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CA1: CMP Upgrade 2012/13 Page 1

The Actuarial Education Company IFE: 2013 Examinations

Subject CA1

CMP Upgrade 2012/13

CMP Upgrade

This CMP Upgrade lists all significant changes to the Core Reading and the ActEd

material since last year so that you can manually amend your 2012 study material to

make it suitable for study for the 2013 exams. It includes replacement pages and

additional pages where appropriate. Alternatively, you can buy a full replacement set of

up-to-date Course Notes at a significantly reduced price if you have previously bought

the full price Course Notes in this subject. Please see our 2013 Student Brochure for

more details.

This CMP Upgrade contains:

All changes to the Syllabus objectives and Core Reading.

Changes to the ActEd Course Notes, Series X Assignments and Question and

Answer Bank that will make them suitable for study for the 2013 exams.

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Page 2 CA1: CMP Upgrade 2012/13

IFE: 2013 Examinations The Actuarial Education Company

1 Changes to the Syllabus objectives and Core Reading

1.1 Syllabus objectives

There have been no changes to the syllabus.

1.2 Core Reading

Chapter 1

Page 7

The first sentence of Section 3.1 now starts: The Institu te and Faculty of Actuaries

requirements...

Page 8

The first sentence of Section 3.2 now starts: These are detailed in Technical

Actuarial Standards...

All references to the Professions Guidance Notes have been removed. Therefore the

third and sixth bullet points on this page have been deleted.

Page 9

A new section has been added, which discusses the principles of materiality and

proportionality.

We recommend that you remove pages 910 from your Course Notes and use

replacement pages 9a, 9b, 9c and 10 provided below.

Chapter 4

Page 7

The first sentence of Core Reading now refers to systemic collapse, instead of

systematic collapse.

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Page 10

The definition of moral hazard has been changed, to read:

Moral hazard

The action of a party who behaves differently from the way they would behave if

they were fully exposed to the consequences of that action. The party behaves

inappropriately or less carefully than they would otherwise, leaving the

organisation to bear some of the consequences of the action. Moral hazard is

related to information asymmetry, with the party causing the action generally

having more information than the organisation that bears the consequences.

This is not the same as anti-selection which is also taking advantage of

particular aspects of an insurance contract, but within the terms offered by theinsurer.

Page 11

The last sentence of the second example now reads: This is an example of fraud.

Chapter 10

Page 18

The second sentence of Core Reading, which readsThe charges on the product will

need to be suf ficient to meet the providers expenses. has been deleted.

Chapter 30

Page 17

The third paragraph of Core Reading has been corrected, to refer to the Institute and

Faculty of Actuaries.

Chapter 31

Page 12

The second paragraph of Core Reading has been corrected, to refer to the Institute and

Faculty of Actuaries.

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Chapter 33

Page 7

A new sentence has been added to the second bullet point, so that this bullet point now

reads:

The provider will also need to decide whether it is prepared to offer the

business on a single premium or a regular premium basis or both. The

provider may charge a higher premium for regular premium policies, in

order to encourage policyholders to pay the whole premium up front.

Chapter 39

Page 12

In the penultimate sentence of the first paragraph, change the last word from trader to

trade.

Chapter 41

Page 8

Part of point 5 has been deleted, so it now reads:

5. Moral hazards should be eliminated as far as possib le because these are

difficult to quantify.

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Glossary

Page 19

The definition of moral hazard has been changed, to read:

Moral hazard

The action of a party who behaves differently from the way they would behave if

they were fully exposed to the consequences of that action. The party behaves

inappropriately or less carefully than they would otherwise, leaving the

organisation to bear some of the consequences of the action. Moral hazard is

related to information asymmetry, with the party causing the action generally

having more information than the organisation that bears the consequences.

This is not the same as anti-selection which is also taking advantage of

particular aspects of an insurance contract, but within the terms offered by the

insurer.

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2 Changes to the ActEd Course Notes

Chapter 1

Page 9

A new section has been added, which discusses the principles of materiality and

proportionality.

We recommend that you remove pages 9 10 from your Course Notes and use

replacement pages 9a, 9b, 9c and 10 provided below.

Pages 19 20

The Chapter Summary has been changed to reflect the new Core Reading. We have

provided replacement pages 19 and 20 below.

Page 24

A new solution has been written to Question 1.4, relating to the new Core Reading on

the principles of materiality and proportionality. This reads:

Solution 1.4

TAS D states that checks should be carried out on any data used but that the choice

and extent of these checks is a matter of judgement.

Therefore the choice and extent of checks is a material decision. However, if some of

the data relate to a business class that is not in itself material to the overall result, then

the principle need not be complied with for that subset of data.

You may like to renumber subsequent questions and solutions in this chapter.

Chapter 4

Page 11

Part (iii) of Question 4.7 now reads:

(iii) An insured driver not bothering to put the car in the garage at night.

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Page 28

In the second set of bullet points, part of the second bullet point has been deleted, so it

now reads:

They can lead to anti-selection.

Page 31

Solution 4.3 now reads:

This systemic risk refers to the failure of the financial system. An example is where

the failure of one financial institution leads to the failure of another, which in turn

causes difficulties for a third institution and so on. Such risks arise when the financialpositions of different institutions are very closely inter-linked.

Page 33

Solution 4.7 now reads:

(i) is an example of a policyholder intentionally withholding relevant information from

the insurer, or even lying on the proposal form. It is therefore an example of fraud,

rather than moral hazard.

(ii) is an example of anti-selection rather than moral hazard, since it involves taking

advantage of the insurers inadequate underwriting process.

(iii) is an example of moral hazard, because the insured is behaving differently as a

result of having insurance in place.

Chapter 5

Page 2

The second sub-bullet now reads:

insurance products and pensions: http://www.thisismoney.com and

http://www.moneyadviceservice.org.uk.

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Chapter 8

Page 20

A further explanation has been added to the bottom of page 20, which reads:

Note that in practice, the term health insurance, or health and care (H&C) is an

umbrella term used to describe the four main types of cover:

income protection

critical illness

long-term care

private medical insurance.

However, the Core Reading for Subject CA1 uses the term health insurance to mean

only private medical insurance.

Chapter 16

Page 11

The second bullet point now starts: market valuation of holdings being lower than ...

Chapter 24

Page 31

Solution 24.12 has been significantly re-written. We recommend that you remove

page 31 from your Course Notes and use the replacement page provided below.

Chapter 34

Page 17

The final sentence of the example has been corrected to read:

However, the expenses and the first two categories of benefits would be paid in full

and the remainder would be reduced to 83.3% of their promised level.

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Chapter 35

Page 10

The first sentence of Question 35 has been corrected, to read:

The table below shows the claim payments on a household insurance portfolio in each

development year, for accident years from 2008 to 2011.

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3 Changes to the Q&A Bank

Part 1 Questions

A new question (Question 1.5) has been written. We recommend that you remove

pages 1 and 2 of your Course Notes and use the replacement pages provided below.

You may also like to renumber subsequent questions.

Part 1 Solutions

Page 4-5

A new solution has been written, for the new Question 1.5. We recommend that youremove pages 3 and 4 of your Course Notes and use replacement pages 3, 4a, and 4b

provided below.

You may also like to renumber subsequent solutions.

Page 14

The solution to Question 1.18 has been updated. We recommend that you remove

pages 13 and 14 of your Course Notes and use the replacement pages provided below.

Part 2 Questions

Question 2.4 has been re-written. We recommend that you remove pages 1 and 2 of

your Course Notes and use the replacement pages provided below.

Part 2 Solutions

Solution 2.4 has been re-written. We recommend that you remove pages 3 and 4 of

your Course Notes and use the replacement pages provided below.

Part 7 Solutions

Solution 7.9 has been corrected, to refer to the Institute and Faculty of Actuaries

(instead of the Faculty and Institute of Actuaries).

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Part 9 Solutions

In Solution 9.17, the top left box on page 23 now reads:

Moral hazard, egcar owners leave their cars unlocked

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4 Changes to the X Assignments

This section provides details of material changes that have been made to the

2012 X Assignments, so that you can continue to use these for the 2013 exams.

However, if you are having your attempts marked by ActEd, you will need to use the

2013 version of the assignments.

Assignment X6

Question X6.3

Part (iii) has been amended, to read:

(iii) What are the main circumstances when an individual would hold a large

proportion of assets in cash deposits? [2]

Question X6.11

Part (ii) of this question has been significantly re-written. We recommend you remove

pages 34 of your questions and use the replacement pages provided below.

Solution X6.11

Part (ii) of this solution has been significantly re-written. We recommend you remove

pages 1718 of your solutions and use the replacement pages provided below.

Assignment X9

Solution X9.7

On page 11, the first sentence under Investment returns has been corrected to read:

The contracts are fundamentally providing protection cover and claims reserves can be

significant under either design. []

Assignment X10

Question X10.4

Part (i) of this question has been significantly re-written. We recommend you remove

pages 12 of your questions and use the replacement pages provided below.

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Solution X10.4

Part (i) of this solution has been significantly re-written. We recommend you remove

pages 56 of your solutions and use replacement pages 5, 6a and 6b provided below.

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5 Other tuition services

In addition to this CMP Upgrade you might find the following services helpful with

your study.

5.1 Study material

We offer the following study material in Subject CA1:

ASET (ActEd Solutions with Exam Technique) and Mini-ASET

CA1 Bitesize

Flashcards

Mock Exam A and Additional Mock Pack (AMP)

Revision Notes

Smart Revise

Sound Revision.

For further details on ActEds study materials, please refer to the 2013 Student

Brochure, which is available from the ActEd website at www.ActEd.co.uk.

5.2 Tutorials

We offer the following tutorials in Subject CA1:

a set of Regular Tutorials (lasting three full days)

a Block Tutorial (lasting three full days)

a series of webinars (lasting approximately an hour and a half each)

For further details on ActEds tutorials, please refer to our latest Tuition Bulletin, which

is available from the ActEd website at www.ActEd.co.uk .

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5.3 Marking

You can have your attempts at any of our assignments or mock exams marked by

ActEd. When marking your scripts, we aim to provide specific advice to improve your

chances of success in the exam and to return your scripts as quickly as possible.

For further details on ActEds marking services, please refer to the 2013 Student

Brochure, which is available from the ActEd website at www.ActEd.co.uk .

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6 Feedback on the study material

ActEd is always pleased to get feedback from students about any aspect of our study

programmes. Please let us know if you have any specific comments (egabout certain

sections of the notes or particular questions) or general suggestions about how we can

improve the study material. We will incorporate as many of your suggestions as we can

when we update the course material each year.

If you have any comments on this course please send them by email to [email protected]

or by fax to 01235 550085.

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CA1-01: How to do a professional job Page 9a


Work may depart from the requirements of a TAS if the departure is considered

not to be material. In this context, something is material if, at the time the work

is performed, the effect of the departure (or the combined effect if there is more

than one departure) could influence the decisions to be taken by the users of the

resulting actuarial information.

Knowledge of the detailed technical content of actuarial standards is not

required until the Specialist Application subjects.

More information about the BAS can be found on its website, at www.frc.org.uk/bas.

3.3 Exercising Judgement Materiality and Proportionality

The Technical Actuarial Standards (TASs) are principles based.

This means that the TAS aim to move away from detailed, prescriptive rules and allow

actuaries to focus instead on achieving desirable outcomes.

These principles need to be considered when carrying out actuarial work that is

within the scope of a particular TAS.

We will first discuss the principles of materiality and proportionality, and then apply

these to the TASs.

Materiality

The following definition of material is given in each TAS:

Matters are material if they could, individually or collectively, influence the

decisions to be taken by users of the related actuarial information. Assessing

materiality is a matter of reasonable judgement which requires consideration of

the users and the context in which the work is performed and reported.

This means that a principle in a TAS can be ignored if it is felt that its inclusion

would not have a material effect.

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Page 9b CA1-01: How to do a professional job


Example

Principle C.5.3 of TAS D states that The definitions of all items of data shall be

documented.

Lets say that you are carrying out a simple pricing exercise in which you find that only

one rating factor has a significant impact on the risk and the other potential factors are

found to be not useful in describing the risk.

So even though you may have looked at the other potential factors, you may not feel it

necessary to document their definitions because they are not material to the pricing

decision. You can therefore disregard principle C.5.3.

Proportionality

Proportionality is not defined in the TASs. However proport ionality is referred to

in TAS R and TAS D as fo llows:

Nothing in this standard should be interpreted as requiring work to be

performed that is not proportionate to the scope of the decision or assignment to

which it relates and the benefit that users would be expected to obtain from the

work.

This statement indicates that a principle which is material can be disregarded(without further consideration or comment) in some situations. For example,

there may be a number of principles within TAS R that are material to a decision

that the user needs to make but the making of that decision i tself is immaterial to

the user.

Question 1.4

Give a specific example of when a principle that is material may be disregarded.

In this situation the actuary could decide not to apply certain principles when

carrying out or reporting the actuarial work. However, in such a situation there

is still a professional requirement to ensure that anyone affected by the decision

to be taken by the user is not adversely affected by this course of action.

It is not possible to give any general advice on what is proportionate in any

situation as the judgement will be driven by the individual circumstances

applying to the specific user and the specific decision at the relevant time.

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CA1-01: How to do a professional job Page 9c


Apply ing the pr inciples of proport ional ity and material ity to actuarial

work

Where a principle is applicable and material in a specific context a judgement

needs to be made as to how to apply the princip le.

If the judgement is that the principle should be applied, then the actual

application of the principle should be carried out in a manner that is

proportional.

Judgements on the materiality and the proportionality of a principle in a specific

context must be exercised in a manner that is both reasoned and justifiable.

When cons idering the application of a principle in a TAS, the principle can be put

into one of the following three groups:1. The principle is not applicable.

2. The princ iple is applicable but its inclusion is not material to the decision

to be taken by the user.

3. The princ iple is applicable and its inclusion is material to the decision to

be taken by the user.

Principles falling in group 1. are mainly matter of fact.

Principles falling in group 2. and 3. require the exercise of judgement. In

exercising this judgement the decisions for which the actuarial information is

being supplied will need to be considered. This may involve discussions with

the user.

If a principle falls in to category 3. then judgement will need to be exercised as to

what is a proportionate application of that principle.

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Page 10 CA1-01: How to do a professional job


4 Doing a professional job

An important skill that you will develop in studying this subject is to think around

issues and generate ideas about them, rather than pre-learning appropriate responses

for every conceivable situation.

As a forerunner to this, spend a few minutes considering the following question before

going on to study the remainder of this section. As you then read on, consider where

and why your answer differs from the Core Reading. As well as being good practice,

this may make this unit more interesting to study(!).

Question 1.5

This section discusses actuaries doing a professional job. Without looking below,describe what you think being a professional means.

4.1 Being a professional

Professionalism is the way in which an actuary carries out the work and presents

the advice resulting from the use of the skills acquired through this course and

beyond. As a professional, an actuary will be required to make decisions and

take personal responsibility for those decisions. An actuary must act wi th

integrity and with detachment from his or her own personal circumstances. An

actuary must also develop a direct, personal and trusting relationship with a

client in order to advise on the most suitable solution for that particular client.

An actuary must also recognise that the views of others (including other

actuaries) may differ from h is/her own and that the other views may be valid.

A professional must achieve and demonstrate competence in his/her specialised

skill, and its practical application, in order to build the trust of clients and the

public in the advice that is presented. Addit ionally, an actuary should also

maintain and improve competence in the skills that are necessary to provide

actuarial advice.

An actuary should also be rel iable in particular th is means del ivering a work

product that meets the clients requirements in terms of detail, quality and

timeliness. Timeliness is often a major issue. An actuary should not promise to

complete work in unrealistic timescales that might prejudice the detail or quality

of the output. In the event that it becomes clear that the actuary cannot

reconcile the detail, quality and timeliness of the work required, discussions with

the client should be started at the earliest opportun ity.

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CA1-01: How to do a professional job Page 19


Chapter 1 Summary

Jobs that actuaries do

The jobs that actuaries do can be grouped into the areas of:

risks

modelling

managing assets and liabilities

monitoring experience.

Statutory roles

In some territories there are statutory roles that can only be taken by actuaries. Thestatutory roles for actuaries mainly relate to the certification of the adequacy of the

valuation of assets and liabilities for a life insurer, general insurer or pension scheme,

for example:

proper records have been kept for valuing liabilities

proper provision for the liabilities has been made

assets and liabilities have been valued according to legislative rules

liabilities have been valued in the context of the assets

the difference in the assets and liabilities has been stated

premiums or contributions are adequate to meet future commitments

professional guidance has been complied with.

Actuaries may also work for the statutory body with personal responsibility for various

areas of practice or are more commonly employed to check that regulatory objectives

are adhered to.

Professional framework of the Actuarial Profession

Actuaries must comply with:

ethical and professional standards, which are set out in the Actuarial Profession

Standards and issued by the Institute and Faculty of Actuaries

Technical Actuarial Standards (TASs), issued by the Board for Actuarial

Standards (BAS).

Actuaries should consider the principles of proportionality and materiality when

applying TASs.

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Page 20 CA1-01: How to do a professional job


The Actuarial Quality Framework aims to promote actuarial quality through methods,

communication, actuaries and the environment. It is designed by the Financial

Reporting Council and aims to complement professional and other regulation affecting

actuaries and their clients.

Doing a professional job

An actuary must:

act in a professional manner with integrity and with detachment from his or her

own personal circumstances

develop a direct, personal and trusting relationship with a client in order to

advise on the most suitable solution for that particular client

recognise that others have valid views

attain and maintain competence in a given field

be reliable, iedeliver good quality work in a given timeframe

communicate clearly

recognise exactly who the client is and what their needs are

recognise and seek to avoid conflicts of interest.

Conflicts of interest

Principles to adhere to in managing conflicts of interest include:

avoidance of the conflict, for example declining to advise one of the parties

Chinese wallsestablished to ring fence people and data

disclosure of the conflict to both parties

keeping detailed records of work assignments

notifying the regulators if the actuary believes that his/her client is not treating

customers fairly.

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CA1-24: Valuation of asset classes and portfolios Page 31


Solution 24.12

The current market value of the portfolio is 100m + 50m = 150m. Assume that the

assets are invested in equities and bonds according to the benchmark asset allocation,

ie 50% bonds and 50% equities.

Value of equities

We calculate the value of next years dividend by applying the prospective market

dividend yield to the notional market value. We can then value the asset using our

long-term valuation assumptions:

prospective dividend yield share price 0.05 7593.750

9.5% 5.5%

E

D mV m

i g i g

= = = =

- - -

Value of bonds

price per bond number of bondsBV =

We value the price per bond using the schemes long-term assumption of 9.5%i= .

We calculate the number of bonds by taking the notional market value and dividing by

the marketprice of a bond, iecalculated using the GRY of 10%.

(Remember that the value of an undated bond, with a coupon of CisC

i.)

Thus:

price per bond number of bonds

0.025 100 75

0.025 1000.0950.10

78.947

BV

m

m

=

=

=

Hence, the notional value of the portfolio is:

93.750 78.947 172.697E BV V m m m+ = + =

This is closest to 175, so the correct answer is A.

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All study material produced by ActEd is copyright and is

sold for the exclusive use of the purchaser. The copyright

is owned by Institute and Faculty Education Limited, a

subsidiary of the Institute and Faculty of Actuaries.

Unless prior authority is granted by ActEd, you may nothire out, lend, give out, sell, store or transmit

electronically or photocopy any part of the study material.

You must take care of your study material to ensure that it

is not used or copied by anybody else.

Legal action will be taken if these terms are infringed. In

addition, we may seek to take disciplinary action through

the profession or through your employer.

These conditions remain in force after you have finished

using the course.

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CA1: Q&A Bank Part 1 Questions Page 1


Part 1 Questions

Introduction

The Question and Answer Bank is divided into 10 parts. For each part the questions

may require knowledge from earlier parts of the course.

Each Question and Answer Bank part is split into three sections:

Section 1 Development Questions. The aim of these questions is to build on

your understanding, test key Core Reading and bring your knowledge and skills

to the level required to tackle Exam-style Questions.

Section 2 Exam-style Questions. These questions are of the level of difficulty

you are likely to face in the examination. It is very important that you focus on

these questions as preparation for the exam.

Section 3 provides a grid of all the past CA1 examination questions related to

the topics covered in this part of the course.

We recommend that you do not use the questions as a set of material to learn but

attempt the questions for yourself before looking at the solutions provided.

This last point highlights the difference between active studying and passive studying.

Given that the examiners will be aiming to set questions to make you think (and in doing

so they will be devising questions you have not seen before) it is much better if you

practise the skills that they will be testing.

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CA1: Q&A Bank Part 1 Solutions Page 3


Solution 1.3

Examples of potential conflicts of interest

Several actuaries of the same consulting firm acting to advise both the vendor and

possibly a number of prospective purchasers in the case of a takeover or merger of two

insurers. [1]

Where an actuary has statutory responsibilities, these frequently include the requirement

to notify the regulatory authorities if the actuary believes that his client (egan insurance

company) is acting in a way that would prejudice the interests of its customers

(egpolicyholders). [1]

An actuarial consultancy asked to provide advice in the case of a bulk transfer of

pension scheme liabilities, where the consultancy has previously acted as scheme

manager to both parties. [1]

An actuary being approached to provide advice on a particular issue, when they are

already, or have been previously, asked to provide such advice to another party. [1]

A life insurance actuary who sits on the board, and therefore is directly responsible to

shareholders, but needs to set bonus rates to meet policyholders expectations. [1]

Actuaries operating within an investment house who may act to advise a client andpotential bidders in the case of a share issue. [1]

An actuary who takes more than one role within a pension scheme, egwho is a member

of the scheme and a significant shareholder of the sponsoring company, or advisor to

the sponsor, and the trustees. [1]

[1 for each suitable example, maximum 5]

Solution 1.4

The actuary can bring the following skills:

an ability to assess, quantify, and determine how to manage and monitor the

risks associated with different asset mixes and liability profiles []

an ability to use economic analyses to form judgements about future inflation

and interest rates, this will be needed in order to build an investment model []

an ability to handle data in a critical manner []

and to use the data relating to future liabilities to estimate the appropriate

investment strategy []

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Page 4a CA1: Q&A Bank Part 1 Solutions


an understanding of how to build, parameterise, test and implement models []

an ability to project and discount future cashflows using assumptions []

an understanding of how to handle assumptions in a critical manner []

including how to build appropriate margins into assumptions and appreciate

the impact of such margins []

participation in decisions on investment policies to ensure that future liabilities

are met []

an ability to work with other professionals, eginvestment managers, in order to

determine the most appropriate policy []

an understanding of where and when the expertise of other professionals is

needed, eg the actuary may only set the general investment strategy and leave

stock selection to investment managers []

an understanding of the life insurance and investment environment that requires

professionalism and scrutiny []

an ability to apply the highest standards of independence ensuring there should

be no conflict of interest []

to communicate the results of all his/her work to the managers of the insurance

company. []

[Maximum 6]

Solution 1.5

The principle of proportionality

Work need only be performed that is proportionate:

to the scope of the decision []

or assignment to which it relates []

and the benefit that users would be expected to obtain from the work. []

In other words, the principle of proportionality says that an action should be

proportionate to the problem or task in hand ... []

... and need not go beyond what is necessary to achieve its objective. []

The principle of materiality

Matters are material if they could, individually or collectively, influence the decisions to

be taken by users of the related actuarial information. []

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CA1: Q&A Bank Part 1 Solutions Page 4b


Assessing materiality is a matter of reasonable judgement which requires consideration

of the users and the context in which the work is performed and reported. []

This means that a principle in a TAS can be ignored if it is felt that its inclusion would

not have a material effect. []

[Maximum 3]

Solution 1.6

(i) Checks to be carried out on the answers

The actuary needs to check that:

the answers look reasonable [] the sensitivity testing carried out was appropriate []

the range of answers produced is consistent with the level of confidence

associated with the assumptions made []

the results are reviewed by a peer. []

[Total 2]

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using the course.

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Solution 1.16

It is compelled, or at least encouraged, to do so by regulation imposed by the

State. [1]

The employer wants to act in a paternalistic way towards its employees []

in particular it may want to reward loyal or key staff, and care for those in

need. []

It wants to attract and retain good employees []

and so offer benefits at least as good as key competitors. []

In order to benefit from economies of scale, ie it may be cheaper to provide

benefits to employees through a pooled arrangement than for employees to make

their own individual arrangements. [1]

The employer may be part of a multi-employer scheme that provides benefits.

[]

[Maximum 4]

Solution 1.17

An investment exchange ought to be required to demonstrate to the regulator that:

it has adequate financial resources to provide the requisite exchange services [1]

proper conduct of business rules exist, in particular []

all parties (traders and issuers of securities) should be aware of the rules and

understand them []

these rules are monitored to ensure they are enforced []

to prevent insider trading and fraud []

it operates proper, transparent and sufficiently liquid markets in the securities

traded [1]

appropriate procedures for recording transactions exist, eg time, price andvolume of each trade, and the parties involved [1]

appropriate procedures exist for admitting new listings []

proper arrangements exist for the clearing of transactions []

to prevent fraud. []

[Maximum 6]

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Page 14 CA1: Q&A Bank Part 1 Solutions


Solution 1.18

The professional framework of the UK actuarial profession comprises both ethical or

conduct standards and technical or practice standards. [1]

The Institute and Faculty of Actuaries requirements are set out in the Actuarial

Profession Standards. []

The Actuarial Profession Standards framework comprises:

the Actuaries Code []

other Actuarial Profession Standards (AP Standards) developed since 2006. []

Professional skills and consideration of the Actuarial Profession Standards are covered

in detail in a two-day post-qualification course. []

Actuaries subject to the continuing professional development scheme are required to

keep their professional as well as their technical skills up to date. []

The Board for Actuarial Standards (BAS) issues Technical Actuarial Standards (TASs).

These can be on either specific or generic topics. []

The TASs apply to work done in relation to UK operations of entities and any non-UK

operations which report in the UK. []

The aim of the TASs is to ensure that users of actuarial information can have confidence

in the informations relevance, transparency of assumptions, completeness and

comprehensibility. [1]

Actuaries may only depart from these standards if the departure is not considered to be

material. []

[Maximum 4]

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CA1: Q&A Bank Part 2 Questions Page 1


Part 2 Questions

Note that the split between Development Questions and Exam-style Questions is

somewhat subjective. For example, there have been past CA1 exam questions that testknowledge of the Core Reading, and so are similar to what weve included here as

Development Questions. The Exam-style Questions involve more application and a

wider range of ideas and are typically the more challenging questions in the exam.

1 Development Questions

Question 2.1

Describe the customer needs met by the following contracts:

(i) income protection

(ii) critical illness

(iii) long-term care. [5]

Question 2.2

Comment briefly on the following quote. Buying a without-profit annuity to provide

income in retirement is foolish. The insurer will only take the money and invest it in

fixed-interest securities, and so the policyholder would do better to buy these directly

and cut out the insurers expenses and profit. [5]

Question 2.3

List the perils associated with each of the following forms of insurance:

employers liability

public liability

product liability

professional indemnity

marine hull cover

pecuniary loss

fidelity guarantee. [7]

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Page 2 CA1: Q&A Bank Part 2 Questions


Question 2.4

Moral hazard is the risk that an insured behaves differently from the way they would

behave if they did not have insurance in place.

Give four examples of possible moral hazard within household insurance. [2]

Question 2.5

A friend has recently established a pizza delivery company. He has asked you for some

advice as to the types of general insurance products that he might need. Describe

briefly the types that he might need, including your reasons for suggesting them. [3]

Question 2.6

State the cash inflows and outflows associated with a motor vehicle insurance policy

(from the perspective of the insurer) and the uncertainty associated with the cashflows.

[3]

Question 2.7

Outline features of a contract design that increase the financing requirements. [4]

Question 2.8

Why would a regular premium pure endowment assurance result in higher financing

requirements than a single premium version of the contract, all other things being equal?

[2]

Question 2.9

List the factors to consider in designing a financial contract. [9]

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public liability

perils relating to policy type

examples include dog bites, falling objects

product liability

perils depend upon the nature of the product

examples include faulty design, faulty manufacture, faulty packaging,

misleading or incorrect instructions

professional indemnity

perils depend upon the profession

examples includeincorrect medical diagnosis, inappropriate legal advice,error in actuarial report

marine hull cover

perils of the seas and navigable waters

fire, explosion

jettison, piracy etc

pecuniary loss

bad debts or failure of a third party

an example is default on mortgage payments (under mortgage indemnity

guarantee insurance)

fidelity guarantee

dishonest actions by employees

examples include fraud or embezzlement

[ each, maximum 7]

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Page 4 CA1: Q&A Bank Part 2 Solutions


Solution 2.4

Four possible moral hazards in household insurance:

engineering accidents to old / broken items and claiming full replacement []

acting carelessly, egleaving a window open or the house unlocked []

carrying more cash / valuable items around with you (ie if personal effects

outside the home are included under the terms of the cover) []

arson. []

[Total 2]

Solution 2.5

Types of cover:

building insurance to protect against fire, storm, flood and other hazards []

contents of the kitchen / shop to protect against theft, flood, storm damage and

other hazards []

business interruption cover to protect against loss of profits after damage to

contents or buildings []

theft and liability fleet cover for the delivery vehicles / mopeds []

employers liability against claims from the staff []

possibly public and product liability against claims for negligence from the

public and employees. []

[Total 3]

Solution 2.6

The inflow for the insurance company is the premium received at the start of the year or

at regular intervals, egmonthly. []

The amount and timing of the premium is known precisely []

unless endorsements are made to the policy or the policy is discontinued. []

The outflows consist of claim payments to policyholders or to third parties, egvehicle

repairers. []

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CA1: Assignment X6 Questions Page 3


Question X6.8

Describe the factors influencing the investment strategy of a funded defined benefit

pension scheme, iea defined benefit pension scheme where monies are set aside before

the benefits are due to be paid. [12]

Question X6.9

(i) Define the terms:

risk budgeting

strategic risk

structural risk

active risk [2]

(ii) A small pension fund with total assets of 100mis in the process of choosing a

number of specialist investment managers. Following an asset/liability study by

the scheme actuary, the trustees have been told that 75% of the funds liabilities

are linked to salary inflation and 25% are fixed in nominal terms. The actuary

has recommended that an appropriate asset mix to match these liabilities would

be 50% domestic equities, 25% domestic property and 25% fixed-interest

undated bonds.

The trustees have set up a strategic benchmark of 80% domestic equities and

20% domestic fixed-interest government bonds. The trustees have chosen two

specialist managers to manage the fund: a domestic equity manager whose style

is described as growth and a passive bond manager that aims to match the

FTSE Actuaries over 15-year government bond index. (They were unable to

find a passive manager that targeted undated bonds.)

Describe the risks inherent in the set-up of this pension fund. [4]

[Total 6]

Question X6.10

Suggest ways in which the investment requirements of the following couples might differ:

a couple in their 30s with two young children

a retired couple in their 60s. [8]

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Page 4 CA1: Assignment X6 Questions


Question X6.11

(i) Describe how you would calculate the historical tracking error and the forward-

looking tracking error of a US equity fund. [2]

(ii) You have been given the following information relating to two fund managers

over the last three years and have been asked to assess their relative

performance.

Size of fund Average annual

investment return

Historic-tracking

error

Fund A $50m 2% 8%

Fund B $1m 6% 1%

Outline the points you would make in your response. [5]

[Total 7]

End of paper

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CA1: Assignment X6 Solutions Page 17


Liquidity

Immediate access to their capital might be less important to the retired couple. []

Insurance needs

Insurance protection for dependants against death and ill-health is an important

consideration for the younger couple. []

Long-term care may be an important consideration for the retired couple. []

[Maximum 8]

Solution X6.11

Comment

The Core Reading for this question is discussed in Chapter 28, Developing an

investment strategy (2).

(i) Tracking errors

Tracking error is normally defined as the annualised standard deviation of the difference

between the fund returns and the benchmark returns (iethe active returns) over a given

time period. [1]

The historical tracking error is calculated using historical data. []

A forward-looking tracking error uses estimates of likely future volatilities and

correlations of different stocks and markets to estimate the future tracking error. []

[Total 2]

(ii) Comparison of the two funds

Fund manager B appears to have significantly outperformed fund manager A, by

earning a higher return on average. []

However, fund manager B did not take on very much active investment risk, and

therefore this outperformance is likely to be due to the performance of the

underlying benchmark rather than the investment decisions of the fund manager.

[1]

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Page 18 CA1: Assignment X6 Solutions


The tracking error gives no indication of whether the fund managers have

performed better or worse than their respective benchmarks ... []

... so fund manager B may have underperformed his benchmark while fund

manager A may have outperformed his. [] Three years may not be a long enough time period to make inferences about

investment performance. []

The results may be very different over other periods (both longer and shorter).

[]

In particular, fund B is much smaller than fund A, so it is likely to be more

volatile. []

A direct comparison may not be appropriate, for example:

the managers of the funds may have had different constraints orobjectives. []

the two managers may be investing in very different funds, eg different

asset classes. []

Past performance is not necessarily a good guide to the future ... []

... hence, it would be useful to look at other measures, eg forward-looking

tracking error, in order to estimate the likely future performance of the two fund

managers. []

[Maximum 5]

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CA1: Assignment X10 Questions Page 1


Question X10.1

You have been given the following information regarding the past claims experience on

a particular line of business.

Total claims (m) in one year 0 1 2 3 4 5 6 7 8

Frequency of occurrence

within last 32 years8 6 12 0 2 2 0 0 2

The average claim size over the last 32 years was 0.5m with a very small standard

deviation. No claims occurred within two weeks of any other claim.

If the past claims experience is deemed to be a good indication of future claims

experience, discuss:

(i) the appropriateness of reinsurance (in general) for this class of business [3]

(ii) which types of reinsurance contract would be suitable. [3]

[Total 6]

Question X10.2

A proprietary life insurance company sells a range of business, including a significant

volume of term insurance.

Describe a modelling investigation that the company might perform to set its

reinsurance retention limit and the other factors the company should take into account in

setting the retention limit. [13]

Question X10.3

(i) Outline the main features of surplus and stop loss reinsurance. [7]

(ii) Give with reasons the main types of reinsurance and extent of reinsurance that

would be mostsuitable for:

(a) an insurance company writing motor insurance

(b) a large insurance company writing industrial property fire insurance. [4]

[Total 11]

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Page 2 CA1: Assignment X10 Questions


Question X10.4

A life insurance company sells without-profit critical illness policies.

(i) State the key reason why the company will wish to obtain medical evidence

when underwriting these policies and list the medical information that the

company may wish to obtain. [4]

(ii) Describe the options open to the company if the underwriting process shows an

applicant to have a higher than standard level of risk. Explain when each option

is appropriate. [5]

[Total 9]

Question X10.5

(i) List different ways in which a life insurance company can diversify its business

in order to reduce the risks it faces. [5]

(ii) Describe why too much diversification is not necessarily a good thing. [2]

(iii) Excluding reinsurance, list ten other risk management tools. [5]

[Total 12]

Question X10.6

Describe the reasons why life insurance companies need capital. [9]

Question X10.7

(i) Describe how both traditional and financial reinsurance can be used to aid a

provider in managing its capital requirements. [6]

(ii) Describe, with examples, the other external and internal capital management

tools available to a general insurance company. [13]

(iii) State the factors that will influence the companys choice between the tools

described in part (ii). [6]

[Total 25]

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CA1: Assignment X10 Solutions Page 5


Stop loss

non-proportional so claim split not pre-defined

type of aggregate excess of loss reinsurance reinsurer pays for aggregate claims from all events caused by all perilscovered

by the direct written policy

above a retention limit and up to an upper limit

cedant may be required to pay a proportion of the claims within the limits so as

to retain an interest in the risk

cover tends to be expensive

used to reduce the risk of insolvency

used to protect against accumulations of risk

used to smooth profits by reducing claims fluctuations [ each, maximum 3]

(ii)(a) Insurance company writing motor insurance

A motor account can give rise to the occasional enormous liability claim. []

These may relate to a single claim (eg bodily injury or death to a single driver) or

multiple claims (ega motorway pile-up). [1]

So the insurer would need individual and aggregate excess of loss reinsurance. []

Sufficient layers would be required to provide cover for any size of claim (ieunlimited).

[]

(ii)(b) Large insurance company writing industrial property fire insurance

Industrial fire risks can be very large, so even a large insurer is not likely to want to

retain all the risk for each policy. []

So the insurer would need proportional insurance whereby the proportion reinsured for

each individual risk is determined by the size of that risk (which is likely to vary for

each different building). [1]

A surplus treaty would be required (since industrial properties are relatively

heterogeneous) probably with quite a high maximum retention. A second surplus treaty

may be required to cope with very large risks. [1]

[Maximum 4]

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Page 6a CA1: Assignment X10 Solutions


Solution X10.4

Comment

It is tempting with this question to discuss the sources of information from Chapter 30,

Data. However, Chapter 30 is concerned with sources of mass data to be used for

modelling purposes. In contrast, this question asks about the sources of data available

forone applicant. Therefore this is a question on underwriting, which is discussed in

Chapter 45, Risk management tools (2).

(i) Medical information

The company will obtain evidence about the health of the applicant so as to assess

whether he or she attains the companys required standard of health ... []

... and if not what their state of health is relative to that standard. []

Medical information that could be used for underwriting includes:

health

medical history

lifestyle

country of residence

occupation

family histories of critical illness and early death

a report from the applicants doctor

an independent medical examination

standard medical tests, such as blood tests, urine tests, blood pressure tests etc

specialist medical tests, eg MRI scan etc.

[ each maximum 3]

(ii) Options if an applicant has a higher than expected level of risk

The applicant could be declined insurance ... []

... This option would only be adopted as a last resort, for the highest risk lives, when all

other possible ways of dealing with a case are considered to be too risky for the

company. []

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CA1: Assignment X10 Solutions Page 6b


An extra premium could be charged, commensurate with the extra degree of risk, for all

or part of the policy term ... []

... This method is appropriate for cases in which the level of extra risk can be assessed

with a good degree of confidence, and is not too excessive. []

A deduction could be made from the sum assured. The deduction could be a fixed

amount or on a sliding scale ... []

... This method is appropriate if the policyholder could not afford an extra premium. []

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