INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

25 September 2020 (am)

Subject CP1 – Actuarial Practice

Core Practices

Paper Two
Time allowed: Three hours and fifteen minutes

In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

If you encounter any issues during the examination please contact the Examination Team on
T. 0044 (0) 1865 268 873.

CP12 S2020 © Institute and Faculty of Actuaries

[Note: your work needs to link to the information provided in the questions and should
discuss/outline areas of professionalism/actuarial advice as required. Limited credit will be
given to solutions where generic answers have been given that do not refer back to the
information provided.]

1 Background

An insurance company in a developed country offers a wide range of life and general
insurance products.

The company’s board has commissioned several projects to improve its business
results.

Project 1

The government has introduced a requirement for all companies that own their own
commercial properties to purchase commercial property insurance that covers the
policyholder in the event of fire damage to its property. Although the company offers
property insurance products, it does not offer this specific product and the board
wishes to expand into this market by launching a commercial property insurance product.

Project 2

The payments in respect of the sum assured paid out under one of its group life term
assurance policies increased significantly over the year, following an explosion that
caused multiple fatalities at a factory. The board wishes to review the pricing of future
group life term assurance policies and consider how it can improve the management
of the risks under these policies.

Project 3

Responsible investment is an investment strategy that integrates environmental, social

and governance factors into investment analysis and decisions.

The board wishes its defined benefit scheme to increase the proportion of the
scheme’s assets that are invested in ‘Responsible Investments’ and has earmarked a
significant investment in either:

(a) an electricity company using solar and wind power to produce electricity; or

(b) a ‘Responsible Investments’ fund offered by an external investment manager,

investing in a range of different companies.

Project 4

The company currently sells an income protection product that pays out an income in
the event of incapacity. The beneficiaries covered by this product are required to visit
a local doctor every year to confirm they remain eligible to continue to receive the
benefit over the next 12 months. To control and manage the costs of providing these
benefits, the company wishes to appoint its own doctors to make the assessment
instead.

CP12 S2020–2
 Questions

(i) Discuss how the proposals should be prioritised. [3]

(ii) Outline the factors that the company would need to consider for a launch of
the new product under Project 1. [6]

(iii) Describe how the company would review the pricing of the product under
Project 2. [6]

(iv) Discuss how the company can manage and control its risks in Project 2. [8]

(v) Compare the two investment options under Project 3 in relation to the impact
each option would have on both the company and the defined benefit pension
scheme. [8]

(vi) Suggest the possible impact of the board’s decision for both options under
Project 3 on the scheme’s funding and risk position. [8]

(vii) Outline how the company could, by appointing its own doctors under Project 4,
control its benefit payments and costs. [8]
[Total 47]

CP12 S2020–3 PLEASE TURN OVER

2 Background

A large proprietary life insurance company writes a range of products in its home
market. It has implemented the principles of treating customers fairly throughout all
aspects of its business.

The company has been making losses on its portfolio of annuities in payment for the
last 5 years. The Board of the company feel that a significant factor in these losses is
due to poor policy data for its annuity business. The pricing actuary of the company
has also expressed concerns that the rate of future improvements in longevity will be
higher than was assumed in the original pricing of the existing annuity business.

The Board of the company are also under pressure from the company’s shareholders
to start selling new business in developing markets overseas. The Board are therefore
considering a potential opportunity in a large overseas Country X. To date, the only
life insurance policies that have been allowed to be sold in Country X have been
through the state nationalised insurer. The state nationalised insurer offers only a very
limited range of products, and significant parts of the population have not purchased
any life insurance products. Proprietary life insurance companies have just started to
be allowed to compete with the state nationalised insurer. The Company is
considering whether to start selling life insurance business in Country X.

The insurance regulator in Country X is considering how it might assess whether

customers have been treated fairly, by surveying customers when they receive the
payouts on their products, and then asking how happy the customers are with their
payout.

Questions

(i) Describe the types of checks that could be made on the policy valuation data
of the annuity business. [4]

(ii) Discuss how the company’s accounting data could be used to assess the policy
valuation data of the annuity business. [13]

(iii) Discuss the advantages and disadvantages to the shareholders of the company
of adopting the same approach to treating customers fairly for business written
in Country X to the business written in the company’s home market. [5]

(iv) Discuss the advantages and disadvantages for the following parties if the
company has a significantly weaker approach to treating customers fairly for
Country X business than that taken for business written in the company’s
home market:

(a) potential consumers in Country X.

(b) the overseas regulator in Country X.

[4]

CP12 S2020–4
 (v) Assess the effectiveness of the proposal by the insurance regulator in Country X
to assess whether customers have been treated fairly. [9]

(vi) Outline the main advantages, compared with a small mutual insurer, you
would expect the company to have in starting to sell business in Country X.
[8]

(vii) Discuss the factors that the company should consider in deciding on the
relative importance of launching overseas or improving the profitability of the
annuity business. [10]
[Total 53]

END OF PAPER

CP12 S2020–5