(Papers) ACET Paper May 2010 "SA2 – Life Insurance "
You are the appointed actuary of a recently established
Indian life insurance company, which is a joint venture between a retail bank
and a foreign life insurance company. In the first year of business you launched
a range of individual products, namely:
Non-par term insurance (single and regular premium)
Unit linked endowment without guarantees (regular
premium, with a range of cover
Unit linked endowment without guarantees (single premium,
with cover of 5P)
Unit linked pension plan (single and regular premium
Various level immediate annuity plans (single life and
joint life, with/without guar
period, with/without return of capital on death)
Traditional par endowment plan (with compound
reversionary bonus and terminal
bonus on death and maturity)
Traditional par pension plan (without cover).
Your company sold 50,000 recurring premium policies in its
first year of business (2009/10), and 45,000 are still in force (at 31 March
2010). The average annual premium of recurring premium business is Rs. 20,000. A
further 3,000 single premium policies were sold, with an average premium of Rs.
40,000. About 90% of the business came from the parent bank, with the balance
coming from 3 corporate agents at a higher cost. The operating loss for the
2009/10 year was Rs.50 Crores, and shareholders infused Rs.75 Crores of capital
in December 2009 in order to meet solvency requirements and the deficit.
However, the shareholders have indicated that they do not want to infuse more
than Rs.60 Crores in the coming year.
(a) A director has questioned why the company made a loss, in
spite of achieving the Business Plan targets for sales. Provide an explanation
and indicate the major factors that will determine whether an operating profit
is made in 2010/11.
(b) The same director has suggested that launching a tied
sales force will help increase volumes and improve brand awareness. Discuss the
risks associated with this.
(c) The head of sales has commented that the retention of
business is very high, based on the fact that only 10% of business has been lost
in the first year of operations. Discuss the validity of this comment, and
describe the other factors that may have contributed to the high retention of
(d) The MD has insisted that the company launch a critical
illness rider in the next six months.
1. Describe the product features and rules that can be
included to reduce the risk for the company.
2. List the areas in which a reinsurer could help you.
(e) The chairman (a senior manager from the parent bank) has
expressed the view that the company should move to Embedded Value as a measure
of value of the company and asked for your opinion. Discuss the issues
associated with moving to Embedded Value.
(f) You have been asked to make non-profit immediate annuity
rates more competitive. What are the main levers for improving annuity rates,
and what will the impact be on the annuity book if Market Consistent Embedded
Value is introduced? (6)
(g) Given the pressure to improve the rates for the immediate
annuity with return of purchase price on death (RPP), discuss the mortality
assumptions, the matching investments and the potential role of fixed interest
investments of different tenures, credit ratings, and tradability.
You are the Appointed Actuary of a proprietary life insurance
company with a large with profits fund, which contains both participating and
non-participating business in significant volumes. The participating business
consists of regular premium endowments with sum assured and vested reversionary
bonus guaranteed on maturity or earlier death. Uniform compound reversionary
bonus is declared annually. Terminal bonus is also declared annually and is
payable on maturity or earlier death. Terminal bonus rates are set by reference
to asset shares on a market value basis. The non-participating business consists
of conventional business, and it is the company's practice to allocate the
surpluses arising from this business to the with profits policies.
Shareholder transfers from the fund are solely through a
90:10 gate, i.e. 1/9 the cost of bonus may be appropriated to the P&L at each
(a) You are about to recommend this year’s reversionary and
terminal bonus rates to the Board. State how and why you would use:
1) Asset shares
2) Other investigations.
b) The Board understands that the regulatory balance sheet
has considerable margins for prudence built into it and has requested that a
realistic balance sheet be produced for the with profits fund, with the assets
at market value. Discuss how you would treat the following aspects of the
liabilities and any particular difficulties you would meet:
1) the treatment of investment guarantees
2) the treatment of future lapses, surrenders and paid up policies