Institute of Actuaries of India 2005 Subject CA1 Core Applications Concepts, 2(Liabilities and Asset Liability Management) - Question Paper

1 A large employer is setting up a benefit scheme for its employees. It is intended that
the scheme will be administered in-house.
explain ways in which the costs of setting up and administering the scheme can be
minimised. [10]


2 (i) State the reasons why an insurance company might wish to purchase
reinsurance. [6]
(ii) explain the problems which an insurer should consider when assessing the
security of a reinsurer. [5]
[Total 11]


3 A general insurance company has been asked to quote premium rates by a large
country-wide motor dealer for residual value insurance on loans organizes by the
motor dealer for car purchase. The loans would typically have a term of five years. The
insurance is offered at point of sale of a car to the car buyer. The cover given is
the difference ranging from the amount needed to pay off the loan and the amount
recoverable under the policyholder s motor insurance policy if a car is written off as a
total loss through accident or theft.
(i) In order for the insurance company to determine the premium rates to be
quoted:
(a) List the info needed.
(b) define an approach to determining and expressing the premium rates
that could be used.
[12]
(ii) State the risks involved for the insurance company in providing this benefit
and suggest how these could be mitigated. [6]
[Total 18]


4 The government of a certain country has just passed legislation creating a Fund for
Protecting Pensions (FPP). When a sponsor of a described benefit scheme becomes
insolvent and the scheme is unable to give the benefits that have been promised to
members, the FPP will take over the scheme in order to guarantee benefits. The FPP
will be financed by levies on the sponsors of described benefit schemes and by the
assets of schemes that it takes over.
(i) List the parties which will be affected by the imposition of levies, and state
how every is affected. [6]
(ii) explain the potential conflicts of interest that an actuary might face in advising
the FPP on the levies it should charge, and comment on how these potential
conflicts could be managed. [5]
CA12 S2005 3
A few years after the FPP has come into effect, all described benefit schemes in the
country have been terminated. Schemes have either been wound up after securing all
their liabilities, or their assets and liabilities have been transferred to the FPP. The
FPP has assets of around $10 billion to meet the benefits of schemes it has taken over.
The government has made it clear that it will not give any funds if the FPP were
unable to meet all the benefits promised.
(iii) explain the factors the FPP should consider at this point in setting its
investment strategy and managing its liabilities. [16]
[Total 27]


5 (i) State the requirements and basic features of an actuarial model to be used to
determine the premium rates for a new life insurance product. [7]
(ii) explain the relative importance of the assumptions for:
investment return
mortality experience
expenses
withdrawal rates
when setting the pricing basis for the subsequent products:
(a) a without profits term assurance
(b) a without profits level immediate annuity [12]
For every product in part (ii), it has been decided that the pricing model should involve
stochastic simulation of a few of the 4 items listed above.
(iii) For every product, state with reasons which of the 4 items would be
modelled stochastically. [6]
(iv) provide reasons why the prices charged for the products might be various from
the prices determined by the modelling process, and explain the implications
for the company of such differences. [9]
[Total 34]

Earning:   Approval pending.