ACTL10001 Introduction to Actuarial Studies Problem Sets The problem sets correspond to each week of the subject with

h the exception of Problem Set 0 which is for discussion at your tutorial class in the rst week of semester. You should attempt all numerical questions using one of the following calculators: Casio FX82 (with or without any sux) Casio FX83 (with or without any sux) Casio FX85 (with or without any sux) Sharp EL531 (with or without any sux) Texas Instruments BA II Plus (with or without any sux) Texas Instruments TI-30 (with or without any sux)

These are the only calculators allowed in actuarial exams. Problem Sets 112 contain three types of question: tutorial problems for discussion in the tutorial class; these should be attempted before you attend your tutorial and you should be prepared to present your solutions in class. past exam questions (from mid-semester or end of semester exams); these are not for discussion in tutorial classes. After each tutorial class, you should attempt these questions. problems from An Introduction to Actuarial Studies, 2nd edition (AITAS2E hereafter). Model solutions to tutorial problems and past exam questions will be made available on the LMS at the end of the corresponding week. You should review these model solutions when they appear as part of your learning process. Solution to problems in AITAS2E are available in the book. By the end of semester you will have been presented with about 150 problems of varying length and of varying degrees of diculty. If you understand the solutions to these questions you are adequately prepared for the end of semester examination. If you do not understand the solutions, extra problems will not help you.

Problem Set 0 The following questions are NOT based on lectures. Rather, they test prerequisite knowledge that you should have coming into this subject. 1. You should know that 1 + 2 + 3 + ... + n = n(n + 1) . 2

(a) Prove this result from rst principles. (b) Prove this result by induction. 2. Show from rst principles that
n

xi = x
i=1

1 xn . 1x

Hence give an expression for 3. Let

n1 i=0

xi .

g (t) = exp{ + t}. Given that g (10) = 8.1882 and g (20) = 60.3403, calculate g (15). 4. Consider a function f such that f (11) = 1.234 and f (12) = 2.345. Assuming that the function is linear over the interval from 11 to 12, calculate f (11.36). 5. Let g (x) = log(1 + x2 ). (We will use log to denote natural logarithm, so that log ex = x.)
d g (x). (a) Find and expression for dx (b) Explain why g (x) is an increasing function of x for x > 0.

6. Suppose we can represent a function f as a power series so that

f (x) = a0 + a1 x + a2 x + a3 x + . . . =
n=0

an x n .

(a) (b) (c) (d)

What is f (0)? Dierentiate f (x) and set x = 0. What is a1 ? Repeat (b) to nd a2 . Satisfy yourself that an = f (n) (0)/n! for n = 1, 2, 3, . . . , where f (n) denotes the nth derivative of f . (e) Let f (x) = ex . Express f (x) as a power series. 2

Problem Set 1 1. An investor can earn simple interest at 6% per annum. (a) Calculate the accumulated amount at time 3.5 years of an investment of $2,000. (b) How much should be invested now to secure an accumulation of $5,000 six years from now? 2. Calculate the accumulation for three years of an investment of $5,000 under a rate of simple discount of 5% per annum. 3. An investor is choosing between banks A and B. In Bank A, money accumulates at 6% per annum simple interest. Bank B oers a rate of simple discount d per annum. The investor (correctly) decides that Bank A provides a greater accumulation of money over a half-year period. What does this tell you about the value of d? 4. An investor purchased a $100,000 bill 100 days before maturity at 6% per annum simple discount. 40 days before maturity, the investor received an oer to sell the bill at 4% simple discount. The proceeds will be deposited and will earn interest at 4.5% per annum simple interest until the maturity date of the bill. (a) Determine whether the investor should sell the bill or hold it until maturity. (b) Calculate the rate of simple interest which an investor would earn if he holds the bill from purchase for 100 days until maturity. 5. According to the Australian Oce of Financial Management, the price, P per $100 face value, of Treasury Notes is P = 100 f 1 + ( 365 )i

where f is the number of days from the date of settlement to the maturity date and i is the annual yield (per cent) to maturity divided by 100. (See http://www.aofm.gov.au/content/pricing formulae.asp?NavID=58 if you are interested.) If the price on 20 June of a Treasury Note with maturity date of 26 November is $98, what is the annual yield?

Exam questions: You will not yet be able to give full answers yet to these questions, but have a look at the simple interest calculations. 1. An investor has $10,000 to invest for 6 months. Bank A oers a rate of simple interest of 8% per annum on investments. Bank B oers a rate of compound interest of 8% per annum eective on investments. With which bank would you advise the investor to deposit her money? Justify your answer. 2. (a) Find the accumulation of $1,000 for 90 days under simple interest at 6% per annum. Give your answer to the nearest cent. (b) Find the force of interest per annum that gives the same accumulation as in part (a). Give your answer to 4 decimal places. Problems from AITAS2E: Chapter 2: 1, 2 and 3

Problem Set 2 1. Consider an investment of $1,000 made for three years. (a) Calculate the accumulation of this investment at 6% per annum simple and at 6% per annum compound. (b) Explain why they are dierent. (c) Calculate the dierence when the investment was made for 10 years. 2. How long does it take an investment to double in value under: (a) simple interest at 5% per annum, (b) compound interest at 5% per annum. 3. How much does an investor need to deposit today to have $10,000 in an account in 6 years time if interest is earned at 5.5% per annum compound? 4. To the nearest $1, calculate the present value of $100,000 due in 8.25 years using: (a) a rate of interest of 0.05 per annum eective, (b) a force of interest of 0.06 per annum, (c) a rate of interest of 8% per annum convertible quarterly, (d) a rate of interest of 6% per annum convertible monthly, and (e) a rate of interest of 7.2% per annum convertible half-yearly. 5. Correct to 5 decimal places, calculate: (a) i(2) given = 0.05, (b) given i(4) = 0.05, (c) i(12) given i = 0.12, and (d) i given i(12) = 0.063. 6. Calculate the total present value of two payments of $1,000 each due in 3.5 and 5 years time assuming a rate of interest of 6% per annum eective for the rst two years and a force of interest of 5% per annum thereafter. 5

7. Investments of $1,000 are made at time 0 and time 2 (measuring in years). At time 4 the accumulated amount of these investments is $2,692.96. If these investments were accumulated under a nominal rate of interest i(2) per annum convertible half-yearly, nd i(2) . Exam questions: 1. Calculate i(6) when = 0.05. Give your answer to 4 decimal places. 2. Calculate to the nearest cent the accumulation at time 10 years of an investment of $1,000 now assuming that the interest rate for the rst ve years will be 6.2% per annum eective, and for the next ve years will be a nominal rate of 6.4% per annum convertible quarterly. 3. Find the amount of money required now to provide payments of $100 two years from now, $200 seven years from now and $300 twelve years from now, assuming an eective rate of interest of 5.1% per annum for ve years, followed by a nominal rate of interest of 5.2% per annum convertible quarterly. Give your answer to the nearest cent. Problems from AITAS2E: Chapter 2: 4, 5(a)-(c), 6, 7

Problem Set 3 1. Suppose that interest rates in odd numbered years are 8% per annum eective, and in even numbered years 10% per annum eective. Find the present value (i.e. at the start of year 1) of payments of $1,000 at the end of every two years until the total amount of the payments is $10,000. Hint : use a result from Problem Set 0. 2. Calculate the present value of an annuity of $1,000 per annum payable annually in arrear for 10 years, deferred for 3 years (i.e. the rst payment is received in 4 years time). Interest rates are as follows: 0.10 per annum eective for the rst 4 years, and 0.08 per annum convertible quarterly thereafter. 3. Calculate the accumulated value at the end of 10 years of a series of payments as follows: for the rst ve years, $100 per annum half-yearly in arrear, and for the next ve years, $125 per annum annually in arrear. Interest rates are 8.4% per annum convertible half-yearly for the rst seven years, and 7.3% per annum eective for the next three years. 4. Show that sm+n = sm + (1 + i)m sn and explain in words what this equality means. 5. Suppose that interest rates in odd numbered years are 8% per annum eective, and in even numbered years are 10% per annum eective. Payments of $1,000 are made at the end of every two years. The number of payments is the least integer such that the present value of the payments exceeds 5,000. How many payments are made?

Exam questions: 1. Using an eective rate of interest of 6.2% per annum, compute (4) and a 15 . Give your answers to 4 decimal places.
10 |a10

2. An annuity is payable in arrear for 20 years under which payments occur at times 1,2,3,. . . ,20 years from now. The annuity payment at time t is t for t = 1, 2, 3, . . . , 10 years, and each subsequent annuity payment is 10. Let S denote the present value of the payments at times 1,2,3,. . . ,10 at eective rate i per annum. (a) Write down an expression for S in terms of v , where v = (1 + i)1 . (b) By writing down an expression for (1 + i)S or otherwise, nd an expression for S. (c) Find the present value of the 20 year annuity when i = 0.08. Problems from AITAS2E: Chapter 2: 5(d)-(e), 8, 9, 10, 11, 12, 13, 14, 15, 17

Problem Set 4 1. A xed coupon bond paying interest half-yearly at 6% per annum with 8 years to maturity, is priced at $98 for $100 of nominal value of the bond. (a) Set out the equation of value (in the form P (j ) = 0) for calculating the half-yearly eective rate of interest, j , that corresponds to the yield per annum. (b) Estimate, roughly, the solution to this equation of value to the nearest 0.1% per half-annum. (c) Evaluate your equation of value at your estimate under (b). (d) Is the solution higher or lower than this estimate? Suggest a second suitable test value whose evaluation of the equation of value will have the opposite sign to your evaluation under (c). Evaluate the equation of value at this second test value. (e) If necessary, repeat (d) until there are two values for j for which the evaluations of the equation of value have opposite signs. (f) Use linear interpolation to solve for j . (g) State the annual yield involved in the purchase at $98 per $100 of face value. 2. Consider a loan of $100,000 repayable by equal monthly instalments of principal and interest. (a) Calculate the monthly instalment required to repay this loan over 25 years when interest is charged on the outstanding balance at the beginning of each month at 8.4% per annum convertible monthly. (b) Calculate the balance outstanding immediately after the 120th instalment has been paid. (c) Calculate the interest charged during the 10th year of the loan. (d) If the rate of interest is reduced, after 10 years, to 7.2% per annum convertible monthly, calculate the level monthly instalment now required to repay the loan over the remaining term of 15 years. 3. Consider a loan of $200,000 repayable by equal annual instalments. The term of the loan is 25 years and interest is at 10% per annum eective. Set up a loan schedule in Excel, showing the loan outstanding at the start of year, the capital and interest components of each instalment, and the capital outstanding at the end of each year. 9

4. Consider the loan of the previous question. Suppose that after 12 years, the rate of interest is reduced to 9% per annum eective. If the borrower does not change the amount of the annual repayments (except for the nal repayment), how many years does it take to repay the loan and what is the amount of the nal instalment? 5. Suppose that a loan is repayable by annual instalments at an eective rate of i per annum. In the notation of lectures, show that Ct+1 = Xv nt . What does this result tell us about the behaviour of the capital component of instalments over time? Exam questions 1. A government bond has a 20 year term, a face value of $100 and a coupon of 9% per annum, payable half yearly. An investor purchased this bond at its issue date for $95. Calculate the yield (as an eective rate of interest per annum) to the investor assuming the investor holds the bond for 20 years. 2. Six years ago, Peter borrowed $500,000 from his bank to purchase a house. The loan has a twenty-ve year term with equal monthly repayments of principal and interest calculated using a nominal interest rate of 6.6% per annum convertible monthly. (a) Calculate the monthly repayment. (b) Calculate the amount of the loan outstanding after ve years. (c) Calculate the amount of interest paid in the 6th year. (d) Peter now wishes to borrow a further $20,000 to renovate his kitchen. He does not want to change his monthly repayment, and so extends the term of the loan. How many extra repayments are made beyond the original twenty-ve year term of the loan? Give your answers to parts (a) to (c) to the nearest cent. Problems from AITAS2E: Chapter 2: 16, 18, 19, 20, 21, 22, 23, 24, 25

10

Problem Set 5 1. In a certain country, the population size at the start of a year was 16.23 million and at the end of the year it was 16.42 million. During the year there were 0.3 million deaths in the population, there were 0.12 million immigrants and 0.03 million emigrants (a) Calculate the natural increase in the population during the year. (b) Calculate the net migration in the population during the year. (c) Estimate the crude birth rate for the population. (d) Estimate the crude death rate for the population. 2. Use the spreadsheet to calculate the following ratios for the state of Victoria: (a) child-woman ratio, (b) dependency ratio, (c) age dependency ratio, and (d) youth dependency ratio. 3. Use the spreadsheet to calculate the sex ratio in Victoria (a) for the state overall, and (b) at each individual age from 0 to 105. Plot the results for (b) in a graph and comment. 4. The table below gives information about two towns in a certain state, and about the state itself.

Town A Age Population Number of group size deaths 0-15 38,064 6 16-44 67,753 89 45-64 39,985 410 65+ 24,143 1,859 All 169,945 2,364 11

Town B Population Number of size deaths 42,822 8 76,222 104 32,715 328 48,286 3,645 200,045 4,085

State Population size 317,201 564,611 363,489 268,256 1,513,557

Population sizes were estimated mid-year and each number of deaths refers to that year. (a) Calculate the crude death rate for each town. (b) Calculate the standardised crude death rate for each town, taking the states population as the standard population. (You may nd it easier to set out your calculations in a spreadsheet.) (c) By reference to your answers to (a) and (b), comment on the usefulness of the crude death rate as a measure of mortality. 5. You are a tutor in actuarial studies and have arrived at a tutorial with a population pyramid of Australia to discuss with students. Unfortunately it does not show which side represents males and which side represents females. Explain two ways in which you might identify which side is which. 6. Visit the US Census Bureau website at http://www.census.gov/population/international/data/idb/informationGateway.php (a) Consider the population pyramids for Australia in 2000 and 2050. In which year is i. the age dependency ratio higher? ii. the youth dependency ratio higher? Give reasons for your answers. (b) Repeat this question for (i) China and (ii) Malaysia. Exam questions 1. The population pyramid below shows the population of Indonesia in 2005. For this population, state which is the largest and which is the smallest of (a) the child-woman ratio, (b) the age dependency ratio, (c) the number of males aged 80 and above per 100 females aged 80 and above. You are not required to justify your answers. 12

2. The population pyramid below shows the population of a particular country in 2005. State with reasons whether this country is (a) India, (b) Kenya, or (c) Italy

Problems from AITAS2E: Chapter 3: 1, 2 and 3

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Problem Set 6 1. Let F (x) = 1 exp{0.01x} for x > 0. (a) Calculate the probability that a newborn life survives to age 60. (b) Calculate the probability that a newborn life dies before age 40. (c) Calculate the probability that a newborn life dies between the ages of 30 and 50. (d) Calculate the probability that a life aged 40 survives 10 years. (e) Calculate the probability that a life aged 50 survives 10 years. (f) Calculate the probability that a life aged 30 dies between the ages of 70 and 80. (g) Calculate the force of mortality at age 50. (h) Explain why this survival function is unsuitable as a model of human mortality. 2. Let s(x) = (1 x/ )4 , for 0 x . (a) Find an expression for x . (b) Calculate the probability of survival from birth to ages 10, 30 and 60 when = 105. (c) Consider two independent lives, aged 20 and 25, each subject to this survival model. Again assuming = 105, calculate the probability that i. both are alive in 10 years time, ii. only (20) is alive in 10 years time, and iii. at least one of them is alive in 10 years time. (d) Comment on the suitability of this survival function for a human population. (Remember, for two independent events A and B , Pr(A and B ) = Pr(A) Pr(B ).) 3. Construct a life table showing values of lx , dx and px for ages 0, 1, 2 and 3 given the following mortality rates.

14

x 0 1 2 3 Use a radix of 100,000. 4. In lectures it was shown that x =

qx 0.00061 0.00058 0.00054 0.00051

1 d s(x). s(x) dx

(a) Give an expression for x in terms of lx . (b) From Australian Life Tables 200002 Females, you are given that l60 = 93, 919, l61 = 93, 440 and l62 = 92, 920. Let us suppose that over the interval [60, 62], lx is a quadratic function, i.e. that for 0 t 2 we can write l60+t = l60 at bt2 . Use the values of l61 and l62 to nd the values of a and b. (c) Using the assumptions from part (b), estimate 61 . (The value given in Australian Life Tables is 0.00534). 5. A nursing home accepts patients on their 90th birthday and has now reached a stationary population. Their intake is 100 patients per year. Assuming that 3 times as many women as men are accepted and that the patients suer mortality in accordance with the mortality tables in AITAS2E, calculate (a) the total population of the nursing home, (b) the number of individuals reaching their 100th birthday each year, and (c) the number of deaths per year at ages 95 and above.

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Exam Questions 1. The survival function in a population is given by s(x) = 1 x/ , for 0 x . You may assume that > 20. Find expressions in terms of , simplied as far as possible, for: (a) the probability that (50) survives to age 60, but not to age 70, (b) the probability that two independent lives aged /2 both survive for 10 years, (c) ex . (Attempt this part next week.) 2. The survival function in a population is given by s(x) = exp{0.02x1/2 }, for x > 0. Calculate (a) the probability that (40) dies after age 45, (b) the probability that of two independent lives aged 30 and 50, only (30) survives for 10 years, and (c) the force of mortality at age 50. Give your answers to 4 decimal places. 3. Suppose that both males and females in a country experience the mortality of the life tables in AITAS2E. The population of this country has reached a stationary condition. There are 10,400 male births each year, and the sex ratio at birth is 104. (a) How many female births are there each year? (b) How many male children die before age 5 each year? (c) How many deaths are there in the whole population each year? (d) The government wants to instigate a vaccination program for all children on their rst and second birthday. The cost of the rst vaccination is $5 and the second is $10. How much will the program cost each year? Problems from AITAS2E: Chapter 3: 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17 and 18

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Problem Set 7 1. Using the following values from Australian Life Tables 1985-87 (Males), estimate the parameters in Makehams formula and then estimate 65 : 30 = 0.00129, 40 = 0.00174, 2. Consider the survival function s(x) = 1 0.01x for 0 x 100. Find an expression for ex . 3. The table below gives age specic fertility rates for a certain country, together with survival probabilities for females from birth. Age specic fertility rate 0.030 0.092 0.126 0.088 0.029 0.005 0.001 Survival probability 0.9661 0.9607 0.9556 0.9504 0.9435 0.9333 0.9165 50 = 0.00477.

Age group 15-19 20-24 25-29 30-34 35-39 40-44 45-49

Each survival probability is the probability of surviving from birth to the mid-point of the age group. Assuming a sex ratio at birth of 105, estimate the gross reproduction rate and the net reproduction rate for this population. 4. The population of a certain country was 5.3 million at 30 June 2000 and 5.7 million at 30 June 2005. Estimate the countrys population at 30 June 2002 assuming (a) a linear model of population growth, and (b) a geometric model of population growth. 5. Consider the linear model of population growth Pt = P0 (1 + rt), and t = P0 (1 + r)t . Is P t always greater than Pt ? the geometric model P

17

6. Census data for a certain state reveal a population size in 1993 of 4 million, in 1998 of 4.34 million and in 2003 of 4.52 million. Fit a logistic curve to these data and hence estimate the states population in mid2013. Assume that each census took place mid-year. 7. You have been asked to project the male population of Victoria over age 60 as at September 2020. (a) What data would you require as at September 2010? (b) What assumptions would you have to make in order to carry out the projection? Exam Questions 1. The table below shows data for a city over the last calendar year. Age group 15-24 25-34 35-44 45-49 Number of male births 5,500 5,800 4,000 500 Number of female births 5,200 5,400 3,800 480 Female population 60,000 65,000 63,000 32,000

Calculate the following: (a) the sex ratio at birth, (b) age specic fertility rates for each age group, (c) the gross reproduction rate, (d) the net reproduction rate assuming that l0 = 100, 000 and that for 15 x 50, lx = 99, 000 100x. 2. Briey describe the trends in age specic fertility rates in Australia over the last 10 years. 3. State with reasons which you would expect to be the largest, and which the smallest of (a) gross reproduction rate, (b) sex ratio at birth, and 18

(c) net reproduction rate in Australia in 2006. (You may assume each is quoted as a rate per 1,000 women.) Problems from AITAS2E: Chapter 3: 19, 20, 21, 22, 23, 24 and 25

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Problem Set 8 1. The probability that a life aged 20 survives for t years is 0.998t for 0 t 20. Using an interest rate of 6% per annum eective, calculate (a) the EPV of a payment of $100,000 if (20) survives for 20 years, (b) the EPV of a payment of $100,000 at the end of the year of (20)s death should death occur before age 40, (c) the EPV of payments of $10,000 annually in arrear for 20 years provided (20) is alive, and (d) the EPV of payments of $10,000t at times t years from the present provided (20) is alive where t = 1, 2, . . . , 20. Verify your answers by setting up spreadsheet calculations. 2. A 20 year old male is subject to a constant force of mortality of 0.012 over the next 10 years. An insurance contract provides him with $100,000 in 10 years time if he is alive then. Assuming an eective rate of interest of 6% per annum eective for ve years, and 5.5% per annum eective thereafter, what is the EPV of this payment to the nearest dollar? 3. Consider a xed coupon bond paying interest at 8% per annum halfyearly and redeemable at par in six years time. Using an interest rate of 6% per annum convertible half-yearly, and assuming the probability of a payment due time t (years) hence is 0.98t , calculate the expected present value of the payments under the bond per $100 nominal (face) value. Show your answer correct to three decimal places. Verify your answer using a spreadsheet calculation.

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Exam question 1. A local government bond has a face value of $100 and a coupon of 6% per annum, payable half yearly. An investor assumes that the probability that a payment due t years from the issue date of the bond is 0.995t for t = 0.5, 1, 1.5, ..., 10. (a) Show that under an eective rate of interest of 5% per annum, the investor calculates the expected present value of payments from this bond as $104.17. (b) Suppose that the investor pays $103.50 and that all payments due under the bond are made. Find the eective rate of interest per annum the investor obtains on his purchase. Give your answer to four decimal places. Problems from AITAS2E: Chapter 5: 1, 2, 9, 10, 16 and 17

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Problem Set 9 1. By general reasoning, deduce which single premium required to provide the benet described in each of the following pairs will be higher. In each case, the sum insured is identical. (a) A 20 year endowment insurance for a 30 year old and a 20 year endowment insurance for a 50 year old. (b) An endowment insurance for a 20 year old for a term of 20 years an endowment insurance for a 20 year old for a term of 40 years. (c) An endowment insurance for a person aged x for 30 years and a whole life policy for a person aged x. (d) An endowment insurance with term 30 years for a 30 year old and a term insurance with term 30 years for a 30 year old. (e) A whole life policy for a 25 year old that is participating and a whole life policy for a 25 year old that is non-participating. (f) A ten year term insurance for a male aged 20 and a ten year term insurance for a female aged 20. (g) A 10 year term insurance for a male aged 20 and a 10 year term insurance for a male aged 30. 2. You have been asked to write, in no more than 120 words, a response to the following question for a brochure that will be distributed to the public by the life insurance industry body: What would happen if a life insurance company asked you no questions when you applied for insurance? What major points would you cover in your reply? 3. A trainee actuary in a life insurance company has suggested that a persons postcode be used as part of the underwriting process. Do you think this is reasonable? 4. (a) Use Google to nd a denition of moral hazard. (b) Do you think that suicide is an example of a moral hazard in the context of a term insurance policy? If so, how might an insurance company protect itself against this risk?

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Exam Questions 1. What features do an endowment insurance policy and a whole life insurance policy have in common, and what features dier? 2. Bill and Ben are both aged 50. Bill has never smoked, but Ben has been a regular smoker since the age of 20. (a) Bill and Ben decide to buy whole life insurance with sum insured $100,000 by annual premiums from the same life insurance company. Who pays the higher annual premium? Justify your answer. (b) Bill and Ben decide to buy deferred annuities commencing at age 60 by single premium from the same life insurance company. The annual amount of the annuity will be $40,000, payable in advance. Who pays the higher single premium? Justify your answer. Problems from AITAS2E: Chapter 4: 1, 2, 3 and 4

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Problem Set 10 1. Calculate a 30 , the expected present value of a payment of 1 per annum at the beginning of every year while a life now aged 30 is alive using a force of interest of 6% per annum and assuming a force of mortality of 0.005 per annum for all ages. 2. Let l30+t = 100 t for t = 0, 1, 2, ...10. Using an eective rate of interest of 5% per annum, set up a spreadsheet to calculate the following: (a) a 30:10 , (b) A30:10 , and (c) the annual premium for a 10 year endowment insurance issued to a life aged 30 with sum assured $200,000, with the death benet being payable at the end of the year of death. 3. Use the recursive relationship a x = 1 + vpx a x+1 to calculate all values of a x for x = 25, 26 and 27, using an eective interest rate of 5% per annum given a 28 = 18.464, q25 = 0.000695, q26 = 0.000672 and q27 = 0.000656. 4. Calculate A30 , the expected present value of 1 payable at the end of the year of death of a life now aged 30 assuming a rate of interest of 6% per annum eective and a force of mortality of 0.002 per annum for ages up to 50 and 0.03 for ages above 50. Show your answer correct to ve decimal places. Exam Questions 1. A life insurance company issues 10 year endowment insurance policies to lives aged 30 with sum insured S . The insurance company assumes that the lives are subject to a constant force of mortality between ages 30 and 40, and assumes it can earn interest at rate i per annum. (a) Find expressions for t p30 and q30+t . (b) Show that P =S v v e v 10 e10 . 1 v 10 e10

Derive all results that you use. (c) Use general reasoning to explain why P is an increasing function of . 24

2. Suppose that t p50 = exp{t/60} for t 0 and that the eective rate of interest will be 5% per annum for the next ten years, and 4.5% per annum thereafter. (a) Calculate the expected present value of a payment of 1 to (50) if he is alive ve years from now. Give your answer to four decimal places. (b) Calculate the expected present value of a payment of 1 to (50) if he is alive fteen years from now. Give your answer to four decimal places. (c) Calculate the expected present value of an annuity of $50,000 per annum payable annually in advance to (50) (so that the rst payment is now) as long as (50) is alive. Give your answer to the nearest dollar. Problems from AITAS2E: Chapter 5: 3, 4, 5, 6, 7, 8, 12, 13, 14, 15, 18, 19, 20, 21, 22 and 23.

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Problem Set 11 1. (a) What is the dierence between Comprehensive insurance cover and Third party, re and theft cover for motor vehicles? (Hint: visit the CGU website.) (b) Would you expect an insurance company to use the same approach to calculating an outstanding claims reserve under each type of cover in part (a)? (Hint: what, if any, are the possible reasons for dierences in claims settlement patterns?) (c) What is the purpose of rating factors in general insurance? What do you think are the main advantages and disadvantages of a large number of rating factors and a small number of rating factors? 2. Under proportional reinsurance, the reinsurer pays an agreed proportion of claims that occur in a year. If the agreed proportion is 30%, (a) how much does the insurer pay if the total amount of claims in the year is $3,000,000? (b) how much does the reinsurer pay if the total amount of claims in the year is $5,000,000? 3. Under a stop loss reinsurance arrangement, there is a retention level. If the amount of claims is below the retention level, the insurer pays the claims in full. If the amount is above the retention level, the insurers claims payment is limited to the retention level and the reinsurer pays the dierence between the amount of claims and the retention level. Suppose the retention level is $1 million. (a) Find the share of claims for the insurer and the reinsurer if the amount of claims is $800,000. (b) Find the share of claims for the insurer and the reinsurer if the amount of claims is $1.2 million. (c) Find the share of claims for the insurer and the reinsurer if the amount of claims is $10 million. 4. Based on your answers to questions 3 and 4, (a) do you think that in general proportional reinsurance would be more attractive to a reinsurer than stop loss reinsurance?

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(b) do you think that in general proportional reinsurance would be a more expensive form of reinsurance than stop loss reinsurance? 5. Visit the UniSuper website, and look at the investment performance of the Accumulation Funds over the last 5 nancial years. (Financial years start on 1 July in Australia.) Consider an academic whose salary was as follows in each of these nancial years: Year 1 2 3 4 5 Salary 72,456 76,328 80,788 84,560 85,000

Suppose that this persons employer contributed 14% of salary at the very start of each of these ve years to UniSuper. What would be the accumulated amount of these contributions at the end of year 5 if (a) the persons Investment Option was Balanced. (b) the persons Investment Option was Growth. Are you surprised by these answers? http://www.unisuper.com.au/investments/investment-performance

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Exam questions 1. (a) What is the purpose of rating factors in general insurance? (b) Give three examples of rating factors for motor vehicle insurance other than age and gender, saying why each is appropriate as a rating factor. (c) A woman has owned the same car for ten years. Give three reasons why her premium might reduce over the ten year period. 2. State with reasons whether the following statements are true or false. (a) For a life aged 30, a 10-year term insurance is much cheaper than an endowment insurance with the same sum insured and same term. (b) The issuer of general insurance policies is not exposed to moral hazard. (c) Under trauma insurance, guaranteed renewable cover guarantees the premium will be the same each year. (d) Under a dened contribution superannuation scheme the investment risk is borne by the superannuation fund. Problems from AITAS2E: Chapter 4: 6, 7, 8 and 9

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Problem Set 12 1. As a contributing member of a superannuation fund, what do you see as the principal positive and negative features of a dened benet fund as compared with a dened contribution fund? How is your answer aected if you are a contributing employer rather than a member? 2. Give three examples of dierences between the operation of a social insurance scheme and a life insurance fund. 3. When the government provides a xed rate age pension, what do you think are the pros and cons of having (a) a non-contributory means-tested system? (i.e. a system under which there are no contributions and entitlement to benet depends on income) (b) a contributory at rate system? (i.e. a scheme under which contributions are at a xed level) Exam Questions 1. (a) Explain how a disability income insurance policy operates. (b) What features of these policies are intended to reduce claims? (c) Apart from disability, what other policyholder related risk does an insurance company issuing such policies face? Can this risk be managed? 2. State whether each of the following statements is true or false (no justication is required): (a) under dened benet superannuation, scheme members bear the investment risk, (b) underwriting takes place before a person is admitted to a social insurance scheme, (c) under dened contribution superannuation, a scheme members retirement benet is a multiple of the members salary at retirement, and the multiple depends on the length of scheme membership. Problems from AITAS2E: Chapter 4: 5 and 10 29