policy year 2, per policy
in force at the start of year 2.

(ii) (1 point) Explain why the expected profit in policy year 2 decreases due to
this change.

(iii) (1 point) State with reasons whether the total present value of profits in all
years will increase, decrease, or stay the same due to this change.

(This is Question 6 from the Spring 2014 Written Answer exam.)

Page 100
Question 55
An insurer issues a 3-year equity-linked insurance policy to (x). The policyholder pays a single
premium of 5000, and an additional policy fee of 350. The insurer invests 100% of the premium
in a separate account, with management charges of 2.5% of the fund value deducted at the start
of each year including the first.

The policy offers a Guaranteed Minimum Death Benefit and a Guaranteed Minimum Maturity
Benefit of 100% of the initial premium (excluding the policy fee).

The insurer stress tests the profitability of the contract using the following assumptions:
• Pre-contract expenses are 200
• Renewal expenses are 30 at the start of the 2nd and 3rd years.
• Fund management expenses are 2% of the policyholder’s fund value at the start of the
first year, and 1% of the policyholder’s fund value at the start of the 2nd and 3rd years,
before management charge deductions in each case.
• qx + t = 0.05 + 0.01t for t =
0,1, 2.
• There are no lapses
• Interest of 5% per year is earned on the insurer's funds.
• No reserve is held for the contract guarantees in the insurer's assets.
• The insurer uses a risk discount rate of 10% per year.
• The return on the assets in the policyholder's fund for each of the three years (before any
management charge deductions) are:

Year 1 –14%
Year 2 –5%
Year 3 + 4%

(a) Show that the projected fund value at time 3 is 3940 to the nearest 10. You should calculate
the value to the nearest 1.
(b) Calculate the profit vector for the contract.
(c) Show that the net present value of this contract, based on the stress test assumptions given, is
–600 to the nearest 10. You should calculate the value to the nearest 1.

The insurer can purchase options on the underlying fund assets to hedge the guarantees, using the
following parameters:

(i) Volatility, σ = 0.25

(ii) The risk free rate is 4% per year compounded continuously
(iii) Management charge deductions are 2.5% per year

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Question 55 (Continued)
(d) Show that the price of a 3-year put option guaranteeing a return of premium is 0.136 per unit
of premium, to the nearest 0.001. You should calculate the value to the nearest 0.0001.

(e) You are given the following market prices at time 0 for 1 and 2 year put options on the
underlying fund assets, based on the pricing assumptions above, and a premium of 5000.

Term Put Option Price

1-year 446.7
2-year 590.8

Assume that mortality follows the profit test assumptions above. Show that the total cost at
issue of hedging the guaranteed minimum death benefit and the guaranteed minimum
maturity benefit is 665 to the nearest 5. You should calculate the value to the nearest 0.1.

(f) Calculate the net present value of the contract under the same stress test as in (a), but
assuming that the insurer hedges the guarantees by purchasing options at a cost of 665 at the
start of the first year.

(g) Describe one advantage and one disadvantage for the insurer of purchasing put options to
hedge the guarantee costs.

Page 102
Question 56
A 10-year equity-linked policy is issued to (x). The policy offers a guaranteed minimum maturity
benefit of 100% of the initial single premium. After an initial expense charge of 5% of the
premium, the remainder is invested in separate fund. The insurer deducts a 0.2% management
charge from the policyholder's fund at the end of each month, if the policyholder survives.

You are given:

• An investment at t = 0 of 1 in the underlying asset will have value St at t, where St
follows a geometric Brownian motion, with volatility σ, and S0 = 1 .
BSP( K ) EQ0 e 10 r ( K − S10 )  is the Black-Scholes option price formula for a put
− +
•=
 
option on an investment of 1 in the underlying stock at time 0, with strike price K.
• There are no exits other than death.

(a) Show that the risk-neutral value of the GMMB option at issue is
π (0) = P ( 10 px ξ BSP( K *) )
You should state any assumptions you need, and you should define the parameters ξ
and K* in terms of the information given about this specific contract.
(b) Given σ = 0.25, x = 60 , P = 100, 000 , Standard Ultimate Life Table mortality, and
r = 0.04 , show that π (0) = 17,100 to the nearest 100.
(c) Assume that the insurer constructs a hedge portfolio at t = 0 based on the Black
Scholes option valuation. The insurer does not rebalance the hedge until one month
later. You are given that in the first month, the underlying asset values fell by 3%.
Calculate the value of the hedge portfolio at the end of the first month, before
rebalancing.
(12)
(d) You are given that, at 𝛿𝛿 = 2.40%, a60:10 = 8.679. Calculate the cost of the option as
a monthly deduction from the fund, assuming no lapses.

Page 103
Question 57
This question is an Excel question. Please see the ALTAM Sample Excel Question file for
details. The content of the Excel file for this question is provided below for reference.

You are using the following three state Markov model and associated forces of transition for x ≥
50 to model the life of an individual age 50. Probabilities are calculated using Euler's Forward
Method with a step size of h = 1/12.

Healthy Disabled 𝜇𝑥01 = 0.02

0 𝜇𝑥02 = 𝐴 + 𝐵𝑐 𝑥
1
𝜇𝑥12 = 2𝜇𝑥02

A= 0.00022
B= 0.0000027
c= 1.124
Dead

2 h= 0.083333333

(a) Calculate t p500 j for j = 0, 1, 2 and t = 0, 1/12, 2/12, ... , 5 using the model and method
described above.

Time (t) µ5001+t µ5002+t µ50

12
+t t p5000 t
01
p50 t p5002
0
0.083
0.167
0.250
0.333
0.417
0.500
0.583
0.667
0.750
0.833
0.917
1.000
1.083

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Time (t) µ5001+t µ5002+t µ50
12
+t t p5000 t
01
p50 t p5002
1.167
1.250
1.333
1.417
1.500
1.583
1.667
1.750
1.833
1.917
2.000
2.083
2.167
2.250
2.333
2.417
2.500
2.583
2.667
2.750
2.833
2.917
3.000
3.083
3.167
3.250
3.333
3.417
3.500
3.583
3.667
3.750
3.833
3.917
4.000
4.083
4.167
4.250
4.333
4.417
4.500
4.583

Page 105
 Time (t) µ5001+t µ5002+t µ50
12
+t t p5000 t
01
p50 t p5002
4.667
4.750
4.833
4.917
5.000

You are using the above model to price a 500,000 fully discrete 5-year term life insurance
policy issued to this individual at age 50. The death benefit is paid at the end of the
month of death, and premiums are paid at the start of each month the individual is
Healthy. You are also given:
• Expenses consist of 500 at issue, and a maintenance expense of 5 at the start of each
month the policy is in force.
• i (12) = 0.06

Issue Expense; Iss_exp 500

Monthly Maintenance Expense; Maint_exp 5
Death Benefit Amount; DB 500000
Nominal Interest Rate; I_12 6%

(b) Calculate the EPV of the death benefit for this policy.

(c) Calculate the monthly gross premium for this policy.

Now suppose that you modify the force of transition associated with moving to the Disabled
state so that µ x01 = 0.04 for x ≥ 50.

(d) Give two reasons why this change will increase the monthly gross premium.

Page 106
Question 58
This question is an Excel question. Please see the ALTAM Sample Excel Question file for
details. The content of the Excel file for this question is provided below for reference.

An insurer plans to issue a fully discrete 20-year term insurance contract to a lives age 70. The
sum insured of 100,000 is payable at the end of the year of death. The gross premium for the
contract is 3000.

Your task is to profit test the contract using the following assumptions:
(i) Mortality follows the Standard Ultimate Life Table. The mortality rates are given
below.
(ii) At the end of each of the first 10 years, 5% of the policies in force are assumed to
lapse.
(iii) Pre-contract expenses are 300.
(iv) Maintenance expenses are 100 at the start of the first year and increase at an inflation
rate of 2.5% per year.
(v) Commission expenses are 5% of each gross premium.
(vi) Reserves follow the schedule given in the table below.
(vii) The insurer earns interest at 6% on its assets.
(viii) The hurdle rate is 12%.

(a)
(i) Calculate the profit vector Prt for times t = 0, 1, 2, …, 20.
(ii) Calculate the profit signature Πt for times t = 0, 1, 2, …, 20.

Premium Expense Rate; Pr_exp 5.0%

Hurdle Rate; i_h 12%
Earned Interest Rate; i_t 6%
Inflation Rate; i_j 2.5%

Page 107
 Expected Expected Profit Profit
Reserve at cost of Reserve at Vector Signature Decrements
Time (t) time t-1 Premium Expenses Interest Claims t (a) (i) (a) (ii)
0 x qx wx
1 3000 70 0.010413 0.05
2 1000 3000 71 0.011670 0.05
3 1500 3000 72 0.013081 0.05
4 2000 3000 73 0.014664 0.05
5 2500 3000 74 0.016440 0.05
6 3000 3000 75 0.018433 0.05
7 3500 3000 76 0.020668 0.05
8 4000 3000 77 0.023175 0.05
9 4500 3000 78 0.025984 0.05
10 5000 3000 79 0.029132 0.05
11 5500 3000 80 0.032658 0.00
12 6000 3000 81 0.036607 0.00
13 6000 3000 82 0.041025 0.00
14 6000 3000 83 0.045968 0.00
15 6000 3000 84 0.051493 0.00
16 6000 3000 85 0.057665 0.00
17 6000 3000 86 0.064554 0.00
18 6000 3000 87 0.072237 0.00
19 6000 3000 88 0.080798 0.00
20 6000 3000 89 0.090326 0.00

(b) Calculate the NPV. Your answer should be 3440 to the nearest 10.

(c) Calculate the profit margin.

(d) Your colleague states that as the NPV and profit margin meet the insurer's requirements,
the product is ready for market. Critique this claim.

(e)
(i) Calculate the profit signature using zeroized reserves.
(ii) Show that the NPV using zeroized reserves is 2800 to the nearest 10.

Page 108
Question 59
This question is an Excel question. Please see the ALTAM Sample Excel Question file for
details. The content of the Excel file for this question is provided below for reference.

A Type A universal life has the following characteristics:

• The issue age is 60.
• If the insured is alive at age 90, the policy will terminate with the Account Value being
paid at age 90.
• The face amount is 50,000.
• The following expenses at the beginning of each year
- 20% of premium in year 1
- 8% of premium in years 2-10
- 0% of premium thereafter
- 25 per policy
• Cost of insurance is 120% of the mortality rates in the Standard Ultimate Mortality
Model. The mortality rates in the Standard Ultimate Mortality Model are listed in
Column M.
• 𝑖𝑖𝑞𝑞 = 0.03
• 𝑖𝑖𝑐𝑐 = 0.05
• The corridor factor is 1.5 - (0.02)(Attained age at the beginning of the year minus 60) but
never less than 1.
• There is a surrender charge which is equal to 40 per 1000 of face amount in the first year.
in each year thereafter, the surrender charge reduces by 10% of the original surrender
charge for each duration. In other words, in year 2 it is 90% of the original surrender
charge, 80% in year 3, etc. until it is 10% in year 10. There is no surrender charge in
years after 10.

Mort Premium Expense Cor

Age Year Rate DB s s iq ic Fact AV
0.00339
60 1 8
0.00379
61 2 2
0.00423
62 3 4
0.00473
63 4 0
0.00528
64 5 8
0.00591
65 6 5
0.00661
66 7 9

Page 109
 0.00740
67 8 9
0.00829
68 9 7
0.00929
69 10 4
0.01041
70 11 3
0.01167
71 12 0
0.01308
72 13 1
0.01466
73 14 4
0.01644
74 15 0
0.01843
75 16 3
0.02066
76 17 8
0.02317
77 18 5
0.02598
78 19 4
0.02913
79 20 2
0.03265
80 21 8
0.03660
81 22 7
0.04102
82 23 5
0.04596
83 24 8
0.05149
84 25 3
0.05766
85 26 5
0.06455
86 27 4
0.07223
87 28 7
0.08079
88 29 8
0.09032
89 30 6

Page 110
(a) Assume that the insured pays a level annual premium of 1600 each year. The account
value at age 90 will be 85,000 to the nearest 1000. Calculate the account value to the
nearest 1.

(b) Based on this premium pattern, state below the death benefit at the end of the following
years:
- DB at end of 15th year
- DB at end of 20th year
- DB at end of 25th year

(c) Based on this premium pattern, state below the cash at the end of the following years:
- CV at end of 1st year
- CV at end of 2nd year

(d) State the purpose of a surrender charge.

(e) Use goal seek to determine the level annual premium that must be paid so that the
account value would be zero at age 90.

(f) Do the corridor factors affect the premium that must be paid under part (e)? Explain your
answer.

(g) If this were a Type B universal life with all the same characteristics, charges and an
annual premium as determined in part (e), determine the year in which the policy would
terminate.

(h) Some universal life policies have a no lapse guarantee which could prevent a policy from
terminating under the situation in part (g). Explain how a no-lapse guarantee works and
the requirements for it to be effective.

Page 111
Question 60
This question is an Excel question. Please see the ALTAM Sample Excel Question file for
details. The content of the Excel file for this question is provided below for reference.

An employer offers a Final Average Salary DB pension plan, with the following plan design:
(i) The accrual rate is α = 1.7%.
(ii) The final average salary is over the last three years of employment.
(iii) The projected unit credit method is used.
(iv) The service table is used, and the following salary scale is used:
𝒙𝒙 𝒔𝒔𝒙𝒙 𝒙𝒙 𝒔𝒔𝒙𝒙
54 3.186 60 3.484
55 3.234 61 3.536
56 3.282 62 3.589
57 3.332 63 3.643
58 3.382 64 3.698
59 3.432
(v) On the valuation date, an employee is exactly age 55 with 25 years of service.
(vi) Their salary in the year up to the valuation date is 100,000.
(vii) No reduction is applied to the benefits if the employee retires before age 65.
(viii) The benefit is payable as a monthly life annuity-due.
(ix) The interest rate is 𝑖𝑖 = 5% for all calculations.
(x) The following monthly life annuity factors are given:
Annuity Annuity
Age Age
Factor Factor
60 14.4414 63.5 13.5139
60.5 14.3149 64.5 13.2312
61.5 14.0559 65 13.0870
62.5 13.7889

(a) Show that the final salary if the employee retires at age 65 is 114,350 to the nearest 50.
You should calculate the value to the nearest 1.

(b) Show that the actuarial liability for this employee is 389,600 to the nearest 100. You
should calculate the value to the nearest 10.

(c) Calculate the normal contribution for the employee at the valuation date.

Page 112
(d) Often plans will apply a reduction of benefits for early retirement. What is the purpose of
these reductions, and how should they be calculated?

(e) Propose a schedule of reductions to make the benefits actuarially fair.

(f) What would the replacement rates be for each retirement age, using your proposed
actuarial reductions? What would they be without any reductions?

Page 113
Question 61
Your company issues 2-year equity-linked policies to lives age 85. Policyholders pay a single
premium of 10,000. The insurer deducts a management charge of 3% of the fund value at the
start of each year, including the first. There are no other expense deductions. The fund price is 1
per share at inception. There is no guaranteed minimum maturity benefit.

If the policyholder dies during the contract term, the death benefit, payable at the end of the year
of death, is the fund value at the end of the year, or the guaranteed minimum death benefit
(GMDB) if larger. The GMDB is the premium accumulated at 6% compounded continuously.

(a) Let {St}t>=0 denotes the stock price process. Calculate the highest ratio of S2/S0 such that
the benefit payable for a death at time 1.3 would be the GMDB. Your answer should be
1.20 to the nearest 0.01. You should calculate the value to the nearest 0.0001.

The insurer constructs a hedge portfolio at the issue date, after deduction of the management
charge, based on the Black-Scholes option valuation.

You are given the following assumptions:

(i) The risk-free rate is r = 0.04 continuously compounded.
(ii) The volatility is σ = 0.30.
(iii) Mortality follows the Standard Ultimate Mortality Model.
(iv) There are no exits other than death.

(b)
(i) Show that, in the calculation of the contribution of year 1 to the cost of the hedge
portfolio at issue, 𝑑𝑑1 is -0.018 to the nearest 0.001. You should calculate the value to
the nearest 0.0001.
(ii) Show that the cost of the contribution of year 1 to the cost of the hedge portfolio at
issue is 77 to the nearest 1. You should calculate the value to the nearest 0.01.
(iii) Calculate the cost of the hedge portfolio at issue.
(iv) Let c denote the component of the annual 3% management charge that is required to
fund the GMDB guarantee. You are given that c is a portion of the 3% annual charge at
the start of each year, not an additional charge. Calculate c.
(v) Without further calculation, state with reason whether the cost of the hedge portfolio at
issue would decrease if the fund price were 2 per share at inception.

At the end of year 1, the fund price per share has doubled from its initial value. The insurer
offers, and the policyholder accepts, a reset. Future GMDBs are based on the fund value at the
end of year 1, accumulated as before. The insurer calculates a new hedge portfolio

(c)
(i) Let D be the value of d1 in the calculation of the first year after reset to the cost of the
hedge portfolio. Show that the ratio of D to your answer to (b)(i) is 1.00 to the nearest
0.01.

Page 114
 (ii) Calculate the value of the hedge portfolio at time 1.

The insurer decides it will also offer these policies with a GMMB as an option, either with no
GMDB or with the existing GMDB.

Let ValueGMDB, ValueGMMB, and Valueboth denote the corresponding values of the hedge fund at
time 0. Your colleague suggests that Valueboth < ValueGMDB + ValueGMMB, since the GMDB and
GMMB payouts are negatively correlated.

(d) State whether you agree with your colleague. Justify your response.

Page 115