CONFIDENTIAL ——— CSIJUN 2013/ASC569 UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE ACTUARIAL PRACTICE COURSE CODE ASC569 EXAMINATION : JUNE 2013 TIME 3 HOURS INSTRUCTIONS TO CANDIDATES 1 This question paper consists of five (5) questions, 2. Answer ALL questions in the Answer Booklet. Start each answer on a new page. 3. Do not bring any material into the examination room unless permission is given by the invigitator. 4 Please check to make sure that this examination pack consists of i) the Question Paper ji) a two-page Appendix 1 iil) an Answer Booklet — provided by the Faculty DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 5 printed pages (© Hak Cipta Universit Teknologl MARA CONFIDENTIALCONFIDENTIAL 2 CSIJUN 2013/ASC569 QUESTION 1 The Net Level Premium Reserve Method is not suitable for statutory valuation of liabilities and needs to be modified to meet the Bank Negara Malaysia statutory requirement. a) _ Explain the difference between the Net Level Premium Reserve and the Modified Net Level Premium Reserve based on the Malaysian Insurance Act 1996. You should include in your explanation the general formula and the basis of valuation. (8 marks) b) Why is it necessary to modify the net level premium for the statutory reserve calculation? (2 marks) ©) Determine the statutory minimum reserve for a 30-Pay Whole Life participating policy per 1000 sum assured for a life assured aged 30 years at entry and 15 years duration. The policy participates in simple reversionary bonus at 3.5 per cent per annum. (10 marks) QUESTION 2 You work in the Actuarial Department of a Life Office and have been assigned to develop a new life insurance product with savings elements. You need to consider whether to use conservative pricing or realistic pricing assumptions. a) Whats meant by conservative pricing and realistic pricing? (6 marks) b) Sensitivity testing and scenario testing are performed during the product development process. Explain each of these testing methods and their purpose. (8 marks) c) The management of your company emphasized the corporate goal of maximizing profits in your pricing structure. However, you have advised them the need to have a balance between profitability and marketability to be competitive in the life insurance industry. Discuss your choice of pricing basis and defend your case to the management board. (6 marks) (© Hak Cipta Universiti Teknologi MARA, CONFIDENTIAL,CONFIDENTIAL 3 CSIJUN 2013/ASC569 QUESTION 3 You were consulted by SAK Life Sdn Bhd for advice on the management of its life insurance fund. The financial year of the company runs from 1 January to 31 December each year. The following data was extracted from its 2012 Financial Report: (Figures in thousands) RM Gross Premium Received in financial year 2012 115,344 Claims in financial year 2012 45,887 Expenses in financial year 2012 23,624 Reserves at 1 Jan 2012 101,952 Reserves at 31 Dec 2012 145,851 Net Premiums Received in financial year 2012 89,902 Fund at 1 January 2012 309,406 Fund at 31 December 2012 373,969 The actuarial valuation of liabilities on the fund was based on the Malaysian statutory minimum valuation basis. a) Construct the 2012 Revenue Account for the life insurance company. (6 marks) b) Calculate the three main sources of surplus for the financial year 2012. Verify your answer by evaluating the total surplus that emerged during the financial year 2012. (12 marks) ©) The life insurance industry investment performance was on average 5% per annum in the last five years. Find the investment performance of SAK Life and comment on your results, (3 marks) (© Hak Cipta Universiti Teknologi MARA, CONFIDENTIALCONFIDENTIAL 4 CSIJUN 2013/ASC569 QUESTION 4 a) b) °) d) The data for householders’ policies issued by a general insurer in 2011 and 2012 were gathered based on quarterly periods as follows: Number issued or renewed Quarter 2011 2012 1 January - 31 March 124 132 1 April - 30 June 115 126 1 July - 30 September 138 153 1 October-31 December 144 447 Using the “eighth rule’, approximate the exposure to the risk of a claim in 2012. State the assumptions used in your approximation. (7 marks) 8 policies were terminated during 2011 and 2012 as shown below: Date of termination Renewal date | Date of termination Renewal date 2 February 2011 14 April 24 March 2012 5 September 15 May 2011 3 March 13 June 2012 28 August 18 November 20117 May 8 October 2012 19 July 29 December 2011 _9 July 7November 2012 _ 3 January Calculate the total reduction in exposure. Why is the reduction necessary? (6 marks) ‘The number of claims in respect of policies in force in 2012 was reported to be 30 and an estimated 4 claims are incurred but not reported. Based on the results from part (a) and part (b) above, determine the point estimate of the claim frequency rate. (3 marks) How would your approximation of exposures in part (a) be modified if the number of policies issued or renewed in 2011 and 2012 were collected based on half-yearly periods instead of quarterly periods? (4 marks) (© Hak Cipta Universiti Teknolog! MARA, CONFIDENTIALCONFIDENTIAL 5 CSHJUN 2013/ASC569 QUESTION 5 ‘The expenses of a 15-year endowment policy issued to (25) are assumed to be allocated as follows: First year: 50% of Premium, Flat amount RM10. Second to fifth year: 25% of Premium, RMS per RM1000 of sum assured at the beginning of the year. Thereafter: 10% of Premium, RMS per RM1000 of sum assured at the beginning of the year. Cost of claim settlement: RM10 a) Explain the three types of expenses and give two examples of each type. (6 marks) b) Assuming immediate payment of claims, develop the formula for the annual gross premium per 1000 of sum assured in terms of commutation functions. Hence, calculate the gross premium using DG! 1996 Mortality Table at 4% interest. (11 marks) ) What modification is necessary to the formula found in part (a) above if on average, death payment is made at the end of the first quarter of the year of death? Interpret your result. (3 marks) END OF QUESTION PAPER (© Hak Cipta Universiti Teknologi MARA, CONFIDENTIALCONFIDENTIAL APPENDIX 1 (1) CSNUN 2013/ASC569 ‘Commutation functions based on DGI 1996 Mortality Table at 4% interest per annum [ape Nee eee] 6,755,641.7 | 155,874,750.0 | 3,130,429,877.0 | 10,198.42 | 759,934.67. 6,485,610.9 | 149,119,108.3 | 2,974,555,127.0| 9,728.42 | 749,736.25 | 34,606,477.27 6,226,435.9 | 142,633,497.4 | 2,825,436,018.7 | 8,920.57 | 740,007.84 | 33,916,741.02 5,978,037.0 | 136,407,061.5 | 2,682,802,521.2 | 8,334.76 | 731,087.27 | 33,176,733.18 5,739,777.8 | 130,429,024.5 | 2,546,395,459.7 | 7,947.38 | 722,752.51 | 32,445,645.91 5,511,069.7 | 124,689,246.7 | 2,415,966,435.2 | 7,630.71 | 714,805.12 | 31,722,893.41 5.291,474.8 | 119,178,177. | 2.291.277, 166.4 | 7,590.16 | 707,174.41 | 31,008, 088.28, '5,080,426.3 | 113,886,702.3 | 2,172,099,011.4 | 7,522.94 | 699,644.23 |_30,300,913.88 4,877,502.4 | 108,806,275.9 | 2,058,212,309.2 | 7,644.55 | 692,121.29 | 29,601,269.64 4,682,261.6 | 103,928,773.5 | 1,949,406,033.2 | 7,923.83 | 684,476.75 | 28,909,148.35 4,494,250.8 | 99,246,512.0 | 1,845,477,259.7 |_ 8,210.65 | 676,552.92 | 28,224.671.60 4,313,184.3 | _94,752,261.2 | 1,746,230,747.7 | 8,584.90 | 668,342.27 | 27,548,118.68 4,138,707.7 | 90,439,076.8 | 1,651,478,486.6 | 8,715.16 | 659,757.37 | 26,879,776.41 3,970,811.5 | 86,300,369.1 | 1,561,039,409.7 | 8,323.43 | 651,042.21 | 26,220,019.03 3,809,764.5 | 82,329,557.6 | 1,474,739,040.6 | 7,729.43 | 642,718.78 | 25,568,976.82 3,655,505.7 | _78,519,793.1 | 1,392,409,483.0 | 7,170.42 | 634,989.35 | 24,926,258.04 [0.00198] 3,507,738.9 | 74,864,287.4 | 1,313,889,689.9 | 6,678.20 | 627,818.94 | 24,291,268.69 l0.00192| 3,366,147.7 | _71,356,548.4 | 1,239,025,402.6 | 6,214.43 | 621,140.74 | 23,663,449.75 (0.00187| 3,230,466.1 | 67,990,400.7 | 1,167,668,854.1 | 5,808.63 | 614,926.32 | 23,042,309.01 [0.00182] 3,100,408.7 | 64,759,934.7 | 1,099,678,453.4 | 5,425.72 | 609,117.69 | 22.427,382.69 [0.00178] 2,975,736.5 | _61,659,525.9 | 1,034,918,518.7 | 5,093.09 | 603,691.97 | 21,818,265.00 10.00177| 2,856,192.0 | _58,683,789.4 973,258,992.8 | 4,861.02 | 598,598.89 | 21,214,573.03 10.00179| 2.741,477.5 | _55,827,597.4 '914,575,203.4 | 4,718.50 | 593,737.87 | 20,615,974.14 10.00185| 2,631,317.5 | _53,086,119.9 858,747,606.0 | 4,680.71 | 589,019.36 | 20,022,236.27 10.00193| 2,525,432.3 | 50,454,802.4 805,661,486.1 | 4,686.62 | 584,338.65 | 19,433,216.91 10.00202| 2,423,613.7 | 47,929,370.1 755,206,683.7 | 4,707.40 | 579,652.03 | 18,848,878.26 10.00214| 2,325,690.4 | _45,505,756.4 707,277,313.6 | 4,785.56 | 574,944.63 | 18,269,226.22 10.00226| 2,231,455.2 | 43,180,066.1 661,771,557.2 |_ 4,849.12 | 570,159.08 | 17,694,281.59 0.00239] 2,140,780.8 | 40,948,610.9 618,591,491.1 | 4,919.68 | 565,309.95 |_17,124,122.51 0.00254] 2,053,523.4 | _38,807,830.1 577,642,880.2 | 5,015.34 | 560,390.27 | 16,558,812.56 0.00272] 1,969,526.4 | 36,754,306.6 538,835,050.1 | 5,151.07 | 555,374.94 | 15,998,422.29 10.00293| 1,888,624.4 | 34.784,780.2 502,080,743.5 | 5,320.84 | 550,223.87 | 15,443,047.35 10.00319| 1,810,664.1 | 32,896,155.8 467,295,963.4 | 5,553.86 | 544,903.03 | 14,892,823.48 |0.00349| 1,735,469.3 | _31,085,491.7 434,399,807.5 | 5,823.83 | 539,349.17 | 14,347,920.45 10.00383| 1,662,896.7 | _29,350,022.4 403,314,315.8 | 6,123.94 | 533,525.33 | 13,808,571.28 145|0.00419] 1,592,815.2 | 27,687,125.7 373,964,293.5 | 6,417.21 | 527,401.40 | 13,275,045.95. \46|0.00460| 1,525,135.8 | _26,094,310.5 346,277,167.8 | 6,745.79 | 520,984.19 |_12,747,644.55. \47|0.00505| 1,459,731.0 | 24,569,174.7 320,182,857.2 | 7,088.12 | 514,238.40 |_12,226,660.36 '48|0.00552| 1,396,499.4 | _23,109,443.7_ 295,613,682.5 | 7,412.19 | 507,150.28 |_11,712,421.97 49|0.00603] 1,335,375.7 | 21,712,944.4 272,504,238.8 | 7,742.61 | 499,738.09 |_11,205,271.69 '50|0.00660| 1,276,272.4 | 20,377,568.7 250,791,294.4 | 8,099.42 | 491,995.48 | 10,705,533.60 |51|0.00721| 1,219,085.6 | _19,101,296.3 230,413,725.7 | _ 8,451.55 | 483,896.06 | 10,213,538.12 |52|0.00790| 1,163,746.2 | _17,882,210.6 211,312,429.5 | 8,839.99 | 475,444.51 | 9,729,642.06 53 |0.00866| 1,110,146.7 | 16,718,464.5 193,430,218.8 | 9,244.11 | 466,604.52 | _9,254,197.54 154/0.00946| 1,058,204.6 | 15,608,317.8 176,711,754.3 | 9,625.59 | 457,360.41 | 8,787,593.03 R/S RSS [8[s/s|8[e[8/[B[8[2/8/3/S/8/8) (© Hak Cipta Universiti Teknologi MARA. CONFIDENTIAL,CONFIDENTIAL APPENDIX 4 (2) CSIJUN 2013/ASC569 Commutation functions based on DGI 1996 Mortality Table at 4% interest per annum [0.01033] 1,007,878.9 | 14,550,113.1| _161,103,436.6 | 10,010.95 | 447,734.82 | 8,330,232.61 [0.01122] 959,103.4 | 13,542,234.2 | _146,653,323.5 | 10.347.25 | 437,723.87 | 7,882,497.79 [0.01210] _917,867.5 | _12,583,130.9 | _133,011,089.2 | 10,609.23 | 427,376.62 | 7,444,773.93 [0.01295] 866, 186.5 | 17,671,263.4 | 120,427,958. | 10,785.69 | 416,767.39 | 7,017,397.31 0.01381] 822,085.9 | 10,805,076.9 | 108,756,694.9 | 10,916.36 | 405,981.70 |" 6,600,620.97 0.01479] _779,550.9 | 9,982,997.0| _97,957,618.0 | 11,086.11 | 395,065.35 | 6,194,648.21 [0.01597] 738,482.0 | 9,203,440.1 | 67,968,627.0 | 11,330.96 | 383,979.24 |” 5,799,582.86 jo.01741| 698,738.9 | 8,464,958.1| 78,765, 186.9 | 11,697.16 | 372,639.28 | 5,415,603.62 [0.01903] 660,167.2 | _7,766,219.2 | 70,300,228.8 | 12,079.79 | 360,942.12 | 5,042,964.34 [0.02084] 622,696.3 | 7,106,052.0 | 62,534,009.6 | 12,477.66 | 348,862.33 | 4,682,022.22 [0.02286] 586,268.6 | 6,483,355.7 | 55,427,957.5 | 12,606.64 | 336,384.45 | 4,333, 159.89, [0.02506] 550,833.2 | _5,897,087.1| _48,944,601.9 | 13,272.96 | 323,497.62 | 3,996,775.43, BERBER RBBB le7|o.o2755| 516.3743 5,346,2539 | 43,047,514.8 | 13,678.95 | 310,224.86 | 3,673,277.61 [ea|o.03019] —482,834.8 | 4,829,8795 | 37,707,260.9 | 14,016.14 | 206,545.90 | 3,363,052.75 [eo|0.03303| 450.248.1 | 4.347,0447 | 32,871,381.4 | 14,209.71 | 262,629.77 | 3,066,506.85 '70|0.03615| 418,631.2 | 3,696,796.6 | _ 28,524,396.7 | 14,551.46 | 268,230.06 |" 2,783,977.08 71]0.03961| 387,978.5 | 3,.478,165.4| _ 24,627,540.0 | 14,776.76 | 253,678.60 | _2,515,747.02 '72|0.04345| 358,279.5 | 3,090,186.9| _ 21,149,374.6 | 14,968.50 | 236,901.84 | 2,262,068.42 '73|0.04756| _329,531.0| _2,731,907.4| _18,059,187.7 | 15,069.71 | 223,933.34 | 2,023,166 58 '74|0.05200| _301,787.0 | 2,402,376.4| 15,327,280. | 15,089.35 | 208,863.63 | 1,799,233.24 '75|0.05684| _275,090.5| 2,100,589.3| 12,924,903.9 | 15,034.75 | 193,774.28 | _1,590,369.61 [76|0.06215| 249,475.3| 1,825,4088| _10,824,314.5 | 14,908.55 | 178,739.62 | 1,306,595.33 7|0.06799| 224,971.6 | 1,576,023.5| _8,998,815.7 | 14,707.52 | 163,830.97 | 1,217,855.81 78 [0.07425] 201,611.3| _1,351,051.9| __7,422,792.2 | 14,393.66 | 149,123.46 |" 7,054,024.84 '79|0.08098| — 179,463.1 | 1,149,440.6| _6,07%,740.3 | 13,973.97 | 134,729.57 | 904,901.38 '30|0.08824| 158,586.8 | 969,977.5| _4,922,200.6 | 13,455.48 | 120,755.61 | 770,171.81 '81/0.09609| 139,031.8 | 611,390.7| _3,952,322.2 | 12,845.73 | 107,300.13 | 649,416.20 'g2|0.10458| 120,838.7| 672.3589] 3,140,931.5 | 12,151.26 | 94,454.30 | 542,116.07 'g3]0.11367| 104,030.8| 651.5202] 2,468,572.6 | 11,371.35 62,303.14 | 447,661.68 '94|0.12338| 8,666.9 | 447,480.5 1,917,052.3 | 10,518.96 | 70,931.79 | 365,358.54 (95|0.13370| 74,737.7| 368.8136 1,469.571.8 | 9,608.10 | 60,412.83 | 294,426.75 fa6|0.14466| 62,255.0| _284,075.9 7,110,758,3 | 8,659.44 | 50,804.72 | 234,013.93 '87|0.15630|__51,201.2|_227,820.9 826,682.4| 7,694.95 | 42,145.29 [183,209.21 'g8|0.16890| _41,537.0| _170,619.7 604,861.5| 6,745.76 | 34,450.34 | 141,063.92 'g9|0.18230| 33,1936 | _129,082.7 434,241.8| 5,818.46 | 27,704.58 | 106,613.58 '90|0.19655] 26,098. 95,889.1 '305,159.1| 4,932.36 | 21,886.12 | 78,909.00 91021187] 20,1623 69,7906 209,270.0| 4,107.49| 16,953.76 | 57,022.88 '92|0.22867| 15,279.4 49,628.3 139,479.3 | 3,359.55 | 12,846.26 [40,069.13 '93|0.24732| —14,332.1, 34,3489 29,851.1| 2,694.87| 9,486.71 | 27,222.86 [o4lo.26e47| 8,201.4 23,016.8 55,502.1|_2,117.15| 6,791.84] 17,736.15 [95|0.20242| 5,768.8 14,815.4 32,485.3| 1,622.04 4,674.69] 10,944.31 960.1947 3,924.9 9,046.5 17,670.0| 1,205.67 | 3,052.65, 6,269.62 '97]o.35017| 2,568.3 5,121.6 9623.5 | 064.75 | 1,646.98 3216.97, '98|0.38527| 1,604.8 2,553.3 3501.9] 594.49 [ 982.24 4,369.98 :99|0.42513) 948.6 948.6 9486 | 387.75 387.75 387.75 (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL