Exams P1

Question 1

Describe the features of cash as an investment vehicle

Answer 1

General

• Cash typically yields low positive investment returns
• But is very marketable and liquid
• With very little risk attached
• Great for meeting regular outgo, such as expenses or claims in payment

Question 2

List reasons why an insurer would be monitoring their experience.

Answer 2

o Update assumptions for future experience
o monitor actual compared to expected experience and take corrective actions as needed
o monitor any trends in experience
o provide management information to aid business decisions
o make more informed decisions about pricing and about the adequacy of reserves.

Question 3

Describe the advantages of offering a tiered benefit structure for the CI benefit.

Answer 3

a. CI product becomes more comprehensive with benefit offered at levels of disease progression that would not have happened under non-tiered
b. Payment more closely matches financial need reducing incentive for anti-selection
c. Multiple claims are possible which enhances customer satisfaction and retention
d. Could be a competitive advantage/differentiator
e. Could be cheaper as payment is generally expected to be less than 100%
f. Considered more fair to the policyholder

Question 4

Describe the disadvantages of offering a tiered benefit structure for the CI benefit.

Answer 4

a. More complex than non-tiered making it harder to compare products in the market
b. Significant systems development/sales training may be required
c. Potential for higher degree of claims dispute
d. Data to price more accurately could be difficult to find

Question 5

Discuss the advantages of adding Alzheimers to the list of covered conditions.

Answer 5

A worthwhile addition valued by customers, giving competitive edge. Easily identified by the public. Readily communicable to sales people.
If incidence low, increase in premiums may be low.

Question 6

Discuss the disadvantages of adding Alzheimers to the list of covered conditions.

Answer 6

Difficult to draft wording for a mental illness addition. Diagnosis does not tend to be definitive
Onset tends to be in old age – difficult to distinguish from dementia
Good relevant morbidity data hard to find. There may be many potential claims declined if definition is not clear. Addition may be less relevant to younger primary target market.
Difficulty in underwriting/exclusion. Leading to anti-selection
especially if no one else is offering it. Difficulty in approving claims
no independent test. Might not be able to get reinsurance. Increased premiums in competitive market. Expenses of change to claims processing, underwriting etc. arising from two separate contracts.

Question 7

Outline the needs that a LTCI product aims to meet.

Answer 7

• Financing of care at home, including housing costs, care costs, and any aids required at elderly age when a person is unable to fully look after themselves
• Financing care in specialized facilities, e.g. care centres
• Offers financing towards higher levels of care, e.g. nursing care as opposed to informal or less specialized care

Question 8

Outline why it is important for the insurer to monitor aspects of new business sales.

Answer 8

 May be required by the regulator as part of ongoing monitoring.
 To provide management with information, such as trends in sales/mix, to assist in
strategic decision making.
 To enable the insurer to compare actual sales experience to that expected. This is
particularly important for a new company, as estimates of sales/mix etc. will be an
important component of the pricing assumptions and the company will not have
much experience in this regard.
 Feedback into the actuarial control cycle will be of particular relevance to this
relatively inexperienced company.
 Information on sales will be needed for the reserving process.

Question 9

Outline why it is important for the insurer to monitor volumes of new business sales.

Answer 9

 If volumes are lower than anticipated profits are likely to be lower than
anticipated.
 It may also invalidate assumptions relating to per policy expense loadings.
 If the volume of new business is much higher than anticipated this may
introduce a risk of not having enough capital/financial resources to finance the
new business strain.
 This is of particular importance to a relatively new company which may not
have large resources.
 Operationally there is also a risk that the level of service being offered to clients
and intermediaries may deteriorate as a result of high volumes of sales.
 Functions such as underwriting may also suffer if sales volumes are too high.
 This can lead to future mortality experience being worse than expected.
 This is exacerbated as the company sells mainly protection policies.
 It will be important to compare new business volumes with those of
competitors to ascertain growth in market share.
 It can help assess the effectiveness of marketing campaigns.
 It may be used to assist with executive remuneration based on sales volumes.
 To ascertain commissions and the effectiveness of the distribution channels.

Question 10

Outline why it is important for the insurer to monitor Nature/type of business aspects of new business sales.

Answer 10

 This is important to monitor since supervisory reserves will depend on the
nature/type of business sold.
 Whole of life cover tends to require more supervisory reserves than term
assurance.
 Similarly, this could include monitoring the split between regular and single
premium business.

Question 11

Outline why it is important for the insurer to monitor Average size of policies aspect of new business sales.

Answer 11

 If policies are larger than expected new business strain could be higher than
expected.
 If policies are smaller than expected then expenses may not be adequately
recouped.
 This risk is related to the extent of cross-subsidisation between large and small
policies.
 The average size of policies may give an indication of the need for reinsurance.

Question 12

Outline why it is important for the insurer to monitor Source of business aspect of new business sales.

Answer 12

 To compare the effectiveness of the call centre compared to the broker
distribution channels.
 To determine the effectiveness of specific sales agents.
 Experience for the call centre is likely to be different to that of the brokers.
 This is likely to be particularly so with mortality and persistency.
 If such differences are allowed for through differential pricing then the risk is
reduced.
 Monitoring of the take-up rate of quotations can be a useful indicator of the
effectiveness of sales staff.
 It could

Question 13

The mortality rates will be set in two parts by considering:

Answer 13

 The base mortality, and

 The mortality trend.

Question 14

Suggest ways in which insurers can discourage unhealthy lives, or attract healthier lives, in the
absence of medical underwriting.

Answer 14

 Implement, or increase waiting periods on death as a result of pre-existing
conditions or illness.
 Implement exclusions on pre-existing conditions [note that the insurer may still do
medical underwriting, although it may not utilize the information for setting
premiums].
 Implement no-claims discounts or cash-back on survival to a certain term.
 Implement new rating factors which are a proxy for health such as rating on level
of physical activity.
 Targeted marketing to lives which are expected to be healthy based on location,
affinity group or occupation.
 Avoid marketing to lives which are expected to be unhealthy.

Question 15

Stochastic simulation of investment performance:

Answer 15

 Projecting forward the value of the fund using a stochastic model of returns on the fund.
 This would be done using a large number of simulations.
 The probability distribution of investment returns will be best estimate and calibrated to current market conditions.
 The best estimate of the liability for the guarantee is the median of the present value of the cost of the guarantee discounted at an appropriate rate.

Question 16

what are the disadvangeas of reinsurance

Answer 16

 Reinsurance comes at a cost, and the company will have to give away some of its
profits if it enters into a reinsurance arrangement
 The reinsurer may insist on more stringent risk management than the insurer would
like.
 E.g. stricter underwriting or claims processes
 The reinsurance processes may result in a slower service offering to the
policyholder.
 This may limit the ability of the insurer to reach its growth targets.
 The insurer will have increased counterparty risk, as it is exposed to the risk of the
reinsurer failing to meet its obligations.

Question 17

The appropriation price is the price at which a unit would be created and is determined as:

Answer 17

 the net asset value of the fund on an “offer basis”
 divided by the number of units existing at the time of calculation (before any new
units are created)

Question 18

The net asset value of the fund on an “offer basis” is calculated as:

Answer 18

 the market “offer price” value of the assets held by the fund
 plus the expenses that would be incurred in the purchase (including stamp duty)
 plus the value of any current assets (e.g. cash on deposit)
 less the value of any current liabilities (e.g. investments purchased but not yet
settled)
 plus any accrued income (e.g. interest income on deposits) net of any outgo (e.g.
fund charges)
 less any allowance for accrued tax, if applicable

Question 19

list the checks that would be used to verify the ph data used to calculate the ph liabilities

Answer 19

 Reconciliation of current data with data from the previous valuation using data movements.
 Check data movements against accounting data (e.g. movements off with claims paid).
 Consistency checks (e.g. average sum assured for each class of business is sensible and consistent with values from previous valuation).
 Check for unusual values (e.g. unreasonably large sum assured or low premium).
 Spot checks for accuracy for individual records using other records and administration files.

Question 20

describe the process used by an insurer to perform a mortality investigation

Answer 20

The whole life product for higher income customers is a well-established product and the new product has been sold for a number of years so there should be a sufficient volume of stable data internal data to use for this exercise.
Consider the period of data to be used for the product so that information is not outdated.
Divide data into homogenous groups: by product (higher income and low income), age, gender, sales channel, region etc.
Ensure that there are enough data in each group to make the analysis for that group statistically credible.
Calculate the crude mortality rate by taking the number of deaths divided by the exposed to risk for each homogeneous group.
Compare the results of the experience investigation with the mortality assumption and standard mortality tables.
Investigate whether there is any evidence of trends in the mortality experience.
Also investigate any unusual circumstances that could have affected the mortality experience.

Question 21

state the errors that may affect unit pricing

Answer 21

 Not changing the pricing basis when the flows for the portfolio change direction.
 Incorrectly allowing for taxation in the unit pricing process.
 Using the incorrect bid offer spread.
 Errors in the pricing of assets.
 Unfairly/inequitably treating policyholders due to timing mismatches or rectifying past errors.
 Inaccurate/outdated current asset and current liability values.
 System malfunctions or breakdowns resulting in delays in available pricing.

Question 22

Coinsurance on original terms:

Answer 22

The insurance company sets the premium, and the reinsurance premium is in direct proportion to this.
The amount of commission agreed with the reinsurer sets the price of the reinsurance arrangement, and is usually very significant.

Question 23

Coinsurance using level risk premium approach:

Answer 23

The reinsurer sets a level premium for its share of the risk, based on its share of the full sum assured.
The insurer then calculates its own premium rates in the knowledge of the reinsurance premiums it will be paying.
The reinsurance commission is usually not significant.

Question 24

state 8 principles that an insurer should consider when deciding on how to calcualte surrender values

Answer 24

 Take policyholders’ reasonable expectations into account.
 At early durations, the surrender values should not appear too low compared with premiums paid taking into account any projections provided at the new business stage.
 At later durations, surrender values should be consistent with projected maturity values.
 Surrender values should not exceed earned asset shares, in aggregate, over a reasonable time period.
 Take account of surrender values offered by competitors.
 Should not be subject to frequent change, unless dictated by financial conditions.
 Should not be excessively difficult to calculate, taking into account the computing power available.
 Should be capable of being documented clearly.
 Should avoid selection against the insurer.

Question 25

LTCI costs are linked to a combination of:

Answer 25

 Living costs (food, clothing, heating and amenities) which may be linked to Consumer Price Inflation (CPI).
 Housing costs (rent, mortgage payments, property rates and taxes) may be linked to CPI.
 Personal care costs (i.e. carer or nursing costs) may be linked to average salary inflation (or higher due to scarce skills).
 Other needs may include intermediate/recuperative care costs (following an acute event requiring hospitalisation) may be linked to medical inflation.

Question 26

what investments are appropriate to back LTCI

Answer 26

 Equities and property can be expected to generate positive real returns over long periods, however market values can be volatile over short/medium terms.
 Offshore equities and property provide diversification benefit, and some protection against inflation (if this is caused by weakening currency, which may be important for medical inflation).
 Developing market equities and property might provide enhanced returns (due to faster growing economies) but returns may be very volatile (hence exposure should be limited).
 CPI-linked government bonds (smaller extent), since some costs are expected to increase by CPI.
 Direct property has the disadvantages of high dealing costs and low marketability, so a small fund may consider investing property indirectly.

Question 27

Outline the needs that a LTCI product aims to meet.

Answer 27

• May or may not indemnify the patient against the cost of long-term care, depending on policy specifics

Question 28

Outline the needs that a LTCI product aims to meet.

Answer 28

• Reduce strain on government for welfare for old-age care

Question 29

Outline the needs that a LTCI product aims to meet.

Answer 29

• Facilitate the costs of care in informal care settings .e.g. changes in the home such as stair-lifts.
• With modern culture of families spread around the world, this product could provide care for one’s parent while living somewhere else.

Question 30

Outline the needs that a LTCI product aims to meet.

Answer 30

• Provide respite for informal carers by providing temporary nursing care at one’s home

Question 31

Outline the needs that a LTCI product aims to meet.

Answer 31

• Provide for different levels of support that a person/family may need, e.g. Provide support in choosing service providers, or advise on how to tailor individual care strategies.