Subject CM1: Mock Exam Paper B

2021 Examinations
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Subject CM1: Mock Exam Paper B

2021 Examinations
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(i) Present value, discounted mean term and convexity of liabilities
Interest rate 5%

Year Liab cashflow Discount factor PV liabs DMT liabs numerator

1 100,000
2 100,000
3 100,000
4 100,000
5 100,000
6 100,000
7 100,000
8 100,000
9 100,000
10 100,000
11 200,000
12 200,000
13 200,000
14 200,000
15 200,000
16 200,000
17 200,000
18 200,000
19 200,000
20 200,000
21 300,000
22 300,000
23 300,000
24 300,000
25 300,000
26 300,000
27 300,000
28 300,000
29 300,000
30 300,000
Conv liabs numerator
(ii) Show Redington's first two conditions are met
Interest rate 5%
Bond A coupon rate 4%
Bond A redemption rate 105%
Bond B coupon rate 6%
Bond B redemption rate 100%
Nominal of Bond A 1,964,325
Nominal of Bond B 1,054,408

Year Bond A coupon Bond A redempt Bond B coupon

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
Bond B redempt Total asset cashflow Discount factor PV assets DMT assets numerator
(iii) Convexity of asset cashflows
Interest rate 5%

Year Total asset cashflow Discount factor

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
PV assets Conv assets numerator
(iv) Company's surplus at interest rates of 4%, 5% and 6% pa effective

Interest rate
4%

Year Liab cashflow Total asset cashflow Discount factor PV liabs

1 100,000.00
2 100,000.00
3 100,000.00
4 100,000.00
5 100,000.00
6 100,000.00
7 100,000.00
8 100,000.00
9 100,000.00
10 100,000.00
11 200,000.00
12 200,000.00
13 200,000.00
14 200,000.00
15 200,000.00
16 200,000.00
17 200,000.00
18 200,000.00
19 200,000.00
20 200,000.00
21 300,000.00
22 300,000.00
23 300,000.00
24 300,000.00
25 300,000.00
26 300,000.00
27 300,000.00
28 300,000.00
29 300,000.00
30 300,000.00
31 -
32 -
33 -
34 -
35 -
36 -
37 -
38 -
39 -
40 -
 Interest rate Interest rate
5% 6%

PV assets Discount factor PV liabs PV assets Discount factor

PV liabs PV assets
(v) Comment on results
Q1 Summary of answers
(i)(a)
(i)(b)
(i)(c)

(iii)

(iv)(a)
(iv)(b)
(iv)(c)
Policy information and basis
Policy information and charging structure

Premium 1,000 payable annually in advance

Minimum death benefit 10,000
Allocation rate <100% of the first year's premium, varying according to the maturity bonu
98% of the premium in all other years
Bid-offer spread 5%
Fund management charge (FMC) 1% of the unit fund value deducted at the end of each year

Profit testing and reserving basis

Mortality AM92 Select as provided on the 'Q2 Mortality table' sheet

Unit fund growth rate 3.50% per annum
Interest earned on non-unit cashflows 1.50% per annum
Initial expenses 300
Renewal expenses 50 payable at the start of each year except the first, plus inflation app
Renewal expenses inflation 2% per annum (eg the renewal expenses payable at time 1 are 50*1.02
Risk discount rate 6% per annum
g according to the maturity bonus chosen by the policyholder

the end of each year

xcept the first, plus inflation applying from policy outset

ses payable at time 1 are 50*1.02)
Mortality table
AM92
Age l[x] l[x-1]+1 lx q[x] q[x-1]+1
17 9997.8091 10000.0000 0.000427
18 9991.8904 9993.5400 9994.0000 0.000426 0.000548
19 9986.0351 9987.6338 9988.0636 0.000425 0.000544
20 9980.2432 9981.7911 9982.2006 0.000425 0.000541
21 9974.5046 9976.0016 9976.3909 0.000425 0.000538
22 9968.8391 9970.2654 9970.6346 0.000427 0.000535
23 9963.1967 9964.5824 9964.9313 0.000429 0.000534
24 9957.5775 9958.9225 9959.2613 0.000431 0.000533
25 9951.9913 9953.2858 9953.6144 0.000435 0.000533
26 9946.3982 9947.6622 9947.9807 0.000440 0.000535
27 9940.7984 9942.0218 9942.3402 0.000447 0.000538
28 9935.1818 9936.3549 9936.6730 0.000455 0.000542
29 9929.5088 9930.6613 9930.9694 0.000465 0.000549
30 9923.7497 9924.8916 9925.2094 0.000476 0.000558
31 9917.9145 9919.0260 9919.3535 0.000490 0.000569
32 9911.9538 9913.0547 9913.3821 0.000507 0.000584
33 9905.8282 9906.9285 9907.2655 0.000527 0.000602
34 9899.4984 9900.6078 9900.9645 0.000550 0.000624
35 9892.9151 9894.0536 9894.4299 0.000577 0.000651
36 9886.0395 9887.2069 9887.6126 0.000608 0.000683
37 9878.8128 9880.0288 9880.4540 0.000644 0.000722
38 9871.1665 9872.4508 9872.8954 0.000685 0.000768
39 9863.0227 9864.4047 9864.8688 0.000733 0.000823
40 9854.3036 9855.7931 9856.2863 0.000788 0.000887
41 9844.9025 9846.5384 9847.0510 0.000851 0.000962
42 9834.7030 9836.5245 9837.0661 0.000922 0.001049
43 9823.5994 9825.6354 9826.2060 0.001003 0.001150
44 9811.4473 9813.7463 9814.3359 0.001096 0.001267
45 9798.0837 9800.6939 9801.3123 0.001201 0.001402
46 9783.3371 9786.3162 9786.9534 0.001320 0.001557
47 9766.9983 9770.4231 9771.0789 0.001455 0.001735
48 9748.8603 9752.7874 9753.4714 0.001607 0.001938
49 9728.6499 9733.1938 9733.8865 0.001778 0.002170
50 9706.0977 9711.3524 9712.0728 0.001971 0.002434
51 9680.8990 9686.9669 9687.7149 0.002189 0.002732
52 9652.6965 9659.7075 9660.5021 0.002433 0.003070
53 9621.1006 9629.2115 9630.0522 0.002707 0.003452
54 9585.6916 9595.0563 9595.9715 0.003014 0.003881
55 9545.9929 9556.8003 9557.8179 0.003358 0.004363
56 9501.4839 9513.9375 9515.1040 0.003742 0.004903
57 9451.5938 9465.9293 9467.2906 0.004171 0.005507
58 9395.6971 9412.1712 9413.8004 0.004649 0.006180
59 9333.1284 9352.0165 9354.0040 0.005182 0.006929
60 9263.1422 9284.7641 9287.2164 0.005774 0.007760
61 9184.9687 9209.6568 9212.7143 0.006433 0.008680
62 9097.7405 9125.8818 9129.7170 0.007164 0.009696
63 9000.5884 9032.5642 9037.3973 0.007974 0.010815
64 8892.5741 8928.8177 8934.8771 0.008871 0.012046
 65 8772.7359 8813.6881 8821.2612 0.009864 0.013396
66 8640.0481 8686.2016 8695.6199 0.010960 0.014873
67 8493.5187 8545.3532 8557.0118 0.012169 0.016484
68 8332.1396 8390.1611 8404.4916 0.013502 0.018239
69 8154.9318 8219.6390 8237.1329 0.014969 0.020145
70 7960.9776 8032.8606 8054.0544 0.016582 0.022210
71 7749.4659 7828.9686 7854.4508 0.018353 0.024441
72 7519.7027 7607.2400 7637.6208 0.020296 0.026847
73 7271.1461 7367.0828 7403.0084 0.022423 0.029434
74 7003.5216 7108.1052 7150.2401 0.024750 0.032208
75 6716.8231 6830.1844 6879.1673 0.027293 0.035176
76 6411.3459 6533.5008 6589.9258 0.030067 0.038344
77 6087.8084 6218.5759 6282.9803 0.033090 0.041715
78 5747.3624 5886.3628 5959.1680 0.036379 0.045292
79 5391.6400 5538.2791 5619.7577 0.039954 0.049080
80 5022.7931 5176.2224 5266.4604 0.043833 0.053078
81 4643.5129 4802.6290 4901.4789 0.048037 0.057288
82 4257.0056 4420.4525 4527.4960 0.052586 0.061709
83 3866.9884 4033.1467 4147.6708 0.057501 0.066337
84 3477.5929 3644.6327 3765.5998 0.062804 0.071169
85 3093.2863 3259.1862 3385.2479 0.068516 0.076199
86 2718.7128 2881.3467 3010.8395 0.074661 0.081422
87 2358.5299 2515.7310 2646.7416 0.081258 0.086827
88 2017.2298 2166.8805 2297.2976 0.088331 0.092405
89 1698.9089 1839.0458 1966.6499 0.095902 0.098144
90 1407.0550 1535.9801 1658.5545 0.103990 0.104031
91 1260.7354 1376.1906 0.110052
92 1121.9889
93 897.5025
94 703.3242
95 539.0643
96 403.4023
97 294.2061
98 208.7060
99 143.7120
100 95.8476
101 61.7733
102 38.3796
103 22.9284
104 13.1359
105 7.1968
106 3.7596
107 1.8669
108 0.8784
109 0.3903
110 0.1632
111 0.0640
112 0.0234
113 0.0080
114 0.0025
115 0.0007
116 0.0002
117 0.0000
118 0.0000
119 0.0000
120 0.0000
 qx
0.000600
0.000594
0.000587
0.000582
0.000577
0.000572
0.000569
0.000567
0.000566
0.000567
0.000570
0.000574
0.000580
0.000590
0.000602
0.000617
0.000636
0.000660
0.000689
0.000724
0.000765
0.000813
0.000870
0.000937
0.001014
0.001104
0.001208
0.001327
0.001465
0.001622
0.001802
0.002008
0.002241
0.002508
0.002809
0.003152
0.003539
0.003976
0.004469
0.005025
0.005650
0.006352
0.007140
0.008022
0.009009
0.010112
0.011344
0.012716
0.014243
0.015940
0.017824
0.019913
0.022226
0.024783
0.027606
0.030718
0.034144
0.037911
0.042046
0.046578
0.051538
0.056956
0.062867
0.069303
0.076300
0.083893
0.092117
0.101007
0.110600
0.120929
0.132028
0.143929
0.156660
0.170247
0.184714
0.200079
0.216354
0.233548
0.251662
0.270688
0.290613
0.311414
0.333058
0.355505
0.378702
0.402588
0.427090
0.452127
0.477608
0.503432
0.529493
0.555674
0.581857
0.607918
0.633731
0.659171
0.684114
0.708442
0.732042
0.754809
0.776648
0.797477
0.817225
1.000000
(i) Expected non-unit cashflows, non-unit reserves, profit vector and net present value
Maturity bonus 3%
First year allocation rate 50% Unit fund (UF) projection

Cost of UF at start UF at end of year

Year allocation of year before FMC FMC
1
2
3
4
5
6
7
8
9
10
net present value

Cashflow projection

UF at end of year Profit on Mortality Death Survival Maturity

after FMC allocation Expenses Interest FMC rate cost prob cost
 Non-unit reserves (NUR) Profit calculation
Start year
NUR Interest Cost of end of Profit prob in Profit
Cashflow at start of year on NUR year NUR vector force signature Discount
EPV
(ii) Comments
(iii) First year allocation rate and projected maturity value for maturity bonus of 3%
rity bonus of 3%
(iv) First year allocation rate and projected maturity value for maturity bonus of 5%
rity bonus of 5%
(v) First year allocation rate and projected maturity value for maturity bonus of 0%
ity bonus of 0%
(vi) Comments on first year allocation rates and projected maturity value for differen
value for different levels of maturity bonus
(vii) Effect of changing the unit growth rate
Unit fund Projected % change in NPV
growth rate NPV maturity value (compared to 3.5% growth)
2%
3.5%
5%
% change in maturity value
(compared to 3.5% growth)
(viii) Discuss the implications
Q2 Summary of answers
(i)(d)

(iii)(a)
(iii)(b)

(iv)(a)
(iv)(b)

(v)(a)
(v)(b)