Faculty of Actuaries Institute of Actuaries

EXAMINATIONS

18 April 2000 (am)

Subject 105 — Actuarial Mathematics 1

Time allowed: Three hours

INSTRUCTIONS TO THE CANDIDATE

1. Write your surname in full, the initials of your other names and your
Candidate’s Number on the front of the answer booklet.

2. Mark allocations are shown in brackets.

3. Attempt all 17 questions, beginning your answer to each question on a

separate sheet.

Graph paper is not required for this paper.

AT THE END OF THE EXAMINATION

Hand in BOTH your answer booklet and this question paper.

In addition to this paper you should have available

Actuarial Tables and an electronic calculator.

 Faculty of Actuaries
105—A2000  Institute of Actuaries
1 In the context of a pension scheme, explain the term “prospective service
benefit” and state one example. [2]

2 In a select mortality investigation, θx,r corresponds to the number of deaths

aged x next birthday at entry with duration r at the policy anniversary
following death. θx,r divided by the appropriate central exposed to risk gives
an estimate of µ[y]+t .

Derive the values of y and t to which this estimate applies. State clearly any
assumptions used. [2]

3 Mortality levels for a certain country have been studied at national and
regional level. Explain the circumstances under which a particular region
may have an Area Comparability Factor of 0.5. [2]

4 A 25 year annual premium endowment assurance policy was sold to a life

aged 40 exact at outset. Death benefits are payable at the end of the year of
death. Calculate the Zillmerised net premium reserve at the end of the tenth
year per unit sum assured.

Basis: Mortality: A1967–70 Select

Interest: 3% per annum
Initial expense: 2.5% of the sum assured [3]

5 A life insurance company sells an annual premium whole life assurance policy
with benefits payable at the end of the year of death. Expenses are incurred at
the start of each year, and claim expenses are nil.

(a) Write down a recursive relationship between the gross premium

reserves at successive durations, calculated on the premium basis.
Define all symbols used.

(b) Explain the meaning of this formula. [3]

6 1
Calculate A30: 30:30 using A1967–70 mortality and interest of 4% per annum. [3]

105—2
7 A pension scheme provides a pension of 1
45
of final pensionable salary for each
year of service, with a maximum of 2
3
of final pensionable salary, upon
retirement at age 65.

Final pensionable salary is defined as average annual salary over the 3 years
immediately preceding retirement.

A member is now aged exactly 47 and has 14 years of past service. He earned
£40,000 in the previous 12 months.

Calculate the expected present value now of this member’s total pension on
retirement, using the symbols defined in, and assumptions underlying, the
Formulae and Tables for Actuarial Examinations. [3]

8 The random variables Tx and Ty represent the exact future lifetimes of two
lives aged x and y respectively.

Let the random variable g(T) take the following values:

R|a if max{ Tx ,T y } ≤ n
g(T) = S|a
n

if max{ Tx ,T y } > n
T max{ Tx ,T y }

(i) Describe the benefit which has present value equal to g(T). [2]

(ii) Express E[g(T)] as concisely as possible in the form of an annuity

function. [1]
[Total 3]

9 Define the term “asset share” in the context of a with-profit policy. [3]

10 The number of people sick with a new disease is expected to increase

according to the logistic model. The initial number sick is 100,000 and it is
believed that the number sick with the disease will never exceed 250,000. At
the outset, sickness is assumed to grow at 5% per annum.

Calculate the number of people who are sick after exactly 10 years. [3]

11 A multiple decrement table is subject to two forces of decrement α and β.

Under the assumption of a uniform distribution of the independent
decrements over each year of age, ( aq )αx = 0.2 and ( aq )βx = 0.05.

Calculate q αx and q βx . [3]

105—3 PLEASE TURN OVER

12 An insurer sells combined death and sickness policies to healthy lives aged 35.
The policies, which are for a term of 30 years, pay a lump sum of £20,000
immediately on death, with an additional £10,000 if the deceased is sick at the
time of death. There is also a benefit of £3,000 per annum payable
continuously to sick policyholders. There is no waiting period before benefits
are payable. Annual premiums of £500 are payable continuously by healthy
policyholders.

The mortality and sickness of the policyholders are described by the following
multiple state model, in which the forces of transition depend on age.

σx
H = healthy S = sick

ρx

µx νx

D = dead

p xgh,t is defined as the probability that a life aged x who is in state g(g = H, S
or D) is in state h at age x + t (t ≥ 0 and h = H, S or D). The force of interest is
δ.

Express in integral form, using the probabilities and the various forces of
transition, the expected present value of one such policy at its commencement.
[4]

13 A pension scheme provides the following benefit to the spouse of a member,

following the death of the member in retirement:

A pension of £10,000 per annum payable during the lifetime of the spouse, but
ceasing 30 years after the death of the member if that is earlier. All payments
are made on the anniversary of the member’s retirement.

Calculate the expected present value of the spouse’s benefit in the case of a
female member retiring now on her 60th birthday, who has a husband aged
exactly 64.

Basis: a(55) Ultimate mortality at 8% per annum interest [8]

105—4
14 (i) Discuss the suitability of the crude death rate, the standardised
mortality rate and the standardised mortality ratio for comparing

(a) the mortality, at different times, of the population of a given

country

(b) the mortality, at a certain time, of two different occupational

groups in the same population [6]

(ii) The following table gives a summary of mortality for one of the
occupational groups and for the country as a whole.

Occupation A Whole Country

Exposed Exposed
Age group to risk Deaths to risk Deaths
20–34 15,000 52 960,000 3,100
35–49 12,000 74 1,400,000 7,500
50–64 10,000 109 740,000 7,100
37,000 235 3,100,000 17,700

Calculate the crude death rate, the standardised mortality rate and the
standardised mortality ratio for Occupation A. [4]
[Total 10]

15 An insurer issues 15 year term assurance policies to lives aged exactly 50 who
have provided satisfactory answers on a basic medical questionnaire. The sum
assured of £100,000 is payable at the end of the year of death during the policy
term. The policy includes an option at the end of the term which allows
policyholders to convert their policy to a whole life policy for the same sum
assured (payable at the end of the year of death). The premiums payable for
this whole life policy are the office’s standard premium rates, irrespective of
the health of the policyholder effecting the option.

The insurer calculates annual premiums for all products using A1967–70
Select mortality and 4% per annum interest, with an expense allowance of 5%
of all premiums.

(i) Describe:
(a) the North American method and
(b) the conventional method
for pricing mortality options. [5]

(ii) Using the conventional method calculate the extra annual premium the
insurer should charge above that for a term assurance policy with no
option. [5]

(iii) Without performing any further calculations, describe what other

considerations would arise if the option were such that the policy could
be converted on the 10th or the 15th anniversary. [3]
[Total 13]

105—5 PLEASE TURN OVER

16 A life insurance company issues a 4 year unit-linked policy with a level
premium of £1,000 payable annually in advance to a life aged exactly 61. The
death benefit at the end of the year of death is £4,000, or the bid value of the
units if greater. The maturity value is the bid value of the units.

95% of each premium is invested in units at the offer price. The bid price is
95% of the offer price. Premiums payable in the first two years are invested in
capital units which are subject to a management charge of 6% per annum.
Subsequent premiums are invested in accumulation units for which the
management charge is 1% per annum. Management charges are deducted at
the end of each year from the bid value of units before benefits are paid.

Capital units are actuarially funded using factors of A61+t :4 −t calculated using
A1967–70 Ultimate with 5% per annum interest for t = 0, 1, 2 and 3.

The company uses the following assumptions to profit test this contract:

Rate of interest on unit investments: 8% per annum

Rate of interest on sterling fund: 4% per annum
Mortality: A1967–70 Ultimate
Initial expenses: £100 plus 20% of the first premium
Renewal expenses: £20 on the first policy anniversary, and
increasing with inflation at 5% per
annum on each subsequent anniversary

(i) Using a risk discount rate of 12% per annum calculate the expected net
present value of the profit on this contract. [12]

(ii) Without performing any further calculations, state with reasons

whether your answer in (i) would be higher or lower for each of the
following, if

(a) the risk discount rate were 10% per annum

(b) the policyholder were aged 50 exactly
(c) capital units were actuarially funded at 4% per annum [5]
[Total 17]

105—6
17 A man aged exactly 30 effected a 35 year with profit endowment assurance for
a sum assured of £50,000. Level annual premiums are payable throughout the
policy term, ceasing on earlier death. The sum assured, with attaching
bonuses, is payable at the end of the year of death, or on maturity. Compound
reversionary bonuses vest at the end of each policy year.

(i) Show that the premium (to the nearest £1) is £990 per annum using the
following basis:

Mortality: A1967–70 Ultimate

Interest: 6% per annum
Expenses: Initial: £250 plus 60% of the annual premium
Renewal: 2.5% of second and subsequent premiums
Bonuses: 1.923% per annum [7]

(ii) The random variables Tx and Kx represent the exact future lifetime and
the curtate future lifetime of a life aged x, respectively. Using Tx , Kx or
both, express, in stochastic form, the gross future loss random variable
for this policy at duration t, where t is an integer and 0 < t < 35. Use
those elements of the basis set out in part (i) as needed. Assume bonus
declarations have been in line with the original bonus loadings. [3]

(iii) Immediately before the 11th premium is due, and just after the 10th
bonus has brought the sum assured plus accumulated bonuses to
£60,000, the policyholder wishes to convert the policy to a non-profit
whole life policy, with premiums of an unchanged amount payable until
death.

Using the mortality and interest elements of the premium basis set out
in part (i), and allowing for renewal expenses of 2.5% of all future
premiums as well as an alteration expense of £100, calculate the revised
sum assured. [6]

(iv) State one other consideration, if any, that the office should take into
account before completing the alteration in (iii), and explain why they
should do so. [2]
[Total 18]

105—7