COURSE 5
MORNING SESSION
APPLICATION OF BASIC ACTUARIAL PRINCIPLES
SECTION A-WRITTEN ANSWER
COURSE 5: Fall 2003 - 2 - GO ON TO NEXT PAGE
Morning Session
**BEGINNING OF EXAMINATION 5**
MORNING SESSION
1. (5 points) A large employer is considering offering a private pension plan.
(a) Describe the reasons for offering such a plan.
(b) Describe the process involved in designing and implementing such a plan.
2. (5 points)
(a) For basic group term life insurance, briefly describe each of the following items:
(i) Typical plan designs offered
(ii) Eligibility provisions
(iii) Continuity of coverage provisions
(b) Briefly describe how supplemental group term life insurance is different from
basic group term life insurance with respect to:
(i) Typical plan designs offered
(ii) Eligibility provisions
(iii) Continuity of coverage provisions
COURSE 5: Fall 2003 - 3 - GO ON TO NEXT PAGE
Morning Session
3. (5 points)
(a) Describe the reasons a life insurance company may reinsure its risk.
(b) ABC Life Insurance Company has a 40% quota share reinsurance treaty on a first
dollar basis. Its retention limit is $500,000 per policy.
Policy 1 Policy 2
Net Amount at Risk $750,000 X
Amount Retained R Y
Amount Reinsured on a First Dollar Basis S Z
Amount Reinsured on an Excess Basis T $100,000
Calculate the missing values in the table above.
Show all work.
4. (5 points) Explain the U.S. laws and regulations with respect to market conduct that
apply to a life insurance company and its agents.
5. (6 points) Mary and John, respectively 45 and 42 years old, are considering the purchase
of a non-participating whole life, joint last-to-die policy, paid-up at first death with:
•a 5 year term individual rider life insurance convertible and renewable up
to age 65 for Mary and John;
•a Critical Illness rider covering 50 illnesses for Mary and John;
•a Disability income rider providing a lifetime benefit with a 2 week
waiting period for Mary and John.
(a) Describe briefly the policy and its riders.
(b) Describe alternatives to each coverage that could reduce the cost to Mary and
John.
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Morning Session
6. (7 points) For a defined benefit pension plan, you are given:
Pension plan formula:
1.5% of final year’s salary for each year of service up to 10 years, plus
2.0% of final year’s salary for each year of service after 10 years.
Interest Rate 6%
Salary Growth Rate 4%
Pre-retirement decrements None
Assumed retirement age 65
12
a&&65 12
Assets at 1/1/2003 300,000
Assets at 1/1/2004 320,000
Contribution made on 12/31/2003 5,000
Funding method Projected unit credit
Employee Age at Hire Age on 1/1/2003 Salary on 1/1/2003
A 30 40 30,000
B 30 60 50,000
(a) Calculate the unfunded accrued liability at 1/1/2003.
(b) The actual accrued liability on 1/1/2004 is 350,000.
Calculate the total experience gain/loss as of that date.
Show all work.
COURSE 5: Fall 2003 - 5 - GO ON TO NEXT PAGE
Morning Session
7. (5 points) For a property and casualty insurance policy issued January 1, 2000, you are
given:
Effective Date Rate Change
May 1, 2000 +5%
November 1, 2000 +10%
Calendar Year
Earned Premium
Expected effective incurred losses, trended
and developed through December 31, 2002
2000 120,000 100,000
2001 130,000 110,000
2002 140,000 120,000
Expense ratio: 30%
Present average manual rate: 45
Assume all policies have a one-year term and the premium is uniformly
distributed.
Calculate the indicated average gross rate as of January 1, 2003.
Show all work.

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