INSTITUTE OF ACTUARIES OF INDIA
EXAMINATIONS
13th May 2011
Subject ST2 — Life Insurance
Time allowed: Three hours (14.45* – 18.00 Hrs)
Total Marks: 100
INSTRUCTIONS TO THE CANDIDATES
1. Please read the instructions on the front page of answer booklet and instructions to
examinees sent along with hall ticket carefully and follow without exception
2. * You have 15 minutes at the start of the examination in which to read the questions. You
are strongly encouraged to use this time for reading only, but notes may be made. You then
have three hours to complete the paper.
3. You must not start writing your answers in the answer sheet until instructed to do so by the
supervisor
4. The answers are not expected to be any country or jurisdiction specific. However, if
Examples/illustrations are required for any answer, the country or jurisdiction from which
they are drawn should be mentioned.
5. Attempt all questions, beginning your answer to each question on a separate sheet.
6. Mark allocations are shown in brackets.
AT THE END OF THE EXAMINATION
Please return your answer book and this question paper to the supervisor separately.
IAI ST2 0511
Q. 1) List the different types of guarantee that a policyholder can have under a unit-linked policy.
[4]
Q. 2) A life insurance company has been using static solvency assessment to assess its solvency
position. The company now wants to shift to dynamic solvency assessment due to
limitations of the current method.
a) State the limitations of static solvency assessment and explain how the proposed method
overcomes them. (3)
b) Explain the principles the company should consider when deciding how to perform its
dynamic solvency assessment. (6)
[9]
Q. 3) A life insurance company has a large, well-established book of term assurance business and
is concerned about deteriorating persistency, particularly among rural policyholders.
(i) Discuss how you would carry out a withdrawal investigation to ascertain if there is a
trend in withdrawal rates and a difference in persistency between urban and rural areas.
(8)
(ii) A significant difference in withdrawal rates for rural policies is detected and you are
asked to carry out a mortality investigation to assess if the pricing basis may require
adjustment.
List the variables that you would use for this analysis and explain how you would use the
results of the mortality investigation in conjunction with the withdrawal rates to set the
pricing basis? (6)
[14]
Q. 4) The regulators of a developing Asian country have made it mandatory for all life insurance
companies to ensure that they sell Immediate Annuity products which should contribute at
least 5% of total number of new policies sold in any year. ABC Life Insurance Company
had been operating in the country for the past five years and has no experience in this
segment. The company has decided to design a without profit level immediate annuity
product to satisfy the regulatory requirement.
a) Outline the additional risks to the company in writing this business? (8)
b) Discuss the issues to be considered in setting the investment strategy for this product? (8)
[16]
Q. 5) You are the actuary of a new life insurance company in a developing country. The life
insurance industry has not yet been established and there are no specific regulations for life
insurance business although you expect them to be introduced in the medium term. Your
first task is to design a low sum assured whole life assurance policy with limited
underwriting.
(i) Explain the considerations the company would take into account when determining its
underwriting approach and how this may influence the product design. (5)
Page 2 of 3
IAI ST2 0511
(ii) Describe the assistance a reinsurer could give in pricing and designing the product and
the likely types of reinsurance that you may require. (6)
(iii) You have decided to produce a valuation to serve in place of a statutory valuation until
regulations are introduced. Discuss your approach and the issues you may face. (7)
(iv) After a few successful years, your company decides to launch a new product range
with high sums assured payable on death or disability. Discuss how
- the underwriting approach; and
- the reinsurance requirements;
would change for this new product. (7)
[25]
Q. 6) A life insurance company entered the Indian insurance market five years ago and offers
only unit linked and conventional with profits contracts The company is still making
operating losses as its income is insufficient to cover expenses (expense overrun phase).
From inception the company has experienced high lapse rates for all its products. These
rates are higher that those used in the pricing bases and higher than those experienced by the
market.
(i) Describe the concerns of the company and the actions it should take to improve its lapse
rates. (12)
(ii) The chief marketing officer has said that there are lot of inconsistencies in the surrender
value payable to the customer at different durations and the principles to calculate the
surrender values have not been followed. Set out these principles. (6)
(iii) Despite taking corrective measures to improve lapse rates, the company still forecasts
lapse rates to be worse than those used in pricing bases and business planning. This
creates additional concerns about the expenses incurred by the company. The Chief
Finance Officer has asked you, as the Pricing Actuary, to conduct an expense analysis
and revise the expense loadings used to price products in light of this new information.
Describe how this analysis would be carried out. (14)
[32]
*****************
Page 3 of 3
