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　　COURSE 5
　　MORNING SESSION
　　APPLICATION OF BASIC ACTUARIAL
　　PRINCIPLES
　　SECTION A-WRITTEN ANSWER
　　COURSE 5: Fall 2005 - 1 - GO ON TO NEXT PAGE
　　Morning Session
　　**BEGINNING OF EXAMINATION**
　　COURSE 5
　　MORNING SESSION
 
　　1. (4 points) Describe the reasons an individual or a business would purchase:
　　(a) life insurance
　　(b) property and casualty insurance
 
　　2. (4 points) In developing medical claims costs for a group health plan:
　　(a) Describe the factors to consider in selecting the appropriate data sources.
　　(b) List the considerations in assessing the quality of data obtained from outside
　　sources.
　　(c) Describe considerations when normalizing historical data.
　　COURSE 5: Fall 2005 - 2 - GO ON TO NEXT PAGE
　　Morning Session
 
　　3. (6 points) Given the following information:
　　Annual Normal Retirement Benefit: 1.5% of final earnings times service from hire
　　Early Retirement Eligibility: Age 60
　　Early Retirement Benefit: Retirement Benefit accrued to date, reduced by
　　1/15 for each year before age 65
　　Normal form of Payment: Life Annuity, payable monthly
　　Cost Method: Projected Unit Credit
　　Actuarial Assumptions:
　　Interest 6%
　　Salary Increases 4%
　　Pre-retirement death and terminations: None
　　(12)
　　a????62 : 11.61
　　(12)
　　a????65 : 10.87
　　Participant data
　　Employee Birth date Hire date 2004 earnings
　　Brown 1/1/1965 1/1/2000 34,000
　　Smith 1/1/1940 1/1/1995 60,000
　　In prior years, the assumed retirement age was 65. Effective with the January 1, 2005
　　actuarial valuation, the assumed retirement age is changed to 62.
　　Calculate the change in the actuarial liability as of January 1, 2005 due to the change in
　　the assumed retirement age.
　　Show all work.
 
　　4. (4 points) Describe the expense philosophies used in pricing individual life insurance.
　　COURSE 5: Fall 2005 - 3 - GO ON TO NEXT PAGE
　　Morning Session
 
　　5. (6 points)
　　(a) Explain why mortality experience varies from company to company.
　　(b) Describe how breaking a group of lives into risk classes affects assumptions other
　　than mortality.
　　(c) You are dividing an existing group into two risk classifications and are given the
　　following information:
　　Before Risk Classification After Risk Classification
　　Total Group Group A Group B
　　Mortality ratio Weight Weight Weight
　　50% 25.0 25.0 0.0
　　100% 42.5 36.5 6.0
　　150% 37.5 0.0 37.5
　　175% 26.0 0.0 26.0
　　Product: Two-year term life insurance policy
　　Face amount: 100,000
　　( q( 50): 0.0035
　　q(51): 0.0039
　　Interest: 6% per annum
　　Expense loading: 0%
　　Calculate the single premium issued to a 50 year old from Group B before and
　　after risk classification.
　　Show all work.
　　COURSE 5: Fall 2005 - 4 - GO ON TO NEXT PAGE
　　Morning Session
 
　　6. (7 points)
　　(a) Explain why it is difficult to apply the general principles of income taxation to the
　　life insurance industry and its products.
　　(b) Describe the policyholder taxation of life products in Canada and the U.S.
 
　　7. (4 points)
　　(a) Describe the typical approaches for providing old-age financial security.
　　(b) Comment on the differences between pay-as-you-go and funded financing of
　　public plans.
　　8. (5 points)
　　(a) Describe the product features of accumulation annuities.
　　(b) Describe the types of income annuities.
　　COURSE 5: Fall 2005 - 5 - GO ON TO NEXT PAGE
　　Morning Session
　　USE THIS PAGE FOR YOUR SCRATCH WORK
　　COURSE 5: Fall 2005 - 6 - GO ON TO NEXT PAGE
　　Morning Session
　　COURSE 5
　　MORNING SESSION
　　APPLICATION OF BASIC ACTUARIAL
　　PRINCIPLES
　　SECTION B-MULTIPLE CHOICE
　　COURSE 5: Fall 2005 - 7 - GO ON TO NEXT PAGE
　　Morning Session
　　1-6. Each of questions 1 through 6 consists of two lists. In the list at the left are two items,
　　lettered X and Y. In
　　the list at the right are three items, numbered I, II and III. ONE of
　　the lettered items is related in some way to EXACTLY TWO of the numbered items.
　　Indicate the related items using the following answer code:
　　Lettered Item
　　Is Related to Numbered Items
　　(A)
　　X
　　I and II only
　　(B)
　　X
　　II and III only
　　(C)
　　Y
　　I and II only
　　(D)
　　Y
　　I and III only
　　(E)
　　The correct answer is not given by (A), (B), (C) or (D).
　　1. X. Flexible Premium Universal Life I. Lower capital requirements
　　Y. Variable Universal Life II. Competition has a major effect on
　　the credited interest rate
　　III. Priced with a lower profit margin
　　2. X. Markov State Transition I. Designed for a data-poor
　　environment.
　　Y. Rational Artificial Intelligence II. Utilizes benchmark database future
　　costs developed through a process of
　　triangulation.
　　III. Identifies patterns of underlying data
　　to facilitate the prediction of future
　　costs.
　　COURSE 5: Fall 2005 - 8 - GO ON TO NEXT PAGE
　　Morning Session
　　3. X. Medicare – Hospital Insurance I. Deductible adjusted annually
　　Y. Medicare – Supplementary Medical
　　Insurance
　　II. Coinsurance
　　III. Payroll Tax
　　4. X. HMO I. Covers a local service area
　　Y. PPO II. Does not take the insurance risk
　　III. Performs utilization reviews
　　5. X. Preferred risks I. Higher placement rate
　　Y. Residual risks II. Higher lapse rates
　　III. Higher average policy size
　　6. X. Normal cost I. Past service benefits
　　Y. Supplemental cost II. Future service benefits
　　III. Retroactive plan amendments
　　COURSE 5: Fall 2005 - 9 - GO ON TO NEXT PAGE
　　Morning Session
　　7. To limit anti-selection on group supplemental life plans, insurers use all of the
　　following EXCEPT:
　　(A) Limited coverage amounts without evidence of insurability
　　(B) Suicide exclusion
　　(C) Statement of Good Health required for certain amounts
　　(D) Minimum participation requirements that are higher than for basic group term life
　　(E) Step-rated premium structure
　　8. In Canada, the appointed actuary is required to file a report with the annual statements
　　that provides the regulatory authorities with all of the following EXCEPT:
　　(A) A description of any approximations used
　　(B) A signed statement that affirms compliance with the generally accepted
　　accounting principles published by the Canadian Institute of Chartered
　　Accountants (CICA)
　　(C) Any changes in the assumptions from the prior annual filing and the effect thereof
　　(D) A complete justification for each assumption
　　(E) A signed copy of the opinion of the appointed actuary
　　COURSE 5: Fall 2005 - 10 - GO ON TO NEXT PAGE
　　Morning Session
　　USE THIS PAGE FOR YOUR SCRATCH WORK
　　COURSE 5: Fall 2005 - 11 - GO ON TO NEXT PAGE
　　Morning Session
　　9-13. Each of questions 9 through 13 consist of an assertion in the left-hand column and a
　　reason in the right-hand column. Code your answer to each question by blackening
　　space:
　　(A) If both the assertion and the reason are true statements, and the reason is a correct
　　explanation of the assertion.
　　(B) If both the assertion and the reason are true statements, but the reason is NOT a
　　correct explanation of the assertion.
　　(C) If the assertion is a true statement, but the reason is a false statement.
　　(D) If the assertion is a false statement, but the reason is a true statement.
　　(E) If both the assertion and the reason are false statements.
　　9.
　　ASSERTION
　　The Canadian federal
　　government cannot deter a
　　province from allowing user fees
　　and extra billing in its provincial
　　health care plan.
　　BECAUSE
　　REASON
　　Under the Canadian Constitution,
　　matters relating to health fall
　　under provincial jurisdiction.
　　10.
　　ASSERTION
　　Personal-producing general
　　agents receive higher
　　commissions than other agents.
　　BEC
　　AUSE
　　REASON
　　Unlike other general agents,
　　personal-producing general agents
　　have no agents reporting to them.
　　COURSE 5: Fall 2005 - 12 - GO ON TO NEXT PAGE
　　Morning Session
　　11.
　　ASSERTION
　　In the U.S., the usual procedure is
　　to file policy forms in the state of
　　domicile first.
　　BECAUSE
　　REASON
　　Many states require prior approval
　　of policy forms from the state of
　　domicile.
　　12.
　　ASSERTION
　　For individual disability benefits,
　　under the rehabilitation clause, an
　　insured may not have to continue
　　under the care of a physician to
　　qualify for benefits.
　　BECAUSE
　　REASON
　　For individual disability benefits,
　　the rehabilitation clause provides
　　that insureds who join an
　　approved program will be
　　considered totally disabled.
　　13.
　　ASSERTION
　　For a guaranteed insurability
　　option on an individual disability
　　policy, an option passed on one
　　option date may be picked up at
　　the next option date.
　　BECAUSE
　　REASON
　　The guaranteed insurability option
　　on an individual disability policy
　　does not require completion of
　　medical underwriting at a given
　　option date in order for the insured
　　to purchase the increased coverage
　　amount.
　　COURSE 5: Fall 2005 - 13 - GO ON TO NEXT PAGE
　　Morning Session
　　14. You are given the following information on an accumulation annuity:
　　Issue date: January 1, 1996
　　End of current interest guarantee period: December 31, 2010
　　Current guaranteed interest rate: 7%
　　Additional margin: 0.25%
　　Interest rates available for new deposits:
　　Number of years Interest rate guarantee
　　5 4.5%
　　10 5.0%
　　15 5.5%
　　Calculate the market value adjustment on December 31, 2005.
　　(A) 88%
　　(B) 99%
　　(C) 108%
　　(D) 111%
　　(E) None of the above
　　COURSE 5: Fall 2005 - 14 - GO ON TO NEXT PAGE
　　Morning Session
　　USE THIS PAGE FOR YOUR SCRATCH WORK
　　COURSE 5: Fall 2005 - 15 - GO ON TO NEXT PAGE
　　Morning Session
　　15. You are given the following for the first policy year of a dynamic life insurance product:
　　Target Premium: 8
　　Premium Paid: 20
　　Commission Rate High: 70%
　　Low: 20%
　　% Account Value: 5%
　　Sales Expenses: 10% of commissions
　　Year One SurvFactor: 0.90
　　End of Year One Account Value: 50
　　Calculate the total commission and sales expense for the first year.
　　(A) 10.40
　　(B) 11.05
　　(C) 11.28
　　(D) 11.55
　　(E) 13.48
　　COURSE 5: Fall 2005 - 16 - GO ON TO NEXT PAGE
　　Morning Session
　　USE THIS PAGE FOR YOUR SCRATCH WORK
　　COURSE 5: Fall 2005 - 17 - GO ON TO NEXT PAGE
　　Morning Session
　　16-18. Each of questions 16 through 18 consists of two lists. In the list at the left are two items,
　　lettered X and Y. In the list at the right are three items, numbered I, II and III. ONE of
　　the lettered items is related in some way to EXACTLY TWO of the numbered items.
　　Indicate the related items using the following answer code:
　　Lettered Item
　　Is Related to Numbered Items
　　(A)
　　X
　　I and II only
　　(B)
　　X
　　II and III only
　　(C)
　　Y
　　I and II only
　　(D)
　　Y
　　I and III only
　　(E)
　　The correct answer is not given by (A), (B), (C) or (D).
　　16. X. Dynamic products I. Dividends
　　Y. Pre-scheduled products II. Partial withdrawal benefits
　　III. Pure endowment benefits
　　17. X. Joint last-to-die I. Variations of this type of policy can
　　pay double the death benefit if both
　　lives die within a short time of each
　　other.
　　Y. Joint first-to-die II. Frasierized mortality rates
　　III. Common to increase mortality for
　　risk of joint accidental death.
　　COURSE 5: Fall 2005 - 18 - GO ON TO NEXT PAGE
　　Morning Session
　　18. X. Factor method for determining
　　claim reserves
　　I. Usually used for reserves that are
　　easily estimated due to a short lag or
　　run off period.
　　Y. Tabular method for determining
　　claim
　　reserves
　　II. More recently, method has begun to
　　include sex and elimination period as
　　variables.
　　III. Usually used for long-term disability
　　claims where regulatory standards
　　have established minimum reserves.
　　COURSE 5: Fall 2005 - 19 - GO ON TO NEXT PAGE
　　Morning Session
　　19. You are given the following:
　　Development Year
　　Accident year 0 1 2 3
　　Paid to Date as
　　of 12/31/2005
　　2002 260 330 360 390 390
　　2003 300 360 400 380
　　2004 330 430 420
　　2005 350 150
　　0/1 1/2 2/3
　　Incurred loss development factor 1.25 1.1 1.1
　　Calculate the gross IBNR as of 12/31/2005.
　　(A) 230
　　(B) 337
　　(C) 540
　　(D) 1,490
　　(E) None of the above
　　COURSE 5: Fall 2005 - 20 - GO ON TO NEXT PAGE
　　Morning Session
　　USE THIS PAGE FOR YOUR SCRATCH WORK
　　COURSE 5: Fall 2005 - 21 - GO ON TO NEXT PAGE
　　Morning Session
　　20. You are given the following for a group life contract:
　　Employee Amount Expected Annual Mortality Rate
　　per thousand
　　A 50,000 0.11
　　B 80,000 0.16
　　C 100,000 0.23
　　In the prior year, this group had an actual annual claim rate of 0.28 per thousand, which is
　　20% credible.
　　Calculate the expected claim cost for the following year.
　　(A) 41
　　(B) 46
　　(C) 60
　　(D) 64
　　(E) None of the above
　　COURSE 5: Fall 2005 - 22 - GO ON TO NEXT PAGE
　　Morning Session
　　USE THIS PAGE FOR YOUR SCRATCH WORK
　　COURSE 5: Fall 2005 - 23 - GO ON TO NEXT PAGE
　　Morning Session
　　21-22. Each of questions 21 through 22 consists of two lists. In the list at the left are two items,
　　lettered X and Y. In the list at the right are four items, numbered I, II, III and IV. EACH
　　of the lettered items is related in some way to EXACTLY TWO of the numbered items.
　　Match the lettered items (X and Y) with the numbered items (I, II, III, and IV) shown
　　below.
　　Indicate the related items using the following answer code:
　　X
　　Y
　　(A)
　　I and II
　　III and IV
　　(B)
　　I and III
　　II and IV
　　(C)
　　I and IV
　　II and III
　　(D)
　　II and III
　　I and IV
　　(E)
　　II and IV
　　I and III
　　21. X. Deferred tax liabilities created by
　　timing differences between U.S.
　　solvency and tax standards
　　I. Different carrying value for real
　　estate
　　Y. Deferred tax liabilities created by
　　permanent differences between
　　U.S. solvency and tax standards
　　II. Estimation of incurred but not
　　reported claims
　　III. Research and development tax credits
　　IV. Non-taxable investment income
　　22. X. Canadian federal jurisdiction I. Workers compensation
　　Y. Canadian provincial jurisdiction II. Employment insurance
　　III. Automobile insurance
　　IV. Maternity benefit
　　COURSE 5: Fall 2005 - 24 - GO ON TO NEXT PAGE
　　Morning Session
　　23. A homeowner insurance coverage is provided with a uniform loss distribution over the
　　interval rval 0< X < 200.
　　Calculate the deductible amount if the desired expected loss is 50.
　　(A) 43
　　(B) 50
　　(C) 59
　　(D) 69
　　(E) None of the above
　　COURSE 5: Fall 2005 - 25 - GO ON TO NEXT PAGE
　　Morning Session
　　24. Given a joint last-to-die life insurance policy on lives x and y with estimated mortality
　　rates of:
　　t qx (t ) qy (t )
　　1 0.110 0.050
　　2 0.150 0.070
　　Determine the probability of a payment in year two.
　　(A) 0.011
　　(B) 0.019
　　(C) 0.023
　　(D) 0.028
　　(E) None of the above
　　COURSE 5: Fall 2005 - 26 - GO ON TO NEXT PAGE
　　Morning Session
　　25. All of the following are major considerations in financial reporting for group insurance
　　EXCEPT:
　　(A) Alternative funding methods
　　(B) Policyholder accounting
　　(C) Excess surplus
　　(D) Regulatory requirements
　　(E) Administrative arrangements
　　26. All of the following are common purposes of performing an actuarial valuation of a
　　company pension plan in the U.S. EXCEPT:
　　(A) To determine the maximum contribution that the
　　company can deduct in any one
　　year for federal income tax purposes.
　　(B) To complete the annual filing required under state law.
　　(C) To establish plan costs and liabilities in connection with corporate mergers and
　　spin-offs.
　　(D) To provide a basis for the allocation of the assets of a terminated plan.
　　(E) To provide information to plan participants concerning the funding status of their
　　benefits.
　　COURSE 5: Fall 2005 - 27 - GO ON TO NEXT PAGE
　　Morning Session
　　27. For guaranty associations, all the following are true EXCEPT:
　　(A) They provide for the indemnification of losses suffered by policyholders of
　　insolvent companies.
　　(B) They give the public confidence in the ability of the insurance industry to deliver
　　on obligations.
　　(C) The guaranty association in the insolvent insurer’s state of domicile pays all
　　covered claims.
　　(D) They assess companies in proportion to premiums received.
　　(E) They generally avoid assuming the business of an insolvent company.
　　28. All of the following statements are true for a defined contribution plan EXCEPT:
　　(A) Employee assumes investment risk.
　　(B) Value of benefit increases with age.
　　(C) Benefit level directly affected by investment performance.
　　(D) Has high perceived value.
　　(E) Limited capacity to improve past service benefits.
　　COURSE 5: Fall 2005 - 28 - GO ON TO NEXT PAGE
　　Morning Session
　　29. You are given the following with respect to three U.S. domiciled companies:
　　? Company Y is a non-controlled corporation with 25% of its common shares owned
　　by Company X.
　　? Company Z is an unrelated corporation to both Company X and Company Y.
　　? The corporate tax rate is 40%.
　　? Company X pays $100 in dividends to company Y.
　　? Company Y then pays 100% of after-tax dividend revenue to Company Z.
　　Calculate the total income tax payable on these two dividend transfers.
　　(A) 0
　　(B) 19
　　(C) 58
　　(D) 64
　　(E) None of the above
　　COURSE 5: Fall 2005 - 29 - GO ON TO NEXT PAGE
　　Morning Session
　　30-35. Each of questions 30 through 35 consists of an assertion in the left-hand column and a
　　reason in the right-hand column. Code your answer to each question by blackening
　　space:
　　(A) If both the assertion and the reason are true statements, and the reason is a correct
　　explanation of the assertion.
　　(B) If both the assertion and the reason are true statements, but the reason is NOT a correct
　　explanation of the assertion.
　　(C) If the assertion is a true statement, but the reason is a false statement.
　　(D) If the assertion is a false statement, but the reason is a true statement.
　　(E) If both the assertion and the reason are false statements.
　　30.
　　ASSERTION
　　In the U.S., self-insured group
　　medical plans are regulated at
　　both the federal and state levels.
　　BECAUSE
　　REASON
　　In the U.S., federal regulations
　　apply to employer sponsored
　　benefit plans and state law applies
　　to the business of insurance.
　　31.
　　ASSERTION
　　Individual risk assessment
　　techniques are no longer used to
　　underwrite small group medical
　　insurance plans.
　　BECAUSE
　　REASON
　　HIPAA does not allow a carrier to
　　single out individual employees
　　for special rating treatment due to
　　their health.
　　COURSE 5: Fall 2005 - 30 - GO ON TO NEXT PAGE
　　Morning Session
　　32.
　　ASSERTION
　　Nonmedical underwriting is
　　typically used for underwriting
　　large groups of life insureds.
　　BECAUSE
　　REASON
　　Nonmedical underwriting usually
　　only requires that the insureds are
　　actively working with no
　　significant medical absences.
　　33.
　　ASSERTION
　　In collecting medical claim data
　　to develop manual rates, an
　　experience period of at least
　　twelve months is needed.
　　BECAUSE
　　REASON
　　November and December often
　　have fewer incurred medical
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