14. (6 points) You have been hired by Mercury Life to evaluate their primary markets.
(a) (1 point) Describe the criteria involved in evaluating potential target markets.
(b) (5 points) Evaluate the suitability of each of Mercury Life’s primary markets as
target markets.
15. (5 points) XYZ Life plans to enter the term insurance market.
(a) Describe the five elements that should be included in the comprehensive business
analysis, as presented in the LOMA text, to decide whether to enter the term
insurance market.
(b) Explain why XYZ would use reinsurance to manage the financial position of its
term portfolio.
COURSE 8I: Fall 2004 -15- STOP
Individual Insurance – U.S.
Afternoon Session
16. (8 points) You are given the following annuity payments:
Payment Date Payment at Payment Date
January 1, 2006 $50,000
July 1, 2006 $60,000
January 1, 2007 $55,000
July 1, 2007 $70,000
January 1, 2008 $60,000
July 1, 2008 $80,000
(a) Describe the Modified Duration method of duration matching including any
problems associated with it.
(b) Calculate the Modified Duration of the annuity payments as of July 1, 2005,
based on an interest rate of 4%. Show all work.
(c) Describe the Exact Matching method of duration matching including any
problems associated with it.
(d) Non-callable bonds have been purchased to exactly match the annuity payments
as of July 1, 2005 using the Exact Matching Method.
Information about the bonds is shown in the following table:
Years to Maturity Annual Coupon Rate
1.5 4.0%
2.0 4.5%
2.5 5.0%
3.0 5.5%
Bonds have a par value of $100.
Coupons are paid semi-annually.
Determine the number of bonds with a maturity of 2 years that were purchased.
Show all work.
(e) Describe the Horizon Matching method and its appropriateness for the annuity
payments.
**END OF EXAMINATION**
AFTERNOON SESSION

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