CT5 – P XS – 11

Series X Solutions

ActEd Study Materials: 2011 Examinations

Subject CT5

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Series X Solutions

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CT5: Assignment X1 Solutions Page 1

Assignment X1 – Solutions
Markers: This document does not necessarily give every possible approach to solving
each of the questions. Please give credit for other valid approaches.

Solution X1.1

We can write:

l 9129.717
exp ⎛ − ∫ μ[60]+t dt ⎞ = 2 p[60] = 62 =
2
= 0.985596 [1]
⎝ 0 ⎠ l[60] 9263.1422

So:

2
∫0 μ[60]+t dt = − loge 0.985596 = 0.01451 [1]

Solution X1.2

(i) Present value random variable

The present value random variable is 5, 000aT . [1]

42

(ii) Variance formula

For the variance we can write:

(
var 5, 000aT
42
) = 5, 000 var ( a )
2
T42

Using the formula for a continuously-payable annuity gives:

( )
⎛ 1 − vT42 ⎞ ⎛ 5, 000 ⎞ 2
2
5, 000 var aT
42
2
= 5, 000 var ⎜
⎝ δ ⎠ ⎝ δ ⎠
⎟ =⎜ ⎟ ( )
var vT42 [1]

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Page 2 CT5: Assignment X1 Solutions

Now vT42 represents the present value random variable of a whole of life assurance with
a benefit of 1 payable immediately on death. Substituting in the formula for the
variance of this benefit, which is on Page 36 of the Tables, we get:

2 2
⎛ 5, 000 ⎞
( ) ⎛ 5, 000 ⎞ ⎡ ⎡ 2
( ) ( )
T42 ⎤ ⎤
T42 ⎤ ⎡ 2
T42
⎜⎝ ⎟⎠ var v =⎜ E v − E v
δ ⎝ δ ⎟⎠ ⎢⎣ ⎣⎢ ⎦⎥ ⎣ ⎦ ⎥⎦

2
⎛ 5, 000 ⎞
=⎜
⎝ δ ⎟⎠ ( 2
A42 − ( A42 ) 2 ) [1]

[Total 2]

(iii) Variance calculation

Evaluating this using an interest rate of 4%, we get:

2
⎛ 5, 000 ⎞ ⎛
( ) ( )
½ 2 2⎞
⎜⎝ ⎜ (1 + i1 ) A42 − (1.04)½ A42 ⎟⎠ [1]
δ ⎟⎠ ⎝

where i1 = 1.042 − 1 .

So the variance is:

( )
2
⎛ 5, 000 ⎞ ⎛ 1 2⎞
⎜⎝ ⎟ 1.04 × 0.07758 − (1.04) 2 × 0.24787
⎟⎠ = 272,810, 000
ln1.04 ⎠ ⎜⎝

= (£16,517) 2 [1]
[Total 2]

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CT5: Assignment X1 Solutions Page 3

Solution X1.3

This question is CT5 April 2005 Question 2.

(a) Expression for expected present value

The expected present value of this temporary annuity-due is:

1 − A50:20
a50:20 = [1]
d

(b) Value of annuity

From the Tables:

D70 D
A50:20 = A 1 +A 1
= A50 − A70 + 70
50:20 50:20 D50 D50

517.23 517.23
= 0.32907 − × 0.60097 +
1,366.61 1,366.61
= 0.48009 [1]

So:

1 − 0.48009
a50:20 = = 13.518 [1]
0.04 /1.04

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Page 4 CT5: Assignment X1 Solutions

Solution X1.4

(i) Present value random variable

The present value random variable is:

⎧100v if K x = 0
⎪
PVRV = ⎨200v 2 if K x = 1 [Total 2]
⎪0 if K x ≥ 2
⎩

(ii) Standard deviation

The EPV of the benefit is:

EPV = 100v qx + 200v 2 px qx +1

100 200
= × 0.025 + × 0.975 × 0.030
1.06 1.062
= 7.56497 [1]

and:

( ) ( )
2
E PV 2 = (100v ) qx + 200v 2
2
px qx +1

2 2
⎛ 100 ⎞ ⎛ 200 ⎞
=⎜ ⎟ × 0.025 + ⎜ × 0.975 × 0.030
⎝ 1.06 ⎠ ⎝ 1.062 ⎟⎠

= 1,149.24870 [2]

So the variance of the present value random variable is:

( )
var ( PV ) = E PV 2 − ( EPV ) = 1, 092.01993
2

and the standard deviation is 1, 092.01993 = 33.0457 [1]

[Total 4]

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CT5: Assignment X1 Solutions Page 5

Solution X1.5

(i) All alive in 20 years

The probability that a life aged 50 is still alive in 20 years’ time is:

l70 79,970
20 p50 = = = 0.830883 [1]
l50 96, 247

So the probability that 5 independent lives aged 50 are all alive in 20 years’ time is:

0.8308835 = 0.39600 [1]

[Total 2]

(ii) Value of k

We want to find the largest integer k such that:

P ( K50 ≥ k ) ≥ 0.9

Now:

l50+ k
P ( K50 ≥ k ) = k p50 =
l50

Setting this equal to 0.9 gives:

l50+ k = 0.9 l50 = 0.9 × 96, 247 = 86, 622.3 [1]

From the Tables, we see that 86,622.3 lies between l65 ( = 87, 093) and l66 ( = 85,875) .
[1]

Since we require k p50 ≥ 0.9 , we must have k = 15 . [1]

[Total 3]

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Page 6 CT5: Assignment X1 Solutions

Solution X1.6

(i) We have:

1
A =A − A1x:10
x:10 x:10

=A
x:10 (
− Ax − v10 10 px Ax +10 )
=A
x:10 (
− Ax − A
1
x:10
Ax +10 )
1
= 0.75 − 0.20 + 0.25 A
x:10

1
= 0.55 + 0.25 A [2]
x:10

So:

1 1 55
0.75 A = 0.55 ⇒ A = = 0.73333 [1]
x:10 x:10 75
[Total 3]

(ii) We now have:

1
A1x:10 = A −A = 0.75 − 0.73333 = 0.01667 [Total 1]
x:10 x:10

(iii) Also:

1 55
10| Ax =A × Ax +10 = × 0.25 = 0.18333 [Total 1]
x:10 75

Alternatively, you could write:

10| Ax = Ax − A1x:10 = 0.20 − 0.01667 = 0.18333

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CT5: Assignment X1 Solutions Page 7

Solution X1.7

The survival probability can be written as:

2 p63.25 = 0.75 p63.25 × p64 × 0.25 p65 [1]

From the Tables:

p64 = 1 − q64 = 0.97801

l65
You could also have calculated p64 as .
l64

(a) UDD

Under the uniform distribution of deaths assumption:

0.25 p65 = 1 − 0.25q65 = 1 − 0.25 × 0.02447 = 0.99388 [1]

and:

p63 p63 0.98035

0.75 p63.25 = = = = 0.98519 [1]
0.25 p63 1 − 0.25q63 1 − 0.25 × 0.01965

So:

2 p63.25 = 0.98519 × 0.97801 × 0.99388 = 0.95763 [½ ]

You could also have calculated 0.75 p63.25 as:

0.75q63
1− 0.75 q63.25 = 1−
1 − 0.25q63

Markers: please give credit for correct alternatives.

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Page 8 CT5: Assignment X1 Solutions

(b) CFM

Under the constant force of mortality assumption:

= ( p65 )
0.25
0.25 p65 = 0.975530.25 = 0.99383 [1]

and:

= ( p63 ) = ( 0.98035)
0.75 0.75
0.75 p63.25 = 0.98523 [1]

So:

2 p63.25 = 0.98523 × 0.97801 × 0.99383 = 0.95761 [½ ]

[Total 6]

Solution X1.8

(i) Explanation of symbols

(a) 3 q[55]+1 is the probability that a life aged exactly 56, who entered the select
population 1 year ago, dies between the ages of 59 and 60. [2]

(b) eD50 is the complete expectation of life for a life now aged exactly 50 who
experiences ultimate mortality, ie the expected number of years in the future that
(50) will live. [1]
[Total 3]

(ii) Evaluation

Using AM92 mortality, we have:

d59 66.7876
3 q[55]+1 = = = 0.00702 [1]
l[55]+1 9,513.9375

and eD50 = e50 + 0.5 = 30.065 [1]

Here we are assuming that deaths occur halfway between birthdays on average. [1]
[Total 3]

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CT5: Assignment X1 Solutions Page 9

Solution X1.9

There are three possible outcomes at the end of 20 years:

● both (30) and (40) alive
● just one of (30) and (40) alive
● neither of (30) and (40) alive

The probabilities of these events and the net present value of the amount due to the trust
are:

Event Present Value Probability

(30), (40) alive 20, 000 20 p × p = 0.9785 × 0.9423

v4% = 3, 042.58 20 30 20 40
3 = 0.9220

only one of (30), (40) 20, 000 20

v4% = 4,563.87 20 p30 (1 − 20 p40 ) + 20 p40 (1 − 20 p30 )
alive 2 = 0.9785 × 0.0577 + 0.9423 × 0.0215
= 0.0767

(30), (40) both dead 20

20, 000v4% = 9,127.74 (1 − 20 p30 )(1 − 20 p40 )
= 0.0577 × 0.0215 = 0.0012
[4]
So the required expected value is:

3, 042.58 × 0.9220 + 4,563.87 × 0.0767 + 9,127.74 × 0.0012 = £3,166 [1]

and the variance is:

3, 042.582 × 0.9220 + 4,563.87 2 × 0.0767 + 9,127.742 × 0.0012 − 3,166 2

= 207,578 [2]

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Page 10 CT5: Assignment X1 Solutions

Solution X1.10

This question is CT5 April 2005 Question 4.

Let X denote the annual annuity payment. Then:

(
X a(12) + v10 10 p60 a70
10
(12)
)= 200, 000 [1]

From Subject CT1:

i
a(12) = a10 = 1.032211 × 7.3601 = 7.5972 [1]
10
d (12)

The formula for a whole life annuity-due payable m thly in advance is given on Page 36
of the Tables. From this we have:

(12) 11 11
a70 = a70 − = 9.140 − = 8.682 [1]
24 24

So:

⎛ 8, 054.0544 ⎞
X ⎜ 7.5972 + 1.06 −10 × × 8.682⎟ = 200, 000
⎝ 9, 287.2164 ⎠

200, 000
⇒X = = £16,947 [1]
11.8015

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CT5: Assignment X1 Solutions Page 11

Solution X1.11

(i) Description of benefit

The benefit is an annuity of 10,000 pa payable annually in advance for a maximum of

10 years, but ceasing on earlier death. [1]

(ii) Proof

We can write:

( min K +1, n}
{
) = 1− A
( )
⎛ 1 − v min{ K +1, n} ⎞ 1 − E v
x:n
ax:n = E amin K +1, n = E ⎜ ⎟=
{ } d d d
⎝ ⎠
[1½]

Rearranging this gives the required result:

Ax:n = 1 − d ax:n [½]

[Total 2]

(iii) Expected present value and standard deviation

The expected present value is:

9
10, 000 ax:10 = 10, 000 ∑ v k k px
k =0

9
= 10, 000 ∑ e −0.04k e −0.02 k
k =0

⎛ 1 − e −0.06×10 ⎞
= 10, 000 ⎜ ⎟
⎝ 1 − e −0.06 ⎠

= 77, 476.56 [2]

We have used the result that the sum to n terms of a geometric series
a + ar + ar 2 + " + ar n −1 is:

sn =
(
a 1 − rn )
1− r

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Page 12 CT5: Assignment X1 Solutions

The variance of the present value random variable is:

var (W ) = 10, 0002 var ⎡ amin K +1,10 ⎤

⎣⎢ { } ⎦⎥

⎡ 1 − v min{ K +1,10} ⎤
= 10, 0002 var ⎢ ⎥
⎢⎣ d ⎥⎦

10, 0002 min{ K +1,10}

= var ⎡⎢ v ⎤
⎥⎦ [1]
d 2 ⎣

Now v {
min K +1,10}
is the present value of a benefit of 1 paid at time 10 or at the end of
the year of death of ( x) , whichever is sooner. So it is the present value of a 10-year
endowment assurance on ( x) , and:

min{ K +1,10}
( )
2
var ⎡⎢ v ⎤ = 2A
⎥⎦ − Ax:10 [1]
⎣ x:10

We can calculate the values of these assurances using premium conversion:

( )
Ax:10 = 1 − d ax:10 = 1 − 1 − e −0.04 × 7.747656 = 0.696210 [1]

Since 2 Ax:10 is equal to Ax:10 evaluated using a force of interest of 2δ = 0.08 , and:

9
1 − e −0.1×10
ax:10 @ (δ = 0.08) = ∑ e−0.08k e−0.02k = 1 − e −0.1
= 6.642533 [1]
k =0

it follows that:

2
( )
Ax:10 = 1 − 1 − e −0.08 × 6.642533 = 0.489298 [1]

So:

min{ K +1,10} ⎤
var ⎡⎢ v = 0.489298 − 0.6962102 = 0.004589
⎣ ⎦⎥

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CT5: Assignment X1 Solutions Page 13

The standard deviation of the present value random variable is therefore:

10, 000 10, 000

× 0.004589 = × 0.004589 = 17, 277 [1]
d (
1 − e −0.04 )
[Total 8]

Solution X1.12

This question is CT5 April 2005 Question 6.

Uniform distribution of deaths

This assumption says that t qx = t qx for integer values of x and 0 ≤ t ≤ 1 . Since we are
starting at age 45 ½ , which is not an integer, we must first write ½ p45½ in terms of
t p45 . So we begin by writing:

p45
½ p45½ = [½]
½ p45

This can be easily seen from the following diagram:

½ p45 ½ p45½

45 45 ½ 46

p45

Then under the UDD assumption:

1 − q45 1 − q45 1 − 0.00266

½ p45½ = = = = 0.99867 [1]
1 − ½ q45 1 − ½ q45 1 − ½ × 0.00266

Also:

l60 86, 714

14 p46 = = = 0.91023 [½]
l46 95, 266

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Page 14 CT5: Assignment X1 Solutions

So:

14½ p45½ = ½ p45½ × 14 p46 = 0.99867 × 0.91023 = 0.90902 [1]

Constant force of mortality

We now assume that μ is constant between integer ages.

In this case:

= exp ⎛⎜ − ∫ μ45½ +t dt ⎞⎟ = e −½ μ
½
½ p45½
⎝ 0 ⎠

( )
½
= e− μ = ( p45 )
½

= (1 − 0.00266 ) = 0.99867
½
[1]

So:

14½ p45½ = ½ p45½ × 14 p46 = 0.99867 × 0.91023 = 0.90902 [1]

Note that the two assumptions give the same answer correct to 5dp.

Another possible assumption that you could have used here is the Balducci assumption,
which you met in Subject CT4 or Subject 104. The Balducci formula is given on Page
33 of the Tables. It states that 1−t qx +t = (1 − t ) qx for integer values of x and 0 ≤ t ≤ 1 .
In this case:

½ p45½ = 1 − ½ q45½ = 1 − ½ q45 = 1 − ½ × 0.00266 = 0.99867 [1]

So:

14½ p45½ = ½ p45½ × 14 p46 = 0.99867 × 0.91023 = 0.90902 [1]

as before.
[Maximum 5]

Markers: please award the full five marks for correct solutions using either method.

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X1 Solutions Page 15

Solution X1.13

(i) Proof

Starting from the definition of the expectation:

∞
E ⎡ aT | ⎤ = ∫ at| t px′ μ x′ +t dt
⎣ ⎦ 0

1
If we integrate by parts with u = at| = (1 − e −δ t ) and dv = t px′ μ x′ +t dt , then
δ
du = e −δ t dt = vt dt and v = − t p′x . So we get:

∞ ∞ ∞
E ⎡ aT | ⎤ = ⎡ at| ( − t px′ ) ⎤ − ∫ ( − t px′ ) vt dt = 0 + ∫ t px′ vt dt [2]
⎣ ⎦ ⎣ ⎦0 0 0

Expressing t p′x in terms of t px :

p x′ = exp ⎛ − ∫ μ x′ + s ds ⎞ = exp ⎛ − ∫ ( μ x + s + k ) ds ⎞
t t
t ⎝ 0 ⎠ ⎝ 0 ⎠

= exp ⎛ − ∫ μ x + s ds ⎞ e − kt = t px e − kt
t
[1]
⎝ 0 ⎠

So we find that:

∞ ∞ ∞
E ⎡ aT | ⎤ = ∫ t px e − kt vt dt = ∫ t px e − (δ + k )t dt = ∫ t px ( v ′ ) dt
t
[½ ]
⎣ ⎦ 0 0 0

The integral on the RHS represents the value of a continuous whole life annuity valued
at a force of interest of δ ′ = δ + k . So E ⎡ aT | ⎤ = a x calculated at force of interest
⎣ ⎦
δ +k. [½ ]
[Total 4]

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Page 16 CT5: Assignment X1 Solutions

(ii) Expected present value of annuity

The expected present value of this annuity is:

10, 000 a60

evaluated using δ ′ = ln1.05 + 0.00947874 = 0.0582689 .

This is equivalent to an effective annual rate of interest of:

i ′ = eδ ′ − 1 = 0.06 [1]

So the expected present value of the annuity is:

10, 000 a60 @ 6% ≈ 10, 000 ( a60 − ½ ) = 10, 000 × 11.391 = £113,910 [1]
[Total 2]

(iii) Premium conversion relationship

We can write:

⎤ 1 − E ⎡⎣ v x ⎤⎦ 1 − Ax
T
⎡ 1 − vTx
ax = E ⎡ aT ⎤ = E ⎢ ⎥= = [1 ½ ]
⎣ x ⎦ ⎢⎣ δ ⎥⎦ δ δ

Rearranging this gives:

Ax = 1 − δ ax [½ ]
[Total 2]

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CT5: Assignment X1 Solutions Page 17

(iv) Expected present value of term assurance

The expected present value of the term assurance is:

20, 000 A
1
60:10 (
= 20, 000 A60 − v10 10 p60 A70 ) [½ ]

Now:

A60 = 1 − δ a60 = 1 − ln1.05 × 11.391 = 0.44423 [1]

A70 = 1 − δ a70 = 1 − ln1.05 × ( 9.140 − 0.5) = 0.57845 [1]

and:

l70 8, 054.0544
v10 10 p60 = 1.06 −10 × = 1.06 −10 × = 0.484251 [1]
l60 9, 287.2164

So the expected present value of the term assurance is:

20, 000 ( 0.44423 − 0.484251 × 0.57845) = £3, 282 [½ ]

[Total 4]

(v) Integral derivation

Starting from the definition of the expectation:

∞
E ⎡⎣ vT ⎤⎦ = ∫ vt t px′ μ x′ +t dt [½ ]
0

Expressing the dashed functions in terms of their undashed equivalents:

∞
E ⎡⎣ vT ⎤⎦ = ∫ vt t px e − kt ( μ x +t + k ) dt
0

∞ ∞
= ∫ vt t px e − kt μ x +t dt + k ∫ vt t px e − kt dt [2]
0 0

Replacing the integrals by the actuarial functions they represent gives:

E ⎣⎡ vT ⎦⎤ = Ax + ka x (calculated at a force of interest of δ + k ) [½ ]

[Total 3]

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 All study material produced by ActEd is copyright and is
sold for the exclusive use of the purchaser. The copyright
is owned by Institute and Faculty Education Limited, a
subsidiary of the Faculty and Institute of Actuaries.

You may not hire out, lend, give out, sell, store or transmit
electronically or photocopy any part of the study material.

You must take care of your study material to ensure that it

is not used or copied by anybody else.

Legal action will be taken if these terms are infringed. In

addition, we may seek to take disciplinary action through
the profession or through your employer.

These conditions remain in force after you have finished

using the course.

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X2 Solutions Page 1

Assignment X2 – Solutions
Markers: This document does not necessarily give every possible approach to solving
each of the questions. Please give credit for other valid approaches.

Solution X2.1

Let P denote the annual premium. Then:

EPV premiums = Pa[40]:25 = 15.887 P [½]

There are two parts to the benefit. Let’s consider the deferred annuity first.

D65
EPV annuity benefit = 15, 000 a65 [½]
D[40]

The D / D factor is calculated using AM92 select mortality. So:

D65 689.23
= = 0.33579 [½]
D[40] 2, 052.54

The annuity factor is calculated using PMA92C20 mortality. So:

a65 ≈ a65 − 0.5 = 13.666 − 0.5 = 13.166 [½]

Hence:

EPV annuity benefit = 15, 000 × 0.33579 × 13.166 = 66,315.90 [½]

Let’s now consider the death benefit.

EPV death benefit = P ( IA)

1
[40]:25

⎧⎪ D ⎫⎪
= P ⎨( IA)[40] − 65 ⎡⎣ ( IA) 65 + 25 A65 ⎤⎦ ⎬
⎪⎩ D[40] ⎪⎭

= P ⎡⎣ 7.95835 − 0.33579 ( 7.89442 + 25 × 0.52786) ⎤⎦

= 0.87615 P [1½]

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Page 2 CT5: Assignment X2 Solutions

So the equation of value is:

15.887 P = 66,315.90 + 0.87615P [½]

So P = £4, 417.86 . [½]

[Total 5]

Solution X2.2

(i) Four bonus methods

There are three methods of declaring a reversionary bonus, whereby the sum insured is
increased and, once increased, cannot be decreased. [½]
• Simple reversionary bonus: the rate of bonus each year is a percentage of the
initial sum insured. [½]
• Compound reversionary bonus: the rate of bonus each year is a percentage of the
initial sum insured plus previously declared reversionary bonuses. [½]
• Super-compound reversionary bonus: there are two rates of bonus. One is
applied to the basic sum insured, the other is applied to the previously declared
bonuses. [½]

In addition there is the terminal bonus, whereby the sum insured is increased at maturity
or on earlier claim. The terminal bonus rate is normally a percentage of final sum
insured. [1]
[Total 3]

(ii) Net premium reserve

The net premium reserve at time 4 is:

4V = 20, 000 4V[40]:20 + B4 A44:16 [1]

where:

B4 = bonuses declared up to time 4 = 20, 000 ⎡1.044 − 1⎤ = 3,397.17 [½]

⎣ ⎦

Note that net premium reserves for with-profits policies:

• include the value of existing bonuses declared to date
• ignore all future bonuses
• assume a net premium that excludes all bonuses.

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CT5: Assignment X2 Solutions Page 3

Therefore:

⎡ a44:16 ⎤
4V = 20, 000 ⎢1 − ⎥ + 3,397.17 A [½]
44:16
⎢ a[40]:20 ⎥
⎣ ⎦

⎡ 11.934 ⎤
= 20, 000 ⎢1 − + 3,397.17 × 0.54100 [½]
⎣ 13.930 ⎥⎦

= £4, 704 [½]

[Total 3]

Alternatively, we could have calculated:

4V = 23,397.17 A44:16 − P a44:16

where:

A[40]:20 0.46423
P = 20, 000 = 20, 000 × = 666.52
a[40]:20 13.930

giving:

4V = 23,397.17 × 0.54100 − 666.52 ×11.934 = £4, 704

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Solution X2.3

If the annual premium is P , then:

EPV premiums = Pa[50]:10| = 8.318P [1]

1 1
EPV benefits = 10, 000 A + 15, 000 v5 5 p[50] A
[50]:5 55:10

⎛ D ⎞ D ⎛ D65 ⎞
= 10, 000 ⎜ A[50] − 55 A55 ⎟ + 15, 000 55 ⎜⎝ A55 − D A65 ⎟⎠
⎝ D[50] ⎠ D[50] 55

⎛ 1,105.41 ⎞
= 10, 000 ⎜ 0.32868 − × 0.38950⎟
⎝ 1,365.77 ⎠

1,105.41 ⎛ 689.23 ⎞
+15, 000 × ⎜ 0.38950 − × 0.52786⎟
1,365.77 ⎝ 1,105.41 ⎠

= 867.31 [3]

EPV expenses = 0.25 P + 0.05 P(a[50]:10| − 1)

= (0.25 + 0.05 × 7.318) P
= 0.6159 P [1]

So the premium equation is:

8.318 P = 867.31 + 0.6159 P

and:

P = 867.31/ 7.7021 = £112.61 [1]

[Total 6]

Note for markers: any candidate who uses ultimate instead of select mortality, but
otherwise performs the calculations correctly, will get an answer of £113.36. Award 5
marks for this.

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CT5: Assignment X2 Solutions Page 5

Solution X2.4

(i)(a) Gross premium

Let P denote the gross annual premium. Then the equation of value is:

P ax:n = A1x:n + I + e ax:n

So:

A1x:n + I + e ax:n
P= [1]
ax:n

(i)(b) Prospective gross premium reserve

The prospective gross premium reserve at integer time t is:

tV
pro
= A1 + e ax +t:n −t − P ax +t:n −t [1]
x +t:n −t

(i)(c) Retrospective gross premium reserve

The retrospective gross premium reserve at integer time t is:

retro ⎡ 1 ⎤ (1 + i )t
tV = ⎣ P ax:t − Ax:t − I − e ax:t ⎦
  [1]
t px
[Total 3]

(ii) Equality of reserves

The premium equation is:

P ax:n = A1x:n + I + e ax:n

Splitting this up at time t , it is equivalent to:

( )
P ax:t + vt t p x ax +t:n −t = A1x:t + vt t p x A
1
x +t:n −t (
+ I + e ax:t + vt t p x ax +t:n −t )
[1]

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Page 6 CT5: Assignment X2 Solutions

Now, rearranging so that all the terms containing vt t px are on the same side of the
equation, we get:

Pax:t − A1x:t − I − e ax:t = vt t p x A

1
( x +t:n −t
+ e ax +t:n −t − Pax +t:n −t ) [1]

Dividing both sides through by vt t px then gives:

(1 + i ) t
( Pa
x:t
− A1x:t − I − e ax:t ) t px
=A
1
x +t:n −t
+ e ax +t:n −t − Pax +t:n −t [1]

The LHS of this equation is the retrospective reserve and the RHS is the prospective
reserve. So the reserves are equal. [1]
[Total 4]

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CT5: Assignment X2 Solutions Page 7

Solution X2.5

(i) Premium calculated using equivalence principle

The premium equation is:

Pa[35] = 100, 000 A[35] + 0.05Pa[35] [1]

So:

15.993P = 100, 000 × 0.09475 + 0.05 × 15.993P

⇒ P = £623.63 [1]
[Total 2]

(ii) Minimum premium

Let K denote the curtate future lifetime of a new policyholder. Then the insurer’s loss
random variable for the policy is:

L = 100, 000v K +1 + 0.05 PaK +1 − PaK +1

= 100, 000v K +1 − 0.95 PaK +1 [1]

L will be positive if the policyholder dies “too soon”. We want to find the value of t
such that:

P ( L > 0) = P ( T < t ) = 0.01

where T represents the policyholder’s complete future lifetime.

In other words, we want to find t such that:

P ( T ≥ t ) = t p[35] = 0.99 [1]

In terms of life table functions, we have:

l[35]+t
≥ 0.99
l[35]

⇒ l[35]+t ≥ 0.99 l[35] = 0.99 × 9,892.9151 = 9, 793.99 [½]

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Page 8 CT5: Assignment X2 Solutions

From the Tables: l45 = 9,801.3123 and l46 = 9, 786.9534

So t lies somewhere between 10 and 11, and we set K = 10 . [1]

So we need to find the “break even” premium P , assuming the benefit is paid at the end
of year 11 and using 6% interest. This is given by the equation:

0.95Pa11| = 100, 000v11 [½]

Rearranging to find P :

100, 000v11 100, 000 100, 000

P= = = = £6, 632.86 [1]
0.95a11| 0.95 
s11 0.95 × 15.86994
[Total 5]

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CT5: Assignment X2 Solutions Page 9

Solution X2.6

(i) Present value random variable

If, for example, the man dies in the fourth policy year (ie if K 65 = 3 ), the present value
of his benefit is:

(
X = 10, 000 v + 1.03v 2 + 1.032 v3 )
(
= 10, 000 v 1 + 1.03v + 1.032 v 2 )
With i = 0.03 , this simplifies to:

X = 10, 000v × 3

or, in general:

10, 000 K 65
X = 10, 000 v K 65 = [2]
1.03

(ii) Expected present value

10, 000 × E ( K 65 ) 10, 000 e65 10, 000 ×16.645

E(X ) = = = = £161, 602 [1]
1.03 1.03 1.03

(iii) Prospective reserve at time 5

The future benefits are 10, 000 × 1.035 at time 6, 10, 000 × 1.036 at time 7, and so on.
All of these payments are contingent on survival. The prospective reserve at time 5 is
the EPV at time 5 of these future benefits.

5V
pro
(
= 10, 000 × 1.035 v p70 + 1.03 v 2 2 p70 + 1.032 v3 3 p70 + " ) [1]

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Page 10 CT5: Assignment X2 Solutions

Assuming i = 0.03 and AM92 Ultimate mortality:

5V
pro
= 10, 000 × 1.034 ( p70 + 2 p70 + 3 p70 + ")

= 10, 000 × 1.034 × e70

= 10, 000 × 1.034 × 13.023

= £146,575 [1]
[Total 2]

(iv) Probability

10, 000 K 65
From (i), the present value random variable is X = . So:
1.03

⎛ 250, 000 × 1.03 ⎞

P ( X > 250, 000) = P ⎜ K 65 > ⎟⎠
⎝ 10, 000

= P ( K 65 > 25.75)

= P ( K 65 ≥ 26) [1]

since K 65 can only take non-negative integer values. Assuming AM92 Ultimate
mortality:

l91 1,376.1906
P ( K 65 ≥ 26) = 26 p65 = = = 0.15601 [1]
l65 8,821.2612
[Total 2]

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CT5: Assignment X2 Solutions Page 11

Solution X2.7

(i) Premium

The premium equation is:

1 D90
Pa[65]:25| = 60, 000 A[65]:25| + 120, 000 + 200 + 0.01P(a[65]:25| − 1) [1]
D[65]

where:

1 D90 48.61
A[65]:25| = A[65] − A90 = 0.52550 − × 0.84196 = 0.465788 [½]
D[65] 685.44

D90 48.61
a[65]:25| = a[65] − a90 = 12.337 − × 4.109 = 12.0456 [½]
D[65] 685.44

ie: 12.0456 P = 60, 000 × 0.465788 + 120, 000 × 0.07092 + 200 + 0.01×11.0456 P [½]

So:

P = 36, 657.68 /11.935 = £3, 071 [½]

[Total 3]

(ii) Reserves

The prospective reserve at the end of the 5th policy year is:

D90
5V
pro
= 60, 000 A 1 + 120, 000 + 0.01 P a70:20| − P a70:20|
70:20| D70

= 60, 000 × 0.521837 + 120, 000 × 0.093982 − 0.99 × 3, 071 × 9.98859

= £12, 220
[Total 3]

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Page 12 CT5: Assignment X2 Solutions

Alternatively, you could have calculated the reserve retrospectively as follows:

D[65] ⎡
5V
retro
= Pa[65]:5| − 60, 000 × A 1 | − 200 − 0.01P(a[65]:5| − 1) ⎤
D70 ⎣ ⎢ [65]:5 ⎥⎦

= 1.3252(3, 071 × 4.5082 − 60, 000 × 0.072012

− 200 − 0.01 × 3, 071 × 3.5082)
= £12, 213

(Note that we get a discrepancy in the 5th significant figure due to using some 4-figure
numbers in the calculations.)

(iii) Insurer’s profit

The reserve per policy at the end of 2004 was:

pro 1 D90
4V = 60, 000 A69:21| + 120, 000 + 0.01Pa69:21| − Pa69:21|
D69

= 60, 000 × 0.511979 + 120, 000 × 0.08836 − 0.99 × 3, 071 × 10.39108

= £9, 730 [1 ½ ]

The reserves required on 1 January 2005 total:

197 × 9, 730 = £1,916,810 [½]

The premiums received on 1 January 2005 total:

197 × 3, 071 = £604,987 [½]

Expenses paid during 2005 total:

2 × 0.01 × 197 × 3, 071 = £12,100 [1]

Interest earned during 2005 was:

2 × 0.04 × (1,916,810 + 604,987 − 12,100) = £200, 776 [1]

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CT5: Assignment X2 Solutions Page 13

There were 9 deaths during 2005. So the reserves required on 31 December 2005 (using
the prospective reserve figure of £12,220) total:

(197 − 9) × 12, 220 = £2, 297,360 [½]

So the profit earned in 2005 was:

Profit2005 = 1,916,810 + 604,987 − 12,100 + 200, 776

− 9 × 60, 000 − 2, 297,360

= −£126,887

ie a loss of approximately £127,000. [1]

[Total 6]

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Page 14 CT5: Assignment X2 Solutions

Solution X2.8

(i) Prospective reserve

The reserve at exact time t is:

∞
t +s s
t V = ∫ P × 1.04 v s px +t μ x +t + s ds [1]
0

When i = 0.04 we have:

∞
1.04 s
∫ 1.04s s px +t μ x+t + s ds
t
tV = P × 1.04
0

∫ s px+t μ x +t + s ds
t
= P × 1.04
0

= P × 1.04t

∞
because ∫ s px +t μ x+t + s ds = ∞ qx+t = 1 . [1]
0
[Total 2]

(ii) Value of the derivative of the reserve at t = 5

Now:

∂ ∂
tV = P × 1.04t = ln1.04 × P × 1.04t = 0.0392207 × tV [1½]
∂t ∂t

Alternatively you could have used Thiele’s equation to find the derivative:

∂
tV = δ tV − μ x +t ( St − tV ) [1]
∂t

where St is the death benefit sum assured at time t.

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CT5: Assignment X2 Solutions Page 15

But St = P × 1.04t = tV , so:

∂
tV = δ tV = 0.0392207 × tV
∂t

as δ = ln1.04 = 0.0392207 . [½]

At t = 5 , the death benefit (and hence reserve) is known to be £45,000.

Therefore:

∂
tV = 0.0392207 × 45, 000 = £1, 764.93 pa
∂t

at t = 5 . [½]
[Total 2]

(iii) Amended policy

Now:

10 −t
tV = ∫ P × 1.04t + s v s s px +t μ x +t + s ds + 1.1P × 1.04t × 1.0410−t v10−t 10−t p x +t
0

= P × 1.04t 10 −t q x +t + 1.1P × 1.04t 10−t px +t

= P × 1.04t (1 + 0.1 × 10 −t p x +t )
[1½]

At time t = 5 this gives:

⎛ l ⎞ ⎛ 9,557.8179 ⎞
5V = 45, 000 ⎜1 + 0.1 × 55 ⎟ = 45, 000 ⎜1 + 0.1 × = 49, 428.53
⎝ l50 ⎠ ⎝ 9, 712.0728 ⎟⎠
[1½]

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Page 16 CT5: Assignment X2 Solutions

Now:

∂ ∂ ⎛ l ⎞
tV = P × 1.04t ⎜1 + 0.1 × x +10 ⎟
∂t ∂t ⎝ l x +t ⎠

∂⎛ l ⎞ ⎛ l ⎞ ∂
= P × 1.04t × ⎜ 1 + 0.1 × x +10 ⎟ + ⎜1 + 0.1 × x +10 ⎟ × P × 1.04t
∂t ⎝ l x +t ⎠ ⎝ l x + t ⎠ ∂t

(
= P × 1.04t × 0.1 × l x +10 − μ x +t l x +t ( −1)(l x +t ) −2 )
⎛ l ⎞
+ ⎜1 + 0.1 × x +10 ⎟ ln1.04 × P × 1.04t
⎝ l x +t ⎠

l x +10
= P × 1.04t × 0.1 × μ x +t + ln1.04 tV [2]
l x +t

Alternatively, using Thiele’s equation:

∂
tV = δ tV + μ x +t ( t V − St )
∂t

(
= δ tV + μ x +t P × 1.04t [1 + 0.1 × 10−t p x +t ] − P × 1.04t )
= δ tV + μ x +t × P × 1.04t × 0.1 × 10−t px +t [2]

These two methods give the same answer since δ = ln1.04 .

So at t = 5 :

∂ l55
tV = 0.0392207 × 5V + μ50 × 0.1 × 45, 000 ×
∂t l50
9,557.8179
= 0.0392207 × 49, 428.5274 + 0.002372 × 4,500 ×
9, 712.0728
= £1,949.13 pa [1]
[Total 6]

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CT5: Assignment X2 Solutions Page 17

(iv) Comments

The reserve is increasing more quickly under the revised contract because:
• the reserve is larger than before, so that more interest is being earned [½]
• the reserve is larger than the death benefit, so that the excess amount is released
on death (whereas, for the old contract, reserves and death benefit were equal so
there was neither release nor strain on death). [½]
[Total 1]

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Page 18 CT5: Assignment X2 Solutions

Solution X2.9

This question is CT5 April 2005 Question 14.

(i) Definitions

The death strain at risk for a policy issued t years ago when the policyholder was
aged x , which provides a sum assured of S payable at the end of the year of death and
provides no benefit on survival to time t + 1 is given by:

DSAR = S − t +1V [1]

It is the amount of money, over and above the reserve at time t + 1 , that has to be paid
in respect of each death during the policy year ( t , t + 1) .

The expected death strain for such a policy is:

(
EDS = qx +t S − t +1V ) [1]

This is the amount that the life insurance company expects to pay extra to the year-end
reserve for the policy. For a group of identical policies, the expected death strain is
given by:

expected number of deaths × DSAR [1]

The actual death strain is:

⎧⎪0 if the policyholder survives to time t + 1

ADS = ⎨ [1]
⎪⎩ S − t +1V if the policyholder dies in the year ( t , t + 1)

So it is the observed value of the indicator random variable:

⎧0 if the policyholder survives to time t + 1

D=⎨ [1]
⎩1 if the policyholder dies in the year ( t , t + 1)

multiplied by the death strain at risk. For a group of identical policies, the actual death
strain is given by:

actual number of deaths × DSAR [1]

[Total 6]

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CT5: Assignment X2 Solutions Page 19

(ii)(a) Death strain at risk for each type of policy for calendar year 2004

The end of calendar year 2004 is time 3, when time is measured in years from the start
of the policies.

Term assurance

To calculate the reserve at time 3, we first need to calculate the annual premium for the
policy. If we denote this by P , then:

Pa45:15 = 150, 000 A 1 [½]

45:15

From the Tables:

a45:15 = 11.386 [½]

Also:

1 D60 882.85
A = A45:15 − = 0.56206 − = 0.03592 [½]
45:15 D45 1, 677.97

So:

150, 000 × 0.03592

P= = £473.21 [½]
11.386

The reserve at time 3 is:

3V = 150, 000 A 1 − 473.21 a48:12

48:12

⎛ 882.85 ⎞
= 150, 000 ⎜ 0.63025 − − 473.21 × 9.613
⎝ 1, 484.43 ⎟⎠

= £777.52 [1]

The death strain at risk for each term assurance policy is then:

DSAR = S − 3V = 150, 000 − 777.52 = £149, 222 [½]

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Page 20 CT5: Assignment X2 Solutions

Pure endowment

Let the annual premium for the pure endowment be P ′ . Then:

D60 882.85
P ′ a45:15 = 75, 000 ⇒ 11.386 P ′ = 75, 000 × ⇒ P ′ = £3, 465.71 [1]
D45 1, 677.97

The reserve at time 3 is:

1
3V = 75, 000 A − 3, 465.71 a48:12
48:12

882.85
= 75, 000 × − 3, 465.71 × 9.613
1, 484.43
= £11, 289.63 [1]

There is no death benefit if the policyholder dies during calendar year 2004, so the death
strain at risk for each pure endowment policy is:

DSAR = 0 − 3V = −£11, 290 [½]

Temporary annuity

Watch out here – these policyholders are aged 55 at entry and have PMA92C20
mortality.

The reserve at time 3 for the temporary annuity is:

3V = 25, 000 a58:2

(
= 25, 000 v p58 + v 2 2 p58 )
⎛ 1 − 0.001814 (1 − 0.001814) (1 − 0.002110) ⎞
= 25, 000 ⎜ + ⎟⎠
⎝ 1.04 1.042

= £47, 018.15 [1]

There is no death benefit for this policy. However, if the policyholder survives to
time 3, there is a survival benefit of £25,000, which is not included in the reserve at
time 3. [½]

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CT5: Assignment X2 Solutions Page 21

So the death strain at risk for each temporary annuity is:

DSAR = 0 − ( 3V + 25, 000) = −£72, 018 [½]

This calculation is quite sensitive to rounding and to the method of calculation used. For
example, if you had calculated the annuity as:

9,826.131
a58:2 = a58 − v 2 2 p58 a60 = 15.356 − 1.04−2 × × 14.632 = 1.881
9,864.803

then you would get:

3V = 47, 023.16 and DSAR = −72, 023

(ii)(b) Total mortality profit or loss

Term assurance policies

There are 5, 000 − 15 = 4,985 term assurance policies in force on 1 January 2004.

The expected death strain for this group of policies is:

EDS = 4,985 q47 × 149, 222 = 4,985 × 0.001802 × 149, 222 = £1,340, 457 [½]

The actual death strain for this group of policies is:

ADS = 8 × 149, 222 = £1,193, 776 [½]

So the mortality profit from this group of policies is:

MP = EDS − ADS = £146, 681 [½]

Pure endowment policies

There are 2, 000 − 5 = 1,995 pure endowment policies in force on 1 January 2004.

The expected death strain for this group of policies is:

EDS = 1,995 q47 × ( −11, 290) = 1,995 × 0.001802 × ( −11, 290) = −£40,587 [½]

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Page 22 CT5: Assignment X2 Solutions

The actual death strain for this group of policies is:

ADS = 1 × ( −11, 290) = −£11, 290 [½]

So the mortality profit from this group of policies is:

MP = EDS − ADS = −£29, 297 [½]

Temporary annuity policies

There are 1, 000 − 5 = 995 temporary annuity policies in force on 1 January 2004.

The expected death strain for this group of policies is:

EDS = 995 q57 × ( −72, 018) = 995 × 0.001558 × ( −72, 018) = −£111, 643 [½]

The actual death strain for this group of policies is:

ADS = 1 × ( −72, 018) = −£72, 018 [½]

So the mortality profit from this group of policies is:

MP = EDS − ADS = −£39, 625 [½]

Total mortality profit

The total mortality profit is then:

146, 681 − 29, 297 − 39, 625 = £77, 759 [½]

[Total 13]

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CT5: Assignment X3 Solutions Page 1

Assignment X3 – Solutions
Markers: This document does not necessarily give every possible approach to solving
each of the questions. Please give credit for other valid approaches.

Solution X3.1

This question is CT5 September 2005 Question 6.

The symbol a(12) represents the expected present value of an annuity of 1 pa

60:50:20
payable monthly in advance while a life aged exactly 60 and a life aged exactly 50 are
both alive, with payments being made for a maximum of 20 years from the outset. [2]

Using PA92C20 mortality and 4% pa interest:

a(12) (12)
= a60:50 − v 20 ( m) ( f ) (12)
20 p60 20 p50 a 80:70 [1]
60:50:20

⎛ 11 ⎞ ( m) (f)⎛ 11 ⎞
= ⎜ a60:50 − ⎟ − v 20 
20 p60 20 p50 ⎜ a − ⎟ [1]
⎝ 24 ⎠ ⎝ 80:70 24 ⎠

⎛ 11 ⎞ 6,953.536 9,392.621 ⎛ 11 ⎞
= ⎜15.161 − ⎟ − 1.04−20 × × × ⎜ 6.876 − ⎟
⎝ 24 ⎠ 9,826.131 9,952.697 ⎝ 24 ⎠
= 12.747 [1]

Solution X3.2

The joint force of mortality is:

μ40:50 = μ40 + μ50 = 0.00478 + 0.00478 = 0.00956

When there is a constant force of mortality, we calculate functions by adding the force
of mortality to the force of interest, and evaluating the relevant functions at the new,
higher rate of interest. [1]

The value of the temporary annuity can be found using a force of interest of:

δ = δ @ 4% + 0.00956 = 0.03922 + 0.00956 = 0.04878

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Page 2 CT5: Assignment X3 Solutions

This corresponds to i = e0.04878 − 1 = 5% . [1]

This gives:

@5%
a40:50:10| = a10| = 7.913 [1]

Solution X3.3

(i) Revised profit in first year

The net premium reserve per policy at the end of the first year can be calculated as:

⎛ a62:3| ⎞ ⎛ 2.805 ⎞
net
V = 10, 000 ⎜1 − ⎟ = 10, 000 ⎜1 − = £2, 256 [1 ½ ]
1
⎝ a61:4| ⎠ ⎝ 3.622 ⎟⎠

So the profit arising from surrenders in the first year is:

0.1 × p61 × (2, 256 − 1,500) = £75 [1]

So the profit in the first year will be increased by £75, from –£100 to –£25. [½]
[Total 3]

(ii) Impact on profit signature

In subsequent years, the numbers of policies remaining in force will be reduced by a

factor of 0.9, leading to a corresponding reduction in the profits in the profit signature.
[1]

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CT5: Assignment X3 Solutions Page 3

Solution X3.4

The expected profit for year 5 per policy in force at the beginning of the year is given
by:

( 4V + P − e) (1 + i ) − 5V (ap) x+4 − ( S + f ) (aq)dx+4 − ( 5P + f ) (aq)sx+4

where e denotes the renewal expenses and f denotes the claims expenses.

Putting in the values gives an expected profit of:

( 5, 000 + 1,100 − 40) (1.08) − 6,500 (1 − 0.01 − 0.07)

− (12, 000 + 100) × 0.01 − ( 5 × 1,100 + 100) × 0.07

= 51.80 [3]

Solution X3.5

(i) Required reserves

The reserves required at the end of Year 2 and Year 1 are:

6
2V = = 5.56 [½]
1.08

1 ⎛ 6 ⎞
and: 1V = ⎜⎝12 + 0.99 × ⎟ = 16.20 [1½]
1.08 1.08 ⎠
[Total 2]

(ii) NPV of profits before and after zeroisation

Before zeroisation, the net present value (based on a risk discount rate of 10%) is:

25 0.99 0.992 0.993 0.994

NPV = − − 12 × − 6 × + 25 × + 35 × = 0.48 [1]
1.10 1.102 1.103 1.104 1.105

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After zeroisation the profit in Year 1 will become:

0.99 0.992
Profit in Year 1 = −25 − 12 × −6× = −41.04 [1]
1.08 1.082

So the profit vector will become:

Year In force profit

1 –41.04
2 0
3 0
4 25
5 35
[1]
So the NPV after zeroisation will be:

41.04 0.993 0.994

NPV = − + 0 + 0 + 25 × + 35 × = 0.14 [1]
1.10 1.104 1.105

As expected, the NPV after zeroisation is smaller because the emergence of the profits
has been deferred and the risk discount rate is greater than the accumulation rate. [1]
[Total 5]

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X3 Solutions Page 5

Solution X3.6

The assurance is payable immediately on (x)’s death if (x) dies after (y) and within the
20 years. The expected present value of this is:

2 1 1
20, 000 A50:50:20| = 20, 000 A50:20| − 20, 000 A50:50:20| [1]

Now:

20
A1 = ∫ e −δ t t p50 μ50+t dt
50:20| 0

20
= ∫ e −0.05 t e −0.005 t 0.005 dt
0

0.005 ⎡ −0.055× 20
= ⎣ e − e0 ⎤⎦
−0.055
0.005 ⎡
= ⎣1 − e −1.1 ⎤⎦ = 0.060648 [1 ½ ]
0.055

20
A1 = ∫ e −δ t t p50:50 μ50+t dt
50:50:20| 0

20
= ∫ e −0.05 t e −0.01t 0.005 dt
0

0.005 ⎡ −0.06× 20
= e − e0 ⎤⎦
−0.06 ⎣
0.005 ⎡
= ⎣1 − e −1.2 ⎤⎦ = 0.058234 [1½]
0.06

The present value of this benefit is therefore:

20, 000 × (0.060648 − 0.058234) = £48.28 [½]

In addition, the assurance is payable if ( x) dies while ( y ) is alive, in which case the
payment is made at the end of the twenty year period. The value of this is:

20, 000 e −20δ 1

20 q50:50 [1]

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Page 6 CT5: Assignment X3 Solutions

The probability term is:

1 20
20 q50:50 =∫ p50:50 μ50+t dt
0 t

20
= 0.005∫ e −0.01t dt
0

=
0.005
0.01
(
1 − e −0.2 )
= 0.090635

giving a value of 20, 000 × 0.367879 × 0.090635 = 666.86 . [1]

So the total expected present value of the policy is £715.14. [½]

[Total 7]

Solution X3.7

This question is CT5 April 2005 Question 1.

A profit vector is a vector whose entries are the expected cashflows at the end of each
policy year per policy in force at the beginning of the respective policy year. [½]

These figures take into account the cost of setting up reserves. [½]

A profit signature is a vector whose entries are the expected cashflows at the end of
each policy year, per policy in force at time 0. [½]

To calculate the profit signature from the profit vector, we multiply each entry in the
profit vector by the probability that the policy is in force at the start of the
corresponding policy year. The first entries in the profit vector and the profit signature
are equal. [½]
[Total 2]

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X3 Solutions Page 7

Solution X3.8

This question is CT5 September 2005 Question 8.

The annuity is payable monthly and is guaranteed for 5 years. It is then paid
throughout the lifetime of the male and continues to be paid to the female, albeit at half
the original annual amount, following the death of the male. However, the date of
commencement of the payments to the female depends on when the male dies. If he dies
before time 5, the payments to the female start at time 5, ie they just follow on from the
guaranteed part. If he dies after time 5, the payments to the female start on the monthly
payment date following his death.

EPV of the guaranteed annuity

The expected present value of the guaranteed annuity benefit is:

i
20, 000 a(12) = 20, 000 × (12)
× a5 = 20, 000 × 1.021537 × 4.4518
5 d
= 90,953.57 [1½]

EPV of the contingent benefit payable to the male (ie after the guarantee expires)

This is:

9, 238.134 ⎛ 11 ⎞
20, 000v5 5 p65 a70 = 20, 000 × 1.04 −5 ×
( m ) (12)
× ⎜11.562 − ⎟
9, 647.797 ⎝ 24 ⎠
= 174, 777.62 [1½]

EPV of the annuity payable to the female following death of the male, provided both
are still alive at time 5

This is:

( m) ( f ) (12)
10, 000v5 5 p65 5 p62 a 70( m )|67( f ) [1]

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Page 8 CT5: Assignment X3 Solutions

Now:

(12) (12) (12)

a70( m )|67( f ) = a
67( f ) −a
70( m ):67( f )

11 ⎛ 11 ⎞
= a67( f ) − − ⎜ a70( m):67( f ) − ⎟
24 ⎝ 24 ⎠

= a67( f ) − a70( m):67( f )

= 14.111 − 10.233

= 3.878 [1½]
So:

( m) ( f ) (12)
10, 000v5 5 p65 5 p62 a 70( m)|67( f )

9, 238.134 9, 605.483
= 10, 000 ×1.04−5 × × × 3.878
9, 647.797 9,804.173
= 29,902.36 [1½]

EPV of the annuity payable to female from time 5, provided she is alive and the male
is dead

This is:

( m) ( f ) (12)
10, 000v5 5 q65 5 p62 a 67

⎛ 9, 238.134 ⎞ 9, 605.483 ⎛ 11 ⎞
= 10, 000 × 1.04−5 × ⎜1 − ⎟ × × ⎜14.111 − ⎟
⎝ 9, 647.797 ⎠ 9,804.173 ⎝ 24 ⎠

= 4, 668.29 [1½]

Total EPV

Summing all the parts above, we get the total expected present value to be:

90,953.57 + 174, 777.62 + 29,902.36 + 4, 668.29 = £300,302 [1½]

[Total 10]

The final answer is quite sensitive to rounding.

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X3 Solutions Page 9

Solution X3.9

This question is CT5 September 2005 Question 9.

(i) Net future loss random variable

The net future loss random variable at the outset for this policy is:

L = 10, 000 aK +1

− P = 10, 000amax{K −P
60:60 60 , K 60 }+1

where P is the single premium and K 60 is the curtate future lifetime of a life aged 60.
[2]

(ii) Single premium

The premium is:

P = 10, 000 a60:60

( ( m)
= 10, 000 a60 (f)
+ a60 − a60:60 ) [1]

= 10, 000 (15.632 + 16.652 − 14.090 ) [1]

= 10, 000 ×18.194

= 181,940 [1]
[Total 3]

The Actuarial Education Company © IFE: 2011 Examinations

Page 10 CT5: Assignment X3 Solutions

(iii) Standard deviation

The variance of the net future loss random variable is:

⎡ 2A
( ) ⎤
2
2⎢ 60:60
− A60:60 ⎥
var( L) = 10, 000 [1]
⎢ d2 ⎥
⎢⎣ ⎥⎦

This formula is derived as follows:

( )
⎛ 1 − v K60:60 +1 ⎞
var ( L ) = var 10, 000 aK +1
= 10, 000 var ⎜ 2
⎟
60:60
⎝ d ⎠

=
10, 0002
d2
var v ( K 60:60 +1
) =
10, 0002 ⎡ 2
d 2 ⎢⎣
(
A60:60 − A60:60 )
2⎤
⎥⎦

Using premium conversion and the result a60:60 = 18.194 at 4% interest from part (ii),
we have:

0.04
A60:60 = 1 − d a60:60 = 1 − × 18.194 = 0.30023 [1]
1.04

Also:

( ) 0.0816
2 @8.16%
A60:60 = 1 − d a60:60 = 1− × 11.957 = 0.09792 [1]
1.0816

So the standard deviation of L is:

⎡ 2A
( ) ⎤
2
2⎢ 60:60
− A60:60 ⎥ = £22,933
10, 000 [1]
⎢ d2 ⎥
⎣⎢ ⎦⎥
[Total 4]

The final answer is quite sensitive to rounding.

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X3 Solutions Page 11

Solution X3.10

This question is CT5 April 2005 Question 7.

The present value random variable for this annuity is:

aT =a [½]
xy {
min Tx ,Ty }

The expected present value is:

( )
E aT
xy
= axy [1]

Alternatively, we have:

( )
Txy
1− v 1 − Axy
aT = ⇒ E aT =
xy δ xy δ

The variance of the present value random variable is:

( ) ( ) ( ) ( ) ⎥⎦⎥⎦
⎛ 1 − vTxy ⎞ 1 Txy 1 ⎡ 2T ⎡ T 2 ⎤⎤
var aT = var ⎜ ⎟ = 2 var v = 2 ⎢ E v xy − ⎢ E v xy [1½]
xy
⎝ δ ⎠ δ δ ⎣ ⎣

Now:

( )=A
E v
Txy
xy [½]

and:

( )=
E v
2Txy 2
Axy [1]

where the superscript of 2 to the left of the assurance symbol indicates that the
assurance is evaluated using twice the standard force of interest, which is equivalent to
evaluating using the rate of interest i ′ = (1 + i ) − 1 . So the variance of the present value
2

random variable is:

var aT ( ) xy
=
1 ⎡2
δ 2 ⎢⎣
( )
Axy − Axy
2⎤
⎥⎦ [½]

The Actuarial Education Company © IFE: 2011 Examinations

Page 12 CT5: Assignment X3 Solutions

Solution X3.11

(i) Completed table

The completed table should read as follows:

Year Prem Exps Int Claims Inc. in Int on Profit

reserves reserves

1 1,530 50 89 (1) 50 (2) 1,570 (4) 0 (3) –51

2 1,530 13 (6) 91 (6) 50 (2) 1,632 (5) 95 (5) 21

3 1,530 21 (6) 91 (6) 5,000 (2) –3,250 (5) 195 45

(Pre-calculated figures are shown in italics.) The missing figures can be derived using
the following steps (which are indicated in brackets beside the figures in the table):

1. Interest (Y1): 6% × (1,530 − 50) = 89

2. Claims (Y1): 1% × 5, 000 = 50

Claims (Y2): 1% × 5, 000 = 50

Claims (Y3): 5, 000 (since all policies in force at the start of the year
receive a benefit)

3. Int. on reserves (Y1): 0 (since the initial reserve is zero)

4. Inc. in reserves (Y1): 1,530 − 50 + 89 − 50 − X + 0 = −51 ⇒ X = 1,570

5. Reserve (end of Y1): 0.99 X = 1,570 ⇒ X = 1,586

Int. on reserves (Y2): 6% × 1,586 = 95

Reserve (end of Y2): 0.06 X = 195 ⇒ X = 3, 250

Inc. in reserves (Y2): 0.99 × 3, 250 − 1,586 = 1, 632

Inc. in reserves (Y3): 0 − 3, 250 = −3, 250 (since the final reserve is zero)

6. Expenses (Y2): (1,530 − X ) × 1.06 − 50 − 1, 632 + 95 = 21 ⇒ X = 13

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X3 Solutions Page 13

Interest (Y2): 6% × (1,530 − 13) = 91

Expenses (Y3): (1,530 − X ) × 1.06 − 5, 000 + 3, 250 + 195 = 45 ⇒ X = 21

Interest (Y3): 6% × (1,530 − 21) = 91

[½ per correct new entry in grid + ½ if all correct]

[Total 7]

(ii) Internal rate of return

The internal rate of return is the interest rate that satisfies the equation:

−51v + 21 × 0.99v 2 + 45 × 0.992 v3 = 0 [1]

(where the 0.99 factors represent persistency).

Dividing through by v gives:

−51 + 20.79v + 44.10v 2 = 0

Now for the quadratic equation ax 2 + bx + c = 0 we know the that roots will be given by

−b ± b 2 − 4ac
x=
2a

Applying this quadratic formula gives (ignoring the negative root):

1
v = 0.8652 ⇒ i = − 1 = 15.6% [1]
0.8652
[Total 2]

Alternatively, you could solve the equation of value using trial and error and/or
interpolation.

(iii) Effect on internal rate of return

The internal rate of return will increase. This is because the profits in the later years
will be released sooner, which will increase their value. [Total 2]

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Page 14 CT5: Assignment X3 Solutions

(iv) Net present value

The net present value calculated using a risk discount rate of 7% is:

NPV = −51v + 20.79v 2 + 44.10v3 = −47.66 + 18.16 + 36.00 = £6.50 [Total 2]

(v) Effect on net present value

The net present value will increase. This is because the profits in the later years will be
released sooner, which will increase their present value. [Total 2]

Solution X3.12

(i) Unit fund

The growth of the unit fund is:

Policy year Premium Cost of Unit fund Fund Annual Fund c/f
allocated allocation b/f before charge
charge
1 900.00 846.00 846.00 930.60 18.61 911.99

2 970.00 911.80 1823.79 2006.17 40.12 1966.05

3 970.00 911.80 2877.85 3165.64 63.31 3102.33

[¼ per box correct]

[Maximum 4]

The value of the fund at maturity will be: 3,102.33 × 1.02 = 3,164.38 [1]
[Total 5]

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X3 Solutions Page 15

(ii) Profit signature

The non-unit fund development is:

Policy Profit on Expenses Non-unit Annual Claims Profit in

year allocation interest charge cost each year

1 154.00 150.00 0.16 18.61 32.79 –10.02

2 88.20 25.00 2.53 40.12 27.33 78.52

3 88.20 25.00 2.53 63.31 19.19+ 48.43

61.42

[¼ per box correct]

[Maximum 4]

Note that the claims cost in Year 1 is calculated as:

( 5, 000 − 911.90) q60 = ( 5, 000 − 911.90) × 0.008022 = 32.79

The calculations for the other years are similar.

The probabilities that a policy is in force at the start of each year are:

(1, 0.99198, 0.98304) [1]

So the profit signature is:

(–10.02, 77.89, 47.61) [1]

[Total 6]

(iii) Profit signature after setting up reserves

The non-unit reserves required are:

End of year 1: 0.02 × 911.99 = 18.24 [1]

End of year 2: 0.02 × 1,966.05 = 39.32 [1]

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Page 16 CT5: Assignment X3 Solutions

The calculations of the revised profit figures are shown in the table below:

Policy year Non-unit Cost of Profit Profit

reserve b/f increasing ignoring allowing for
reserves reserves reserves

1 0.00 18.09 –10.02 –28.11

2 18.24 20.00 78.52 58.52

3 39.32 –40.89 48.43 89.32

[1 mark per correct end year profit]

The cost of increasing the reserves is calculated as follows. At the beginning of Year 1,
there is no reserve. At the end of Year 1 we need 18.24 per policy in force. So the
expected cost of increasing the reserves is:

18.24 p60 = 18.24 × 0.991978 = 18.09

At the start of Year 2 we have 18.24 per policy in force. This grows with interest to
become:

18.24 × 1.04 = 18.97

At the end of Year 2 we require 39.32 for each survivor. So the expected amount
needed is:

39.32 p61 = 39.32 × 0.990991 = 38.97

So the expected cost of increasing the reserves is:

38.97 − 18.97 = 20.00

Year 3 follows similarly.

Applying the in force probabilities to the last column in the table, the profit signature is:

(–28.11, 58.05, 87.81) [1]

[Total 6]

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X3 Solutions Page 17

Solution X3.13

This question is CT5 September 2005 Question 11.

Unit fund

The expected cashflows in the unit fund are given in the table below. Cashflows out of
the fund are shown as negative entries.

Year Prem Cost of Fund at Fund at Mgt Balance

allocation start of end of charge
year year

1 10,000 8,075 8,075.00 8,721.00 –109.01 8,611.99

2 10,000 8,075 16,686.99 18,021.95 –225.27 17,796.67

3 10,000 8,075 25,871.67 27,941.41 –349.27 27,592.14

[2]
Award method marks where appropriate.

Non-unit fund

The expected cashflows in the non-unit fund are:

Year Premium Exp Int Exp Mgt In-force

less cost benefit charge cashflow
of alloc cost

1 1,925 –600 53 –115.16 109.01 1,371.85

2 1,925 –100 73 –24.99 225.27 2,098.28

3 1,925 –100 73 –4,086.19 349.27 –1,838.92

[3]
Award method marks where appropriate.

The Actuarial Education Company © IFE: 2011 Examinations

Page 18 CT5: Assignment X3 Solutions

The expected benefit cost figures are calculated as follows.

If the policyholder dies in Year 1, a death benefit of £20,000 is payable at the end of the
first year. £8,611.99 comes from the unit fund, and the remainder comes from the non-
unit fund. So the expected death cost is:

( 20, 000 − 8, 611.99) q62 = 11,388.01 × 0.010112 = 115.16 [½]

The entry for Year 2 is calculated in a similar way:

( 20, 000 − 17, 796.67) q63 = 2, 203.33 × 0.011344 = 24.99 [½]

If the policyholder dies in Year 3, the benefit will be the bid value of the units at the end
of Year 3 since this is greater than £20,000. This does not result in a cashflow from the
non-unit fund. However, if the policyholder survives to the end of Year 3, he receives
115% of the full bid value of the units. 100% comes from the unit fund and the other
15% comes from the non-unit fund. So the expected benefit cost for Year 3 in the non-
unit fund is:

0.15 × 27,592.14 × p64 = 4,138.82 (1 − 0.012716) = 4, 086.19

Reserves

The final figure in the in-force cashflow column is negative, so we have to set up a
reserve at time 2 to zeroise it. Reserves are assumed to earn interest at the rate of
4% pa. We need

2V × 1.04 = 1,838.92

So:

1,838.92
2V = = 1, 768.19 [1]
1.04

Setting up this reserve affects the expected in-force cashflow at time 2. Before setting
up the reserve, it was 2,098.28, per policy in force at time 1. We need to set up a
reserve of 1,768.19 at time 2 for all continuing policies. So the expected in-force
cashflow at time 2, per policy in force at time 1, is now:

2, 098.28 − 1, 768.19 p63 = 2, 098.28 − 1, 768.19 × 0.988656 = 350.15 [1]

This is positive, so there is no need for a reserve to be set up at time 1.

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X3 Solutions Page 19

The table below shows the profit vector and the profit signature:

Year Profit vector Probability in force Profit signature

1 1,371.85 1 1,371.85

2 350.15 p62 = 0.989888 346.61

3 0 2 p62 = 0.978659 0

[2]
Award method marks where appropriate.

The risk discount rate is 15% pa. The expected present value of the profit is the present
value of the profit signature, ie:

1,371.85 346.61
EPV profit = + = 1, 455.00 [1]
1.15 1.152

The expected present value of the premiums is:

⎛ 0.989888 0.978659 ⎞
EPV premiums = 10, 000 ⎜1 + + ⎟ = 26, 007.79 [1]
⎝ 1.15 1.152 ⎠

So the profit margin is:

EPV profit 1, 455.00

= = 0.0559 = 5.59% [1]
EPV premiums 26, 007.79
[Total 13]

Award method marks where appropriate.

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CT5: Assignment X4 Solutions Page 1

Assignment X4 – Solutions
Markers: This document does not necessarily give every possible approach to solving
each of the questions. Please give credit for other valid approaches.

Solution X4.1

Throughout all the symbols used are as defined for the Formulae and Tables.

This also means that values of rx for all x < 60 are zero. We develop a general
solution that assumes retirement is possible at any age, but remembering that all the
values representing the cost of retirement at ages before 60 will be computed as zero.
This will then meet the requirement in the question that retirement can only occur at
ages older than 60.

Once you have practised lots of questions of this type, you should be able just to write
down the correct commutation function formula. In this solution we show where the
formula comes from. But you only have to write down the last line to get full marks.

Because we don’t know when the member’s last pay rise was, we assume that the next
one is in half a year. So assuming salaries increase at ages 45½, 46½, etc, the amount of
salary earned in the year of age [45 + t , 45 + t + 1] , t = 0, 1, 2, … is:

s45+t
63, 000
s44.5

noting that £63,000 will be the salary over the year of age [44½, 45½].

The career average salary on retirement in the year of age [45 + u , 45 + u + 1] , u = 0, 1,

2, … is, on average:

63, 000
( s45 + s46 + " + 12 s45+u )
( u + 12 ) s44.5
(assuming a uniform distribution of retirements over each year of age).

The pension per annum starting on retirement in that year of age is then:

63, 000
( u + 12 ) ( s45 + s46 + " + 12 s45+u )
= 63, 000
( s45 + s46 + " + 12 s45+u )
35 ( u + 12 ) s44.5 35 s44.5

The Actuarial Education Company © IFE: 2011 Examinations

Page 2 CT5: Assignment X4 Solutions

The expected present value of the retirement pension is then:

{ 12 s45 v45.5 r45 a45.5 + ( s45 + 12 s46 ) v 46.5 r46 a46.5

63, 000 r r
45
+"
35 s44.5 v l45

(
" + s45 + s46 + " + 12 s64 v64.5 r64 a64.5
r
)
+ ( s45 + s46 + " + s64 ) v 65 r65 a65
r
}
Using the symbols as defined in the Tables and rearranging, the value becomes:

63, 000
35 s44.5 D45
s45 { ( 1 C ra
2 45
ra
+ C46 ra
+ C47 ra
+ " + C64 ra
+ C65 )
+ s46 ( 1 C ra
2 46
ra
+ C47 ra
+ C48 ra
+ " + C64 ra
+ C65 + " + s64 ) ( 1 C ra
2 64
ra
+ C65 )}
=
63, 000
35 s44.5 D45
( s ra
M 45 + s M 46
ra
+ " + s M 64
ra
)
63, 000 s R45
ra
63, 000 × 2, 013, 657
= = = £184, 437 [3]
35 s44.5 D45 35 × 8.438 × 2,329

Solution X4.2

This question is CT5 April 2005 Question 8.

Define:

j = the valuation rate of interest [¼]

1
v= [¼]
1+ j

ix = the number of ill-health retirements between x and x + 1 , x ≤ 64 [¼]

l x = the number of active lives at age x exact [¼]

Both ix and lx must come from a suitable service table. [¼]

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X4 Solutions Page 3

aix = the expected present value at age x of a pension of 1 pa payable on ill-health

retirement at age x , and payable in accordance with the scheme rules [¼]

{ sx } is a salary scale such that:

s x +t expected salary earned in year of age ( x + t , x + t + 1)

= [¼]
sx expected salary earned in year of age ( x, x + 1)

s x −1 + sx − 2 + s x −3
zx = [¼]
3

Assume that ill-health retirements occur uniformly over each year of age and part years
of service count proportionately. [¼]

Past service benefit

The member has 10 years of past service, so is already entitled to 10/80ths of final
pensionable salary when he retires. If he retires in the year of age ( y, y + 1) , we are
assuming it occurs at age y + ½ , so his FPS will be:

z y +½
20, 000 [¼]
s34

Note that we have s34 in the denominator since he earned £20,000 between age 34 and
35.

The expected present value of the past service benefit is:

10 ⎡i z i z i z ⎤
× 20, 000 ⎢ 35 v½ 35½ a35½
i
+ 36 v1½ 36½ a36½
i
+ " + 64 v 29½ 64½ a64½
i
⎥
80 ⎣ l35 s34 l35 s34 l35 s34 ⎦

10 ⎡ i35 v35½ z35½ a35½

i
+ " + i64 v 64½ z64½ a64½
i ⎤
= × 20, 000 ⎢ ⎥
80 ⎣⎢ s34 v35 l35 ⎦⎥

Note that we will deal with the guarantee in the future service benefit.

The Actuarial Education Company © IFE: 2011 Examinations

Page 4 CT5: Assignment X4 Solutions

Now define:

Dx = v x l x [¼]

z
C xia = ix v x +½ z x +½ a ix +½ [¼]

and:

z
M xia = zC xia + zC xia+1 + " + zC64
ia
[¼]

Then the expected present value of the past service benefit is:

10 ⎛ zC ia + zC36
ia ia ⎞
+ " + zC64 10 z ia
M 35
× 20, 000 ⎜ 35 ⎟ = × 20, 000 × [¼]
80 ⎝ s34 D35 ⎠ 80 s34 D35

Future service benefit

If the member retires through ill health before age 45, he will receive the minimum
pension of 20/80ths of FPS. 10/80ths have been accounted for in the past service
benefit, so the remaining 10/80ths will form part of the future service benefit. [¼]

If the member retires between 45 and 46, we assume it will occur halfway through the
year, so his future service pension would be 10 ½ /80ths of FPS. Similarly, if he retires
between 46 and 47, his future pension would be 11 ½ /80ths of FPS, and so on. [¼]

So the future service benefit is:

1 ⎡ i z i z
× 20, 000 ⎢10 35 v½ 35½ a35½
i
+ 10 36 v1½ 36½ a36½
i
+"
80 l
⎣ 35 s34 l35 s34

i44 9½ z44½ i i z
+10 v i
a44½ + 10½ 45 v10½ 45½ a45½
l35 s34 l35 s34

i46 11½ z46½ i i z ⎤

+11½ v i
a46½ + " + 29½ 64 v 29½ 64½ a64½ ⎥ [¼]
l35 s34 l35 s34 ⎦

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CT5: Assignment X4 Solutions Page 5

⎡ ⎛ i v35½ z i 44½ i ⎞
1 35½ a35½ + " + i44 v z44½ a44½
= × 20, 000 ⎢10 ⎜ 35 ⎟
80 ⎢⎣ ⎝ s34 D35 ⎠

10½ i45 v 45½ z45½ a45½

i
11½ i46 v 46½ z46½ a46½
i
+ + +"
s34 D35 s34 D35

29½ i64 v 64½ z64½ a64½

i ⎤
+ ⎥ [¼]
s34 D35 ⎥⎦

=
1
× 20, 000 ⎢
(
35 44 45 )
⎡10 zC ia + " + zC ia + 10½ zC ia + 11½ zC ia + " + 29½ zC ia ⎤
46 64
⎥ [¼]
80 ⎢ s34 D35 ⎥
⎣ ⎦

The numerator in the bracketed term above is:

(
10 zC35
ia
+ " + zC44
ia
+ 10½ zC45
ia
)
+ 11½ zC46
ia
+ " + 29½ zC64
ia

= 10 zC35
ia
(+ " + zC64
ia
+ ½ zC45
ia
)
+ 1½ zC46
ia
+ " + 19½ zC64
ia

= 10 z M 35
ia
+ ½ zC45
ia
+ zC46
ia
+ " + zC64
ia

+ ½ zC46
ia
+ zC47
ia
+ " + zC64
ia

+"

+ ½ zC64
ia

= 10 z M 35
ia
+ ( z ia
M 45 − ½ zC45
ia
+) ( z ia
M 46 )
− ½ zC46
ia
+" + ( z ia
M 64 − ½ zC64
ia
) [¼]

If we define:

z
M xia = z M xia − ½ zC xia [¼]

and:

z
R ia z ia z ia z ia
x = M x + M x +1 + " + M 64 [¼]

then the above expression is:

10 z M 35
ia
+ z M 45
ia
+ z M 46
ia
+ " + z M 64
ia
= 10 z M 35
ia
+ z R ia
45 [¼]

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Page 6 CT5: Assignment X4 Solutions

So the expected present value of the future service benefit is:

1 ⎛ 10 z M 35
ia
+ z R ia
45
⎞
× 20, 000 ⎜ ⎟ [¼]
80 ⎝ s34 D35 ⎠

Combining this with the past service benefit gives a total expected present value of:

1 ⎛ 20 z M 35
ia
+ z R ia
45
⎞
× 20, 000 ⎜ ⎟ [¼]
80 ⎝ s34 D35 ⎠
[Maximum 5]

Solution X4.3

This question is CT5 April 2005 Question 5.

The probability of a life aged x , who is currently sick, staying in the sick state for t
years is given by:

= exp ⎛⎜ − ∫ ( ρ x + s + ν x + s ) ds ⎞⎟ .
SS t
t p40
⎝ 0 ⎠

Since the transition intensities are assumed to be constant, the expression simplifies to:

= e ( ).
SS −t ρ +ν
t p40 [1]

The expected present value of the sickness benefit is then:

dt = 2, 000∫ e (
20 20 − δ + ρ +ν ) t
2, 000∫ e −δ t t
SS
p40 dt [1]
0 0
20
⎡ 2, 000 −(δ + ρ +ν ) t ⎤
= ⎢− e ⎥ [1]
⎣ δ + ρ +ν ⎦0
2, 000 ⎡1 − e −20( ln1.04+0.05) ⎤
=
ln1.04 + 0.05 ⎢⎣ ⎥⎦

= £18, 652.72 [1]

[Total 4]

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CT5: Assignment X4 Solutions Page 7

Solution X4.4

This question is CT5 April 2005 Question 10.

Directly standardised mortality rate

The directly standardised mortality rate is defined as:

∑ s Exc,t mx,t
x

∑ s Exc,t
x

s
where Exc,t is the central exposed to risk between x and x + t for the standard
population, and mx,t is the central rate of mortality between the ages of x and x + t for
the study group.

The standard population is the combined population. So we have:

Exposed to risk for

Age band
standard population

20-29 225,000

30-39 450,000

40-49 300,000

50-59 240,000

Total 1,215,000
[½ ]

The directly standardised mortality rate for the female lives is then:

225 × 0.00125 + 450 × 0.00265 + 300 × 0.00465 + 240 × 0.00685

= 0.00371 [1]
1, 215

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Indirectly standardised mortality rate

This is given by:

F × crude death rate for the study group

where F is the area comparability factor and is given by the formula:

crude death rate for standard population

F=
crude death rate for study population assuming standard mortality

To calculate F , we need the age-specific mortality rates for the standard population.

From the given data, we can calculate the number of deaths in each age band and hence
the mortality rates for the standard population:

Age band Male deaths Female All deaths Age-specific

deaths mortality rate for
standard population

20-29 445 125 570 0.00253

30-39 1,378 662.5 2,040.5 0.00453

40-49 989 930 1,919 0.00640

50-59 1,109.7 1,027.5 2,137.2 0.00891

Total 3,921.7 2,745 6,666.7

The crude death rate for the standard population is then:

total deaths in standard population 6, 666.7

= = 0.00549 [1]
total exposed to risk for standard population 1, 215, 000

The crude death rate for the female lives assuming standard mortality is:

total female deaths assuming standard mortality

total exposed to risk for females
100 × 0.00253 + 250 × 0.00453 + 200 × 0.00640 + 150 × 0.00891
=
100 + 250 + 200 + 150
= 0.00572 [1]

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CT5: Assignment X4 Solutions Page 9

So:

0.00549
F= = 0.95979 [1]
0.00572

The crude death rate for the female lives (using female mortality) is:

total female deaths 2, 745

= = 0.00392 [½ ]
total exposed to risk for females 700, 000

The indirectly standardised mortality rate for the female lives is then:

0.95979 × 0.00392 = 0.00376 [1]

[Total 6]

Solution X4.5

Geographical location can affect mortality in the following ways:

● The rainfall and temperature in a region may make the area prone to certain
types of diseases, eg tropical diseases. [1]
● Natural disasters such as tidal waves, hurricanes, floods, drought and famines
occur more frequently in certain countries than in others. [1]
● Availability of medical facilities, preventative screening and immunisation
programmes will vary with geographical location. [1]
● Road accidents may be more common in cities. However, since the traffic speed
is likely to be slower than elsewhere, road accidents are less likely to be fatal.
[1]
● Countries at war or where there is a high level of violence and social unrest will
have higher mortality rates. [1]
[Total 5]

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Page 10 CT5: Assignment X4 Solutions

Solution X4.6

(i) Proof

We start with the integral expression:

1
( aq)αx = ∫0 t ( ap) x ( a μ )αx +t dt [1]

α
Since t ( ap) x = t pαx t pxβ and ( a μ ) x +t = μαx +t , we can write:

1
( aq)αx = ∫0 t pαx t pxβ μαx +t dt [1]

Now using the assumption that both decrements are uniformly distributed over each
year of age in the single decrement table, it follows that for integer ages x and
0 ≤ t ≤ 1:

t pxβ = 1 − t q xβ = 1 − tqxβ [1]

and:

t pαx μαx +t = constant

As a result of the last statement:

1
qαx = ∫ pαx μαx +t dt = t pαx μαx +t [1]
0t

for all t , 0 ≤ t ≤ 1 .

So:

( ) ( )
1 1
( aq)αx = qαx ∫ 1 − tqxβ dt = qαx ⎡⎣t − ½t 2 qxβ ⎤⎦ = qαx 1 − ½ qxβ
0 0
[1]
[Total 5]

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CT5: Assignment X4 Solutions Page 11

(ii) Probabilities

(a) ( ap ) 60 α
= p60 β
× p60 = (1 − 0.010) (1 − 0.020) = 0.9702 [1]

(b) The required probability can be written as:

2| ( aq)α60 = 2 ( ap) 60 × ( aq)α62 [1]

The first term on the right is:

2 ( ap) 60 = p60
α α
× p61 β
× p60 β
× p61

= (1 − 0.010) (1 − 0.015) (1 − 0.020) (1 − 0.022)

= 0.934623 [1]

Also, from the result in (i):

( aq)α62 = q62
α
(1 − ½ q62β ) = 0.020 (1 − ½ × 0.024) = 0.01976 [½ ]

So:

2| ( aq)α60 = 0.934623 × 0.01976 = 0.018468 [½ ]

[Total 4]

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Page 12 CT5: Assignment X4 Solutions

Solution X4.7

This is a good test of how well you understand the single figure indices. It is not always
enough to be able just to calculate them.

Crude Death Rate

● heavily influenced by mortality at older ages [½]
● beware epidemics distorting figures [½]

(a) OK if population structure reasonably stable [½]

hence beware mass immigration or emigration [¼]
easy to calculate [¼]

(b) don’t do it! [½]

because of different age distributions [¼]
and different sex distributions in each occupational group [¼]

Standardised Mortality Rate

● influenced again by mortality at older ages [½]

(a) generally OK [½]

but practical constraints [½]
since need age/sex-specific mortality rates at each time point [¼]
no problems caused by changing population structure [¼]

(b) good [½]

copes well with age and sex variations provided age-specific rates are available for
occupational groups [½]
but cannot allow for some occupations being selected against [½]
eg entering/leaving an occupation due to health reasons [½]

Standardised Mortality Ratio

● heavily influenced by relative mortality at older ages [1]

(a) generally OK [½]

the standard mortality rates must be the same figures each time otherwise you are
not performing a valid comparison [½]

(b) fine [½]

except possible practical problems with the gathering of data [¼]
eg population age distributions in different occupational groups [¼]
[Maximum 9]

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CT5: Assignment X4 Solutions Page 13

Solution X4.8

(i) 50, 000∫ e −δ t

10
0
( aa
t p50
ai
μ50+t + t p50 υ50+t dt ) [2]

This can be reasoned as follows. Suppose that the life dies at age 50 + t . This can be
from either the able state or the ill state. A benefit of £50,000 is then paid at time t ,
and this is discounted back to time 0. Integrating over all possible times t gives the
required expression.

10 −t −δ s
σ 50+t ⎛ ∫ ds ⎞ dt
9
(ii) 50, 000 ∫ e −δ t t p50
aa
e ii
s p50 +t υ 50 +t + s [3]
0 ⎝ 1 ⎠
aa
This time, suppose that the life gets sick at time t. The notation for this is t p50 σ 50+t .
The life could get sick at any time, but if this happens after time 9, it will not lead to any
benefit. So we integrate t between the limits of 0 and 9.

He has to stay sick for a year before any benefit is paid. If he remains sick for s (>1)
years, and dies from the sick state at age 50 + t + s , then the benefit is paid at time t + s
and must be discounted back to time 0. The “probability” of this happening is
ii
s p50 +t υ 50 +t + s . Note that s must be at least 1 for any benefit to be paid, but the policy
term is 10 years. However, given that the life falls sick at time t, the duration of
sickness required for the payment of the benefit is between 1 and 10 − t . So we
integrate s between these limits.

10
(iii) 5, 000∫ e −δ t t p50
ai
dt [2]
0

ai
If the life is sick at time t, which had probability t p50 , then he will receive benefit at the
rate of £5,000 pa. This is multiplied by the discount factor e −δ t to give the present
value. Then integrate over all points in time t where a benefit could be paid.
[Total 7]

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Page 14 CT5: Assignment X4 Solutions

Solution X4.9

(a) Class selection

Class selection is where individuals are grouped according to characteristics that have
permanent effects on mortality or morbidity. [1]

Examples include:
● sex
● smoker status
● policy type [1]

(b) Selective decrement

This is where lives that exit from the population through a particular cause of decrement
do not have the same mortality or morbidity characteristics as the population as a whole.
The effect of the selective decrement is then to alter the average mortality or morbidity
experience of those who remain in the population. [1]

For example, consider a population of life assurance policyholders. People who are in
good health may withdraw their policies whilst those in poor health are much less likely
to do so. As a result, the average mortality of those who withdraw tends to be lower
than that of the policyholders as a whole, so that the average mortality of those that
remain increases. Withdrawal is therefore acting as a selective decrement with respect
to mortality. [1]

(c) Spurious selection

This is where heterogeneity in a population leads to incorrect interpretations of

mortality or morbidity differences being made. [1]

For example:
● A population of females may have a greater proportion of older lives, or of
smokers, than a population of males. An analysis of the mortality of the two
groups (subdivided only by their sex) would reveal that females have higher
mortality than males. This is almost certainly an erroneous indication of the
effect of sex on mortality.
● Increasing the strictness of underwriting for life insurance policies over time will
lead to a lighter mortality experience. This may be falsely interpreted as an
improvement in mortality over time.
[1]

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CT5: Assignment X4 Solutions Page 15

(d) Adverse selection

This is the name given to any type of selection that leads to an adverse effect on another
party, eg a life insurance company. [1]

Examples include:
● Smokers looking for life insurance will favour companies that charge identical
premiums to smokers and non-smokers, whereas non-smokers will favour
companies that do differentiate as they will charge lower rates to non-smokers.
As a result, companies of the first type will suffer from adverse selection, as they
will end up with a higher proportion of bad risks.
● Selective withdrawal of healthy lives from life insurance policies will result in a
higher average mortality experience for the remaining policyholders. [1]

(e) Temporary initial selection

Temporary initial selection arises when mortality changes with the passage of time since
some event, over and above the change associated with age. This type of selection is
temporary because after a period of time, the length of time since the event took place
becomes insignificant. [1]

An example of temporary initial selection is found amongst life assurance policyholders

who passed some medical underwriting test before being accepted for insurance.
Immediately after passing the test, these lives have much better mortality than lives of
the same age who passed the test several years before. However, their mortality tends
towards that of the overall group as time since the test increases. [1]
[Total 10]

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Page 16 CT5: Assignment X4 Solutions

Solution X4.10

(i) Contribution rate

The formula for the value of the future service benefits is:

75, 000 z R35

ra ra
5 × 2, 000 R35
− [2]
60 s34 D35 60 D35

The benefit formula is based on the same definition of final average pay as is used in the
Tables.

From the Tables:

s34 = 6.389
D35 = 4, 781
z ra
R35 = 3,524,390
ra
R35 = 327, 244

So the value of the future service benefits is:

75, 000 3,524,390 5 × 2, 000 327, 244

× − × = 132,818 [2]
60 6.389 × 4, 781 60 4, 781

The formula for the value of the members’ future contributions is:

⎛ s
N35 N ⎞
k ⎜ 75, 000 − 5 × 2, 000 35 ⎟ [1]
⎝ s34 D35 D35 ⎠

From the Tables:

s
N35 = 502,836

N35 = 59,914

So the value of future contributions of 100k % of pensionable pay is:

⎛ 502,836 59,914 ⎞
k ⎜ 75, 000 × − 5 × 2, 000 × = 1,109,311k [1]
⎝ 6.389 × 4, 781 4, 781 ⎟⎠

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CT5: Assignment X4 Solutions Page 17

So, in order to meet the cost of the benefits (£132,818), the total contribution rate
(members and company combined) must be:

k = 132,818 /1,109,311 = 11.97%

Since the members contribute 5%, the company must pay the remaining 6.97%. [2]
[Total 8]

(ii) Modifications

(a) The salary given in the data is now the starting salary on 1 May 2006. This is
the same as the salary that would have been earned during the 2006 calendar
year (ie between ages 34 2 3 and 35 2 3 ). So the salary scale factor in the
denominator should be changed from s34 to 1s + 23 s35 . [2]
3 34

(b) If service were limited to 20 years, the summations in the definitions of z R35
ra
and
ra
R35 should only include ages 35, 36, ... , 54. Alternatively, we could use the
functions as currently defined and subtract z R55
ra
from z R35
ra ra
and R55 ra
from R35 .
[2]
[Total 4]

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Page 18 CT5: Assignment X4 Solutions

Solution X4.11

(i) Calculations

Occupation A

Crude Death Rate

Deaths are 2,505 (given data)

divided by a population of 234,000 gives a crude death rate of 10.71 per 1,000 [1]

Standardised Mortality Rate

We apply occupation-specific mortality rates to the “all occupations” population

structure:

0.001 × 360 + 0.002 × 390 + 0.004 × 430 + 0.026 × 320

= 7.45 per 1,000 [1]
1,500

Standardised Mortality Ratio (SMR)

Expected deaths are calculated using the “all occupations mortality”:

1,000 × (0.001 × 21 + 0.002 × 42 + 0.006 × 93 + 0.024 × 78) = 2,535 [½]

actual deaths 2,505

= = 0.988 [½]
expected deaths 2,535

Occupation B

Crude Death Rate

Deaths are given as 2,096

divided by a population of 220,000 gives a crude death rate of 9.53 per 1,000 [1]

Standardised Mortality Rate

0.003 × 360 + 0.002 × 390 + 0.005 × 430 + 0.021 × 320

= 7.15 per 1,000 [1]
1,500

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CT5: Assignment X4 Solutions Page 19

Standardised Mortality Ratio (SMR)

Expected deaths are calculated from:

1,000 × (0.001 × 12 + 0.002 × 44 + 0.006 × 92 + 0.024 × 72) = 2,380 [½]

actual deaths 2,096
= = 0.881 [½]
expected deaths 2,380
[Total 6]

(ii) Calculations and comments

Occupation A

21 84 372 2,028
+ + + = 209,500
0.001 0.002 0.006 0.024

209,500
Hence the index gives = 0.895 [1]
234,000

Occupation B

36 88 460 1,512
+ + + = 219,667
0.001 0.002 0.006 0.024

219,667
Hence the index gives = 0.998 [1]
220,000

Both the crude death rate and the standardised death rate of Occupation A exceed that of
Occupation B. The difference in the standardised rates is smaller however, due to the
slightly different population structures that serve to exaggerate the difference in the
underlying mortality levels. [1]

The SMR for each occupation is lower than one, indicating that the occupations suffer
lighter mortality than average. Again Occupation B has the lower figure of the two. [1]

The new index gives a slightly different picture suggesting that Occupation A suffers
lighter mortality than Occupation B. (This index compares the age specific mortality
rates and then weights them according to the size of the population in each age group.
The weighting in both the SMR and the standardised rates are biased towards older
ages.) [1]

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Page 20 CT5: Assignment X4 Solutions

These results show that while single figure indices provide useful summary information,
they can be misleading when viewed in isolation as they only paint part of the picture.
[1]
[Total 6]

Solution X4.12

This question is CT5 September 2005 Question 13.

(i) Age retirement benefit

Let:

i be the valuation rate of interest [¼]

1
v= [¼]
1+ i

rx be the number of age retirements between x and x + 1 , x ≤ 64 [¼]

r65 be the number of age retirements at exact age 65 [¼]

lx be the number of active lives at age x exact [¼]

All of the rx and lx values must come from a suitable service table. [¼]

axr be the expected present value at age x of a pension of 1 pa payable on age

retirement at age x , and payable in accordance with the scheme rules. [¼]

{ sx } is a salary scale such that:

s x +t expected salary earned in year of age ( x + t , x + t + 1)

= [½]
sx expected salary earned in year of age ( x, x + 1)

s x −1 + s x − 2 + s x −3
zx = [¼]
3

Assume that age retirements before age 65 occur halfway between birthdays on average.
[¼]

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CT5: Assignment X4 Solutions Page 21

Past service benefit

The member is aged exactly 26 on the valuation date and has 5 years of past service. So
he is already entitled to 5/60ths of final pensionable salary when he retires. [½]

If he retires in the year of age ( y, y + 1) for y < 65 , we are assuming it occurs at age
y + 0.5 , so his FPS will be:

z y +0.5
50, 000 [1]
s25.25

z65
If he retires at exact age 65, his FPS will be 50, 000 . [½ ]
s25.25

Note that we have s25.25 in the denominator since he started to earn £50,000 on 1 April
2004, when he was aged exactly 25.25.

The expected present value of the past service benefit is:

5 ⎡r z r z
r
× 50, 000 ⎢ 26 v 0.5 26.5 a26.5 r
+ 27 v1.5 27.5 a27.5 +"
60 l
⎣ 26 s 25.25 l26 s25.25

r64 38.5 z64.5 r r z r ⎤

+ v a64.5 + 65 v39 65 a65 ⎥ [½]
l26 s25.25 l26 s25.25 ⎦
5 ⎡ r v 26.5 z26.5 a26.5
r
+ " + r64 v 64.5 z64.5 a64.5
r r ⎤
+ r65 v 65 z65 a65
= × 50, 000 ⎢ 26 ⎥ [½]
60 ⎢⎣ s25.25 v 26l26 ⎥⎦

Note that rx = 0 for x < 60 so it would also be correct to write the expected present
value of the past service liability as:

5 ⎡ r v 60.5 z60.5 a60.5

r r
+ " + r64 v 64.5 z64.5 a64.5 r ⎤
+ r65 v 65 z65 a65
× 50, 000 ⎢ 60 ⎥ [½]
60 ⎢⎣ s25.25 v 26 l26 ⎥⎦

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Page 22 CT5: Assignment X4 Solutions

Now define:

Dx = v x l x [¼]

z
C xra = rx v x +0.5 z x +0.5 a xr +0.5 for x < 65 [¼]

z ra
C65 = r65 v 65 z65 a65
r
[¼]

and:

z
M xra = zC xra + zC xra+1 + " + zC65
ra
[¼]

Then the expected present value of the past service benefit is:

5 ⎛ zC ra + zC27ra ra ⎞
+ " + zC65 5 z ra
M 26
× 50, 000 ⎜ 26 ⎟ = × 50, 000 × [1]
60 ⎝ s25.25 D26 ⎠ 60 s25.25 D26

Note that:

5 ⎛ zC ra + zC61ra ra ⎞
+ " + zC65 5 z ra
M 60
× 50, 000 ⎜ 60 ⎟ = × 50, 000 ×
60 ⎝ s25.25 D26 ⎠ 60 s25.25 D26

is also correct.

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CT5: Assignment X4 Solutions Page 23

Future service benefit

Consider the year of service from age y to age y + 1 . If the member completes this
year of service, he will accrue 1/60th of FPS towards his annual pension. [½]

If he does not complete the year, he will accrue nothing. [½]

So the expected present value of the benefit in respect of the year of future service from
age y to age y + 1 is:

1 ⎡ ry +1 y +1.5− 26 z y +1.5 r ry + 2 y + 2.5− 26 z y + 2.5 r

× 50, 000 ⎢ v a y +1.5 + v a y + 2.5 + "
60 l
⎣ 26 s25.25 l26 s 25.25
[½]
r64 38.5 z64.5 r r z r ⎤
+ v a64.5 + 65 v39 65 a65 ⎥
l26 s25.25 l26 s25.25 ⎦
1
= × 50, 000 ⎡⎣ ry +1 v y +1.5 z y +1.5 a ry +1.5 + "
60
r ⎤
r
+ r64 v 64.5 z64.5 a64.5 + r65 v 65 z65 a65 26
⎦ s25.25 v l26 [½]

1 ⎡ zC yra+1 + " + zC65

ra ⎤
= × 50, 000 ⎢ ⎥ [¼]
60 ⎢⎣ s25.25 D26 ⎥⎦
z ra
1 M y +1
= × 50, 000 × [¼]
60 s25.25 D26

Note that z M yra+1 = z M 60

ra
for y ≤ 59 .

Now we sum over all possible years of future service that would lead to accrual.
Because the pension is subject to a maximum of 40 years of accrual and the member has
already accrued 5 years, we sum over the years of service (26,27), (27,28), …, (60,61).
So the expected present value of the future service benefit is:

z ra
1 M 27 + z M 28
ra
+ " + z M 61
ra
× 50, 000 × [½]
60 s25.25 D26

The Actuarial Education Company © IFE: 2011 Examinations

Page 24 CT5: Assignment X4 Solutions

Now defining:

z ra
Rx = z M xra + z M xra+1 + " + z M 65
ra
[¼]

the expected present value of the future service benefit is:

z ra
1 R − z R62 ra
× 50, 000 × 27 [½]
60 s25.25 D26
[Total 12]

Note that:

1 34 z M 60
ra
+ z M 61
ra
1 33 z M 60
ra
+ z R60
ra
− z R62
ra
× 50, 000 × = × 50, 000 ×
60 s25.25 D26 60 s25.25 D26

is also correct.

(ii) Death in service benefit

We now also define:

d x to be the number of deaths between the ages of x and x + 1 , according to a suitable

service table. [½]

We assume that deaths occur halfway between birthdays on average. [½]

So if the member dies in the year of age ( y , y + 1) , we assume that this happens at age
y + 0.5 . [½]

We also assume that salary increases take place on 1 April each year, ie at ages 26.25,
27.25, 28.25, etc. [½]

The scheme provides a benefit of 4 times annual salary at the date of death on death
before retirement. So if the member dies in the year of age ( y, y + 1) , then using our
s y +0.25
assumptions, the amount of benefit payable is 4 × 50, 000 × . [1]
s25.25

© IFE: 2011 Examinations The Actuarial Education Company

CT5: Assignment X4 Solutions Page 25

So the expected present value of the death benefit is:

⎡d s d s d s ⎤
4 × 50, 000 ⎢ 26 v 0.5 26.25 + 27 v1.5 27.25 + " + 64 v38.5 64.25 ⎥ [½]
⎣ l26 s25.25 l26 s25.25 l26 s25.25 ⎦

s26.25 d 26 v 26.5 + s27.25 d 27 v 27.5 + " + s64.25 d64 v 64.5

= 4 × 50, 000 × [½]
s25.25 l26 v 26

If we now define:

s
C xd = s x +0.25 d x v x +0.5 [½]

and:

s
M xd = sC xd + sC xd+1 + " + sC64
d
[½]

then the expected present value of the death benefit is:

s d
C26 + sC27
d
+ " + sC64
d s d
M 26
4 × 50, 000 × = 4 × 50, 000 × [1]
s25.25 D26 s25.25 D26
[Total 6]

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