April 2014 MLC Multiple Choice Solutions

1. Key: C

We need to determine 3 2.5

q90 .

l 90+3 − l 90 +3+ 2.5 l 93 − l 95.5 l 93 − (l 95 − 0.5d 95 ) 825 − [600 − 0.5(240)]

3 2.5
q 90 = = = = = 0.3450
l 90 l 90 l 90 1, 000
d 97 72 l 97 72
where l 90 = 1, 000, l 93 = 825 , l 97 = = = 72 , l 96 = = = 360 ,
q 97 1 p 96 0.2
l 96 360
l 95 = = = 600 , and d 95 = l 95 − l 96 = 600 − 360 = 240 .
p 95 1 − 0.4

2. Key: D

e[61] = e[61]:3 + 3 p [61] (e 64 )

p [61] = 0.90,
2 p [61] = 0.9(0.88) = 0.792,
3 p [61] = 0.792(0.86) = 0.68112
3
e[61]:3 =  k p[61] = 0.9 + 0.792 + 0.68112 = 2.37312
k =1

e[61] = 2.37312 + 0.68112e64 = 2.37312 + 0.68112(5.10) = 5.847

3. Key: B

Let x be the person’s age.

15 p x = exp  −  0 ( μ x + s + μ x + s ) ds 
11  15 10 12 
 
= exp  −  (0.10 + 0.05)ds 
15

 0 
= exp[−15(0.15)]
= exp[−2.25] = 0.1054

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4. Key: B

E[ Z (1)] = q x v 4.5% = 0.014354  q x = 0.015

E[ Z (2)] = q x v 4.5% + p x v 4.5% v j q x +1 = 0.032308 j is the forward rate from 1 to 2
 0.014354 + 0.985(v 4.5% )(v j )(0.02) = 0.032308

 v j (v 4.5% ) = 0.911371

 (1 + i ) 2 = 0.911371−1 i is 2-year spot rate

 i = 4.7497%

5. Key: C

Let A51ILT designate A51 using the Illustrative Life Table at 6%.
 1 
 ( q 50 + p 50 A51 )
ILT
APV (insurance) = 1000 
 1.05 
 1   5.92  5.92  
= 1000   + 1 −  ( 0.25961) 
 1.05  1000  1000  
= 251.4220

6. Key: D

Let Yi be the present value random variable of the payment to life i.

Ax − ( Ax )
2 2
1 − Ax 0.22 − 0.45 2
E[Yi ] = ax = = 11.55 Var[Yi ] = = = 7.7175
( 0.05 /1.05)
2
d d2
100
Then Y =  Yi is the present value of the aggregate payments.
i =1

E[Y ] = 100 E[Yi ] = 1155 and Var[Y ] = 100Var[Yi ] = 771.75

 F − 1155  F − 1155
Pr[Y ≤ F ] = Pr  Z ≤  = 0.95  = 1.645
 771.75  771.75
 F = 1155 + 1.645 771.75 = 1200.699

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7. Key: A

∞
APV(insurance) = 1000  e −0.05t t p xy00 μ 03 dt
0
∞
= 1000(0.005)  e −0.05t e −0.045t dt
0

(0.005)
= 1000 = 52.63158
0.095

8. Key: B

100, 000 A40 = P[a40:10 + 0.5 10 a40:10 ]

100, 000 A40 100, 000(0.16132) 16,132
P= = = = 1658.14
a40:10 + 0.5 10 a40:10 7.6967 + 0.5(4.0645) 9.72895

where
a40:10 = a40 − 10 E 40 a50 = 14.8166 − (0.53667)(13.2668) = 7.6967

and
a
10 40:10
= 10 E 40  a50 − 10 E 50 a60  = 0.53667 [13.2668 − (0.51081)(11.1454) ] = 4.0645

There are several other ways to write the right hand side of the first equation.

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9. Key: B

W 3
Woolhouse: ax(4) = 3.4611 − = 3.0861
8

UDD
a x(4) = α (4) a x − β (4)
UDD: = 1.00027(3.4611) − 0.38424
= 3.0778

and Ax = 1 − d ax = 1 − (0.05660)(3.4611) = 0.80410

1000(0.80410)
P (W ) = = 260.56
3.0861

1000(0.80410)
P (UDD ) = = 261.26
3.0778

P (UDD ) 261.26
= = 1.0027
P (W ) 260.56

10. Key: A

1 2,143 1
P30:20 = −d  + 0.05 =  a30:20 = 14
a30:20 100, 000 a30:20

A30:20 = 1 − d a30:20 = 1 − 0.05(14) = 0.3

Ga30:20 = 100, 000 A30:20 + (200 + 50a30:20 ) + (0.33G + 0.06G a30:20 )

14G = 100, 000(0.3) + [200 + 50(14)] + (0.33G + 0.84G )

12.83 G = 30, 900

G = 2408

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11. Key: D

P=
(
10, 000 vq 30:30 + v12 q 30:30 )
1 + vp 30:30
q30:30 = (q30 ) 2 = 0.0016
p30:30 = 1 − q 30:30 = 1 − 0.0016 = 0.9984

1
q30:30 = 2 q30:30 − q30:30 = ( 2 q30 ) 2 − 0.0016 = [0.04 + 0.96(0.06)]2 − 0.0016 = 0.00793

 0.0016 0.00793 
APV of Benefits = 10, 000  +  = 87.17
 1.05 1.05 2 

87.17
P= = 44.68
0.9984
1+
1.05

12. Key: B

 10  10
L A = v T − 0.10a T = 1 +  v T −
 6 6
2
 10 
Var[ LA ] = 1 +  Var[vT ] = 0.455  Var[vT ] = 0.06398
 6
 16  16
L B = 2v T − 0.16a T =  2 +  v T −
 6 6
2 2
 16   16 
Var[ LB ] =  2 +  Var[vT ] =  2 +  (0.06398) = 1.39
 6  6

13. Key: E

In the final year: ( 24V + P )(1 + i) = b 25 ( q 68 ) + 1( p 68 )

Since b 25 = 1, this reduces to ( 24V + P )(1 + i ) = 1  (0.6 + P )(1.04) = 1  P = 0.36154

Looking back to the 12th year: ( 11V + P )(1 + i ) = b12 ( q 55 ) + 12V ( p 55 )

 (5.36154)(1.04) = 14(0.15) + 12V (0.85)  12V = 4.089

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14. Key: A

This first solution recognizes that the full preliminary term reserve at the end of year 10
for a 30 year endowment insurance on (40) is the same as the net premium reserve at the
end of year 9 for a 29 year endowment insurance on (41). Then, using superscripts of
FPT and NLP to distinguish the reserves, we have

1000 10V FPT = 1000 9V NLP = 1000( A50:20 − P41:29 a50:20 )

= 1000[0.36084 − 0.01714(11.2918)] = 167
 a50:20   11.2918 
or = 1000 1 −  = 1000 1 −  = 167
 a41:29   13.5597 
 

where
a50:20 = a50 − 20 E 50 a70
= 13.2668 − (0.23047)(8.5693)
= 11.2918
A50:20 = 1 − d (11.2918) = 0.36084
a41:29 = a41 − 29 E 41 a70
= 14.6864 − (0.1314764)(8.5693)
= 13.5597
A41:29 = 1 − d (13.5597) = 0.23247

29
 l 70  6, 616,155
29 E 41 = v   = (0.1845567) = 0.1314764
 l 41  9, 287, 264
0.23247
P41:29 = = 0.01714
13.5597

Alternatively, working from the definition of full preliminary term reserves as having
FPT
1V = 0 and the discussion of modified reserves in the Notation and Terminology
Study Note, let α be the valuation premium in year 1 and β be the valuation premium
thereafter. Then (with some of the values taken from above),

α = 1000vq40 = 2.6226
APV (valuation premiums) = APV (benefits)
α + 1 E40 (a41:29 ) β = 1000 A40:30
2.6226 + 0.94077(13.5597) β = 221.32
221.32 − 2.6226
β= = 17.14
12.7566

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14. Continued

where
1 E40 = (1 − 0.00278)v = 0.94077

A40:30 = A40 + 20 E40 ( 10 E60 )(1 − A70 )

= 0.16132 + 0.27414(0.45120)(1 − 0.51495) = 0.22132
V
10
FPT
= 1000 A50:20 − β a50:10 = 1000(0.36084) − 17.14(11.2918) = 167

15. Key: E

No cash flow beginning of year, the one item earning interest is the reserve at the end of
the previous year

Gain due to interest = (reserves at the beginning of year)(actual interest – anticipated

interest) = 1000(8929.18)(0.04 − 0.03) = 89292 .

16. Key: E

Future expenses at x + 2 = 0.08G + 5

Expense load at x + 2 = Pe

−23.64 = (0.08G + 5) − P e

 Pe = 58.08

1000 Px:3 = 368.05 − 58.08 = 309.97

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17. Key: C

Because the death benefit is F plus account value, the net amount at risk does not depend
on the account value. Therefore the cost of insurance charges are the same for both
policies. Therefore the only difference in ending account value is due to the premiums,
less expense charges, accumulated with interest.

Anne pays 500 more premium in year 1, or 500(1 − 0.40) = 300 more after expense
charges.

Julie pays 500 more premium in each subsequent year, or 500(1 − 0.10) = 450 more after
expense charges.

Julie’s extra account value is

−300(1.06 20 ) + 450
s19 = −300(3.2071) + 450(35.7856) = 15,141.39

Julie’s ending account value is

10, 660 + 15,141 = 25,801

18. Key: E

Defined benefit plan projected benefit

 1.02 22 + 1.02 23 + 1.02 24 

= 50, 000   (30)(0.005)
 3 
= 50, 000(1.5771054)(30)(0.005)
= 11,828

The additional income desired = 42,000 – 11,828 = 30,172.

The necessary defined contribution accumulation at age 65 is
30,172a65 = 30,172(9.9) = 298, 702.

19. Key: C

1 + (1.04) +  + (1.04) 29 
Annual pension at age 65 = 45, 000   (0.02)(30)
 30 
30
(1.04) − 1
= 45, 000(0.02) = 50, 476.44
0.04

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20. Key: D

Let P be the annual premium

 945 895 
APV(premium) = P 1 + v +v2  = 2.711791P
 1000 1000 

 20 25 895 
APV(benefits) = 100  v +v2 + v3  = 81.4858
 1000 1000 1000 

81.4858
P= = 30.05
2.711791

895 30 895 − 30
Note: The term v3 is the sum of v3 for death benefits and v 3 for
1000 1000 1000
maturity benefits.

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