Calculus

Pricing & Reserving

for Life Insurance
Products 1

Unit 2

Practice
Questions
1. CT5 September 2006 Q10
A life insurance company is reviewing the 2005 mortality experience of its portfolio of
whole life assurances.

You are given the following information:

There were 2 death claims during 2005 arising from these policies as follows:

All premiums are payable annually on 1st January throughout life.

Sums assured are payable at the end of the year of death.

Net premium reserves are held, based on mortality of AM92 Ultimate and interest of 4%
per annum.

(i) Calculate the mortality profit or loss for 2005 in respect of this group of policies.

(ii) (a) Calculate the amount of expected death claims for 2005 and compare it with the
amount of actual claims.

(b) Suggest a reason for this result compared with that obtained in (i).

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
Ans:
(i) 1,218.75 profit
(ii) (a) Expected = 21,026.20, Actual claims = 22000
(b) Actual claims were higher than expected claims but the company still made a
mortality profit. This can only have occurred because the deaths were disproportionately
concentrated on lower DSAR lives (policies more mature on average).

2. CT5 April 2008 Q12

A life assurance company issues the following policies:
• 10-year term assurances with a sum assured of £50,000 where the death benefit is
payable at the end of the policy year of death
• 10-year pure endowment assurances with a sum assured of £50,000 payable on
maturity

For the term assurance and pure endowment policies, premiums are paid annually in
advance.

The company sold 5,000 policies of each type to lives then aged 50 exact. During the
first policy year, there were five actual deaths from each of the two types of policies
written.

(i) Assuming each type of policy was sold to a distinct set of lives (i.e. no life buys more
than one type of policy).

(a) Calculate the death strain at risk for each type of policy at the end of the second
policy year of the policies.

(b) During the second policy year, there were ten deaths from each of the two types of
policy written. Calculate the total mortality profit or loss to the company during the
second policy year.

Basis:

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
Interest 4% per annum
Mortality AM92 Ultimate for term assurance and pure endowment
Expenses Nil

(ii) The company now discovers that 5,000 lives had bought one of each type of policy.

(a) State whether the mortality profit or loss calculated would now be higher, lower or
unchanged to that calculated in (i)(b).

(b) State whether the variance of the benefits paid out by the company in future years
would be higher, lower or unchanged to that in (i). Explain your answer by general
reasoning.

Ans:
(i) (a) Pure endowment: DSAR = −8,276.96
Term assurance: DSAR = 49,833.29
(b) total mortality profit = £167,511.70
(ii) (a) The actual mortality profit would remain as that calculated in (i) (b).
(b) The variance of the benefits would be lower than that calculated in (i). In this case,
the company would not pay out benefits under both the PE and the TA but will definitely
pay out one of the benefits. Under the scenario in (i), the company could pay out all the
benefits (if all the TA policyholders die and the PE policyholders survive). Alternatively,
they could pay out no benefits at all (if all the TA policyholders survive and the PE
policyholders immediately die).

3. CT5 April 2010 Q12

On 1 January 2005, a life insurance company issued 1,000 10-year term assurance
policies to lives aged 55 exact. For each policy, the sum assured is £50,000 for the first
five years and £25,000 thereafter. The sum assured is payable immediately on death and

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
level annual premiums are payable in advance throughout the term of this policy or until
earlier death.
The company uses the following basis for calculating premiums and reserves:

Mortality AM92 Select

Interest 4% per annum
Expenses Nil

(i) Calculate the net premium retrospective reserve per policy as at 31 December 2009.

(ii) (a) Explain your numerical answer to (i) above.

(b) Describe the main disadvantage to the insurance company of issuing this policy.

(c) Give examples of how the terms of the policy could be altered so as to remove this
disadvantage.

There were, in total, 20 deaths during the years 2005 to 2008 inclusive and a further 8
deaths in 2009.

(iii) Calculate the total mortality profit or loss to the company during 2009.

Ans:
(i) −41.71
(ii) (a) Explanation – more cover provided in the first 5 years than is paid for by the
premiums in those years. Hence policyholder “in debt” at time 5, with size of debt equal
to negative reserve.
(b) Disadvantage – if policy lapsed during the first 5 years (and possibly longer), the
company will suffer a loss which is not possible to recover from the policyholder.

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
 (c) Collect premiums more quickly by shortening premium payment term or make
premiums larger in earlier years, smaller in later years. Change the pattern of benefits to
reduce benefits in first 5 years and increase them in last 5 years.
(iii) Total Mortality Profit = -£50,182

4. CT5 September 2012 Q7

On 1 January 2007, a life insurance company sold a large number of 30-year pure
endowment policies to lives then aged 35 exact. The sum assured under each policy is
£125,000 payable on maturity. Premiums are payable annually in advance throughout
the term of the policy.

There were 3521 pure endowment policies still in force on 1 January 2011 and 8
policyholders died during 2011.

Calculate the total mortality profit or loss to the life insurance company during 2011
assuming the company calculates net premium reserves on the following basis:
Mortality AM92 Select
Interest 4% per annum
Expenses Nil

Ans: Profit = 54,333.75

5. CT5 September 2014 Q11

A life assurance company has issued whole of life assurance policies over a number of
years. Premiums on these policies are payable annually in advance and the sums
assured are payable at the end of the year of death.

You are given the following information relating to a group of policies within the portfolio
of whole of life assurance policies

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
During 2013, there was 1 death claim (on a policy which was issued on 1 January
2000 for a sum assured of £15,000) arising from this group of policies.

(i) Calculate the mortality profit or loss for 2013 to the company in respect of this group
of policies assuming net premiums are held on the following basis:

Mortality AM92 Ultimate

Interest 4% per annum
(ii) Calculate the amount of expected death claims in 2013 for this group of policies.

(iii) Compare your answer in part (ii) with the amount of actual claims and comment on
your answer with reference to your answer in part (i) above.

Ans:
(i) Mortality profit = -1,925.78
(ii) Exp Claims = 16, 447.24
(iii) Actual claims = 15,000
Actual claims were lower than expected although the company made a mortality loss.
This was due to the DSAR (expressed as a % of the sum assured) on the one death claim
policy being significantly higher than for the group of policies on average.

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
6. CT5 September 2014 Q9
A life aged 60 exact purchases a special deferred term assurance policy for an overall
term of 20 years.

Under this policy a sum assured of £100,000 is paid on death but only on death from
age 65 exact up to the end of the term. On death between age 60 and 65 the benefit is
equal to the total premiums paid without interest.

All payments on death are made at the end of the year of death. An annual premium
paid in advance is payable for the full 20 year term.

Calculate the annual premium payable.

Basis:
Mortality AM92 Ultimate
Interest 4% per annum
Expenses Ignore

Ans: P = £1808 to nearer £

7. CT5 April 2016 Q2

(i) State the two conditions under which the net premium prospective reserve will equal
the net premium retrospective reserve.

(ii) Describe two reasons why these conditions are unlikely to hold in practice.

Ans:

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
(i) The net premium retrospective reserve will be equal to the net premium prospective
reserve if: The retrospective and prospective reserves are calculated on the same basis
And This basis is the same as the basis used to calculate the premiums used in the
reserve calculation.
(ii) In practice these conditions rarely hold since:
The assumptions which are appropriate for the retrospective calculation (based on the
experienced conditions over the duration of the contract up to the valuation date) are not
generally appropriate for the prospective calculation (based on assumptions considered
suitable for the remainder of the term)
and, The assumptions considered appropriate at the time the premium was calculated
may not be appropriate for the retrospective or prospective reserves some years later.

8. CT5 April 2016 Q6

An endowment assurance pays a sum assured of 10,000 immediately on death or on
survival to the end of the term of the policy.

(ii) Calculate, showing all your workings, the premium payable continuously for a life
aged 40 exact for an endowment assurance with a term of 20 years. [4]

Basis:
Mortality μx = .01 for all x
Rate of interest 5% per annum

Ans: £362.4

9. CT5 September 2017 Q4

Explain why a life insurance company will need to set up reserves for the level premium
conventional whole life assurance contracts it has sold.

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
Ans: The expected cost of paying benefits usually increases as the life ages and the
probability of a claim by death increases.
Level premiums received in the early years of a contract are more than enough to pay
the benefits that fall due in those early years, but in the later years the premiums are
too small to pay for the benefits. It is therefore prudent for the premiums that are not
required in the early years of the contract to be set aside, or reserved, to fund the
shortfall in the later years of the contract.
If premiums received that were not required to pay benefits were spent by the company,
perhaps by distributing to shareholders, then later in the contract the company may not
be able to find the money to pay for the excess of the cost of benefits over the premiums
received.

10. CT5 April 2018 Q5

On 1 January 2010, a life insurance company issued single life annuities to
policyholders then aged 65 exact.

Each annuity is for 30,000 payable annually in arrears.

At the beginning of 2017, there were 5650 policyholders alive and during 2017, 80
policyholders died.

The company calculates its reserves using the following basis:

Mortality PMA92C20
Interest 4% per annum
Expenses Ignore

(i) Calculate the mortality profit or loss for these annuities for the year 2017.

(ii) Comment on your answer in part (i).

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
Ans:
(i) Profit = – 7,360,138
(ii) The company expected 103.8 deaths during 2017 and experienced fewer than this
(i.e. 80). There is no death benefit for the annuity. However, there is a release of reserves
on death, so fewer actual deaths than expected leads to a mortality loss.

11. CT5 April 2018 Q3

A life aged 50 exact purchases a single-premium temporary annuity. The annuity pays
7,500 annually in arrears for a term of 10 years, ceasing on death, if earlier.

Calculate the reserve for the annuity at the end of the first policy year, using the net
retrospective method and the following basis:

Mortality AM92 Select

Interest 4% per annum
Expenses Ignore

Ans: 54,745.03

12. CT5 April 2018 Q10

A life insurance company sells a special deferred annuity policy to a life aged 60.75 years
exact (i.e. 60 years and 9 months). The policy is funded by quarterly premiums in
advance ceasing at age 65 (no premium is payable at age 65 exact).

The benefits under the policy are as follows:

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
• At age 65, an annuity of 12,000 a year is payable half-yearly in advance. Payment is
guaranteed for five years and then continues to the age of 75 when it reduces to 10,000
a year under the same payment method until the death of the policyholder.
• At age 75, an additional lump sum benefit of 10,000 is payable. The annuity then
reduces to 10,000 a year, ceasing on the death of the policyholder.

Determine that the quarterly premium is approximately 9,030.

Basis:
Mortality PFA92C20 (assume the uniform distribution of deaths method)
Rate of Interest 4% per annum
Expenses Ignore

Ans: 9026 or 9030 approximately

13. CT5 April 2017 Q11

On 1 January 2000 a life insurance company issued a number of 20-year pure
endowment policies to a group of lives aged 40 exact. In each case, the sum assured was
60,000 and premiums were payable annually in advance throughout the term or until
earlier death.

On 1 January 2016, 18,230 policies were still in force. During 2016, 86 policyholders
died, and no policy lapsed for any other reason.

(i) Calculate the profit or loss from mortality for this group for the year ending 31
December 2016.

Basis:
Mortality AM92 Select

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
Rate of interest 4% per annum
Expenses Ignore

(ii) Comment on your answer in part (i).

Ans:
(i) Mortality Profit = -263,517
(ii) We expected 18230q56 = 91.6 deaths. Actual deaths were 86. With pure endowments,
the death strain is negative because no death claim is paid and there is a release of
reserves to the company on death. In this case, less deaths than expected means this
release of reserves is less than required by the equation of equilibrium and the company
therefore makes a loss.

14. CM1A April 2019 Q10

(i) Define the term “prospective reserve” when used for a life insurance contract.
(ii) State the conditions necessary for the prospective reserve to equal the retrospective
reserve.
A life insurance company issues a whole life assurance with sum assured S to a life aged
exactly x. Annual premiums, payable annually in advance, are paid throughout the
policy term. The benefit is payable immediately on death and there are no expenses.
(iii) Demonstrate that the prospective reserve is equal to the retrospective reserve at time
t, assuming that the conditions referred to in part (ii) are met.

Ans:
(i) The prospective reserve is the expected present value of the future outgo less the
expected present value of the future income.
(ii) If
• the retrospective and prospective reserves are calculated on the same basis; and

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
• this basis is the same as the basis used to calculate the premiums used in the reserve
calculation, using the equivalence principle
then the retrospective reserve will be equal to the prospective reserve
̅̅̅̅̅̅
𝑆𝐴𝑥
(iii) The premium is given by 𝑃 = 𝑎̈ 𝑥

The prospective reserve at time t is

tVxprosp ̅̅̅̅̅̅
= S𝐴 𝑥+𝑡 - P𝑎̈ 𝑥+𝑡

15. CM1A April 2019 Q13

On 1 January 2002 a life insurance company issued the following policies:
• Identical 25-year without profit endowment assurances each with a sum assured of
£200,000 payable at the end of the policy term or at the end of year of death if earlier.
Premiums are payable annually in advance throughout the term or until earlier death.
The policies were issued to lives aged 35 exact.
• Identical level whole life annuities, each payable annually in advance at a rate of
£10,000 per annum, issued to lives aged 65 exact.
An extract from the company’s records gives the following information for 2018 in
respect of these policies:

There were no other exits in 2018.

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
(i) Calculate the mortality profit for the year ended 31 December 2018 in respect of:
(a) endowment assurances
(b) annuities.
Basis:
Mortality - Endowment assurances AM92, Annuities PMA92C20
Interest rate 4% per annum
Expenses Ignore
(ii) Discuss your answers in part (i).

Ans:
(i) (a) -299,080
(b) 372,212
(ii) Endowment Assurance Policies
• With endowment assurances earlier than expected deaths lead to an earlier payment of
the benefit - the benefit is paid as a death benefit rather than as a maturity benefit. This
implies earlier than expected deaths leads to a mortality loss
• The company expected approximately 42.7 deaths, whereas 46 deaths actually
occurred. So actual mortality was heavier than expected.
• Here more deaths occurred than was expected and so the company suffers a mortality
loss of £299,080.

Annuity Policies
• With annuities there is no death benefit, however when a death occurs it leads to the
release of the reserve being held to cover the future annuity payments. [1½]
• The company expected approximately 740.5 deaths, whereas 746 deaths actually
occurred. So actual mortality was heavier than expected.
• Here more deaths occurred than expected and so the company has a greater release of
reserves than expected. Hence the company sees a mortality profit of £372,212 for these
annuities.

Mortality profit/loss from the 2 products cancel each other out to an extent.

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
Mortality profit relatively small compared to book of business, especially for annuity
business.

16. CM1A September 2019 Q5

A life office issued a whole of life assurance contract to a life aged x exact with a sum
assured of 1 payable at the end of the year of death.
Level premiums of P are payable annually in advance, ceasing on death. Ignore
expenses.
(i) Using standard actuarial notation, write down:
(a) The equation of value at time 0.
(b) An expression for the prospective reserve at duration t years, denoted by t𝑉𝑥𝑃 .
(c) An expression for the retrospective reserve at duration t years, denoted by t𝑉𝑥𝑅 .
Assume that the basis used to calculate both the prospective and retrospective reserves
is the same as that used to calculate the premium, P.
(ii) Show that the prospective and retrospective reserves are equal at time t.

Ans:

(i) (a) Equation of value at time 0 is:

(b) Prospective reserve at time is given by:

(c) Retrospective reserve at time t is given by:

(ii) –

17. CM1A April 2021 Q10

On 1 January 2011, a life insurance company planned to issue the following two policies
to lives then aged 45 exact:

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
∙ a 15-year without-profit endowment assurance with a sum assured of S payable on
maturity or immediately on earlier death, and with premiums of P payable annually in
advance
∙ a 15-year temporary life annuity payable annually in advance purchased with a single
premium of $50,000.
The annual annuity payments were calculated to be exactly sufficient to pay the
premiums for the endowment assurance as they fell due.
(i) Calculate P and S.

The policies were actually issued with S = $90,000 payable under each endowment
assurance policy and an annual premium of P = $4,450.
On 31 December 2020, there were 550 policies still in force. During 2020, there were six
deaths with no other decrements taking place.

(ii) Calculate the mortality profit for the calendar year 2020.

(iii) Comment on your numerical result obtained in part (ii).

Basis:
Mortality: AM92 Ultimate
Interest: 4% p.a.
Expenses: Ignore

Ans:
(i) P = $4,391.36, S = $88,846.03
(ii) MP = -$66,727.70
(iii) The insurance company expected approximately 2.21 deaths, whereas 6 deaths
actually occurred. So actual mortality was heavier than expected.
With endowment assurances, earlier-than-expected deaths lead to an earlier payment of
the benefit - the benefit is paid as a death benefit rather than as a maturity benefit. This
implies earlier than expected deaths lead to a mortality loss. Here, as actual mortality
was heavier than expected, there is a mortality loss on the endowments.

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
With an annuity, early deaths imply no future benefits are paid. Thus earlier-than-
expected deaths lead to a mortality profit. Here, as actual mortality was heavier than
expected, there is a mortality profit on the annuities.
The mortality loss on the endowments > the mortality profit on the annuities, thus
overall there is a total mortality loss.

18. CM1A September 2021 Q9

A life insurance company issues 30-year pure endowment assurance policies to a group
of lives aged exactly 30. Each policy provides a sum assured of $50,000 payable on
survival to the end of the term. Premiums on the policy are payable annually in advance
for 30 years or until earlier death.
There were two deaths during the 25th policy year and the number of policies in force at
the end of that year was 315. There were no exits other than death during the year.
(i) Calculate, showing all working, the mortality profit or loss arising in the 25th policy
year.

(ii) Comment on your result obtained in part (i).

Basis:
Mortality: AM92 Ultimate
Interest: 4% p.a. effective
Expenses: None

Ans:
(i) $26,780
(ii) A death leads to a release of reserve which contributes to profit with a Pure
Endowment no death benefit is paid so higher than expected deaths leads to higher than
expected profit. The company expected approximately 1.3 deaths whereas 2 deaths
actually occurred So, mortality was heavier than expected. Thus higher mortality led to a
mortality profit

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
19. CM1A April 2023 Q10
A life insurance company issued a 15-year special endowment assurance product on 1
January 2013, to a portfolio of policyholders aged 50 exact. The benefits were as follows:

• A death benefit, payable at the end of the year of death, of $100,000 during the
first policy year, which reduces by $5,000 each subsequent year.

• Survival benefits of $20,000 payable on survival to each of the 10th and 15th
policy anniversaries.
Level annual premiums are payable, annually in advance, ceasing after 10 years, or on
earlier death.
(i) Show that the annual premium is approximately equal to $2,786. You must show all
your working.

On 1 January 2022, there were 225 policies in force, and 2 policyholders died during
2022.

(ii) Calculate, showing all working, the mortality profit for this portfolio for 2022.

(iii) Explain your results in part (ii).

Basis:
Mortality AM92 Ultimate
Interest 6% per annum effective

Ans:
(i) -
(ii) -$7,537.18531
(iii) The amount of money the company needs to pay for each life that dies is $55,000.
The amount of money the company needs for each life that survives the year is $35,846
(= $20,000 survival benefit + a reserve of $15,846). Since $55,000 > $35,846 the death
strain at risk is positive.
With a positive DSAR, excess deaths will lead to a mortality profit
Here actual deaths (2) are greater than expected deaths (1.6), so experienced mortality
was heavier than expected. Thus, the company has experienced a mortality loss.

PRLIP -1 UNIT 2
PRACTICE QUESTIONS
PRLIP -1 UNIT 2
PRACTICE QUESTIONS