Professional Documents
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Asset Sample
Asset Sample
Page 1
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Comments or ideas about exam technique are contained in a box like this, identified
with a light-bulb icon.
The solution itself is written in normal font and without boxes. In order to show as
many valid points as possible, there may be more here than you could reasonably expect
to write in the time available: you should note that you may not need to include
everything in order to earn full marks.
Further explanation is contained in a box like this, identified by a teacher-withblackboard icon. The usual purpose of this is to help you to understand a particular
point in the solution.
At the end of each question (or sometimes each part) you may find an information box,
identified by the i icon. Here you will find other relevant information about the
question.
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sufficiently detailed to convince the examiners that you fully understand what
you have written
Page 4
Dont be too brief (or you wont score full marks for the point you are making), but
dont waffle (or youll run into time pressures and make your good points hard to find).
Remember that your aim should always be to give just enough information to convince
the examiner that you understand the points you are making.
In summary, write efficiently. Dont be too brief but dont waffle.
Examiners Reports
ASET is independent of the reports issued by the Board of Examiners and is intended to
complement them, not to replace them. (Students may wish to refer directly to the
reports of the Board of Examiners as part of their study programme.) The views
expressed in this document are the views of the ActEd tutors, and are not necessarily
the same as the views of the Examiners. The independence of the Board of Examiners
is an important concept that the profession is keen to safeguard.
There are occasions when the ideas and solutions in this report differ slightly from those
in the Examiners Reports. This is inevitable given the large number of points covered
and the extent to which there is more than one way to answer certain questions. You
should note, however, that the differences are sufficiently minor as to have no impact on
pass/fail type decisions.
Sept 2011
April 2012
Sept 2012
April 2013
Sept 2013
April 2014
Sept 2014
% of students passing at
this sitting
April 2011
The table below shows the pass rates for the Subject CA1 exam sittings covered in this
ASET.
43
47
47
51
46
52
43
54
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Stakeholders
External environment
Regulation
3,
7
3
5
6,4
7
1
3,
6
2,
4
5,5
1,6
5,6
7,6
3,4
1,7
5
6,
4
2
4
7,1
,7
4,7
1,7
,1
10
Contract design
11
Project management
12
13
Money markets
14
Bond markets
15
Equity markets
16
Property markets
17
18
19
Overseas markets
Sept 2014
April 2014
Sept 2013
April 2013
Sept 2012
Chap
April 2012
Topic
Sept 2011
Part
April 2011
Exam sitting
7,7
6
5,
4
6
5
1,7
,6
5
4
6
7
5,6
5,6
5,6
,7
6
5
4
6
6,3
5,6
Page 1
Describe the key factors that influence the level and timing of contributions for
these benefits.
[3]
(ii)
Outline why the expected cost of the benefit payments may be different from the
price charged by an insurance company to insure these benefits.
[5]
[Total 8]
(i)
Excess
(b)
No claims discount
(c)
Exclusion clause.
[8]
A six storey residential property is divided into three self-contained apartments, each of
which occupies two floors of the building.
(ii)
Explain why property insurance premiums could vary depending on the position
of the apartment within the building.
[3]
[Total 11]
Page 2
(i)
Outline the risks specific to this show for which the company may wish to take
out insurance cover.
[5]
(ii)
Discuss the factors that will contribute to the moral hazard an insurance
company will face when providing such cover.
[4]
(iii)
Set out the benefits to the insurance company, other than profits to be made on
the contract, of providing this cover.
[3]
[Total 12]
(i)
[4]
A large benefit scheme has recently completed a valuation for supervisory purposes.
The basis for the supervisory valuation is more prudent than a best estimate of future
experience. The scheme is required to disclose a summary of the supervisory valuation
report to beneficiaries.
(ii)
List the information from the supervisory valuation report that should be
disclosed to beneficiaries.
[4]
Discuss why the results of the supervisory valuation may not be appropriate for
use by the investment advisor in conducting this review. Your answer should
include commentary both on relevant specific assumptions and on broader
general issues.
[9]
[Total 17]
Page 3
A large bank operates many business lines in many countries. One of the products it
offers is a derivative based on the level of property prices in a particular country with a
developed property market. The derivative increases in value if a specific property
price index (published by a local property surveyor) falls in value. An investor is
considering purchasing the derivative.
(i)
The bank has one employee in this country, who is assigned to price and monitor the
derivative.
(ii)
[4]
(iii)
Suggest ways the bank could reduce the operational risk presented by this
arrangement.
[3]
(b)
[3]
[Total 19]
(ii)
Outline how the assumptions used to price these policies may differ from those
used for the companys existing business.
[9]
[Total 14]
[5]
Page 4
An airline that only operates within its domestic country is considering expanding by
offering overseas flights. It has started a project to decide the geographical region to
which it will commence flights, from a shortlist of three regions.
(i)
Outline the steps necessary to identify the risks facing the project.
[5]
(ii)
Identify the major risks to the airline of operating in overseas markets, and for
each risk suggest a way to mitigate that risk.
[8]
The airline has decided to focus on a region in which the authorities only offer
three-year licences to new airlines. For this region the airlines project team has
identified three possible scenarios which may occur.
Probability of occurrence
Set up costs
Net revenue:
Year 1
Year 2
Year 3
Scenario A
30%
m
Scenario B
59%
m
Scenario C
20%
m
100
110
120
50
50
50
40
40
45
30
30
30
(iii)
Calculate the Net Present Value of the project, using a discount rate of 5% per
annum.
[3]
(iv)
(a)
(b)
List other factors which may influence the decision on whether to invest
in this project.
[3]
[Total 19]
END OF PAPER
Page 1
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Solution 1
Overview
This question is testing the material in Chapter 33, Pricing and financing strategies,
and in fact it does test both pricing and financing. Both parts to the question are
primarily bookwork.
The Examiners Report commented that this question was surprisingly poorly answered.
Students that considered benefits other than just pensions tended to score better.
(i)
There is no single section / list in the Core Reading that answers this question, however,
the relevant ideas can be found in Sections 3 and 4 of Chapter 33.
Note that the question asks for factors that influence both the level and timing of
contributions, so you may want to split your answer into these sections.
The examiners stated that consideration of the different funding methods that may be
used is not sufficient and that students needed to consider the factors that influence the
funding method.
Level of contributions
The level of contributions will be based on the cost of the benefits accruing over a
certain period.
The certainty of the benefits may affect whether or not the company decides to fund the
benefits in advance. Benefits will typically be more certain if they are:
regular
relatively small.
If the benefits are very predictable and/or small, then a PAYG approach might be
chosen. However, in most cases, money will be set aside in advance.
Timing of contributions
The sponsor may want to change the pace of funding of the scheme by paying a higher
or lower contribution in any year.
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(ii)
The question asks why the price charged may not be the same as the expected cost of
the benefit payments. Again, this is not straightforward bookwork, however, the
relevant ideas can be found in Section 2 of Chapter 33.
The instruction word is outline, so you should avoid going into too much detail.
=
+
+
+
The contribution to expenses may be affected by the extent to which the insurer can
achieve economies of scale.
Changes may be needed for:
if there are few players in the market, then higher premiums could be
charged
the strategy being followed, eg the insurance company might decide to sell the
product as a loss leader in order to:
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a higher premium may be charged to recoup earlier losses incurred by the insurer
the level of prudence required by the insurance company in its pricing basis.
The following questions also relate to pricing (and why the premium charged is not
equal to the cost of cover):
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Solution 2
Overview
This is a general insurance question in particular on domestic property insurance.
Even if you dont work in general insurance, you should have some appreciation of the
concepts being tested from your own experience of buying domestic property insurance,
motor insurance or other general insurance products.
The Examiners Report commented that this question was generally well answered.
(i)
Definitions
This question is testing your knowledge of certain Glossary definitions and your
application of those definitions to a specific product.
Glossary definitions are not frequently tested in Subject CA1 exams, so students could
be forgiven for not knowing the definitions word-for-word (and indeed examiners would
not expect you to know the definitions verbatim as long as you can convey the concept).
In any case, these terms are reasonably straightforward and you should be able to come
up with a reasonable definition yourself, which would satisfy the requirements.
The three descriptions need to merit eight marks between them, so it is worth thinking
about the areas you might want to cover. A good strategy to use here might be to start
by defining each term, give an example to clarify it, and then go on to describe how
each is relevant in the context of domestic property insurance. A good way to relate it to
domestic property insurance is to use examples of claim types / perils that are specific
to this type of insurance.
An idea generation technique that you might sometimes be able to use is to look through
the other questions in the paper and see if they help you to generate any more points.
This might be useful for part (c) here, because claims arising from moral hazard may
not be covered moral hazard is mentioned in Question 3(ii).
(i) (a) Excess
An excess is the sum, specified in the policy, that the insured must bear before any
liability falls upon the insurer. The insured pays the first E of every claim, where E is
the excess.
For example, if the excess is 100 and there is a claim for 500, then the insured will
pay the first 100 and the insurer will pay the remaining 400.
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The insurer may also exclude high-risk situations, for which claims are very likely,
eg insuring a building located on a crumbling cliff face. In addition, there may be
exclusions for other causes, such as negligence (possibly arising from moral hazard),
eg a policyholder being less careful in locking the door when he/she goes out.
Exclusions may be necessary in order to ensure that premiums are affordable.
The following questions also test Glossary definitions:
(ii)
This part of the question requires a bit more thought. You have been asked why
property insurance premiums would vary depending on whether the apartment is on the
ground and first floor, the second and third floor or the fourth and fifth floors.
Lets assume that apart from their distance from ground level, the apartments are
identical. This makes sense, given that the Examiners Report noted that better students
focussed on the position of the apartments.
A higher premium will be due to an increased likelihood of claims and/or greater claim
severity. Therefore you need to consider the different perils (ie causes) of claim, for
example, physical risks such as fire, flood, storm damage, burst pipes and also theft
risk, and how they might be different for each of the apartments.
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Solution 3
Overview
This is an inventive applications question primarily on the topic of risk. The good
news is that the scenario you have been given isnt too complex (in fact, fans of the TV
quiz show Who wants to be a millionaire? should find this scenario rather familiar!).
The Examiners Report stated that there were a wide range of marks awarded for this
question. The best students ensured that their answers were specific to the show itself,
and the proposed insurance cover.
(i)
Risks to be insured
This question has asked for the risks specific to this show for which the company may
wish to take out insurance cover. A careful read of the question is very important here,
as you must make sure that you limit your considerations to those linked to the show,
rather than the general insurance requirements of a broadcasting company.
There are two possible ways of approaching this question:
1.
Consider the risks specific to the show and then consider which could be
reduced using insurance. You might be able to use ideas in Chapter 39, Sources
of risk to help generate ideas.
2.
Consider the different insurance products (in Chapters 7 and 8), and then
consider which of these might be appropriate to the television company.
Method 1 seems like the most appropriate approach, however, for some risks the show
might face eg low viewing figures it may be hard to obtain insurance cover.
Method 2 would probably be easier to use if you had been asked to outline the risks to
the broadcasting company, eg you might come up with products such as employers
liability and property damage insurance.
The approach used below is therefore the first approach. In the answer below, we have
linked the risks to a particular type of insurance cover for completeness, however this is
not necessary in order to score full marks.
There are 5 marks on offer, so you should be aiming for close to 10 risks to insure.
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a contestant (or perhaps too many contestants) wins the jackpot the amount
paid out is ten times the amount paid out for the next highest prize
The company may be able to buy some insurance to share the cost of this risk.
The additional risks that may be covered insurance include:
the risk of needing to compensate the contestants and members of the audience
(or their estate) for accidental bodily injury, disease or death suffered, owing to
negligence of the company (public liability)
the risk of fines resulting from a failure in the phone-in, eg if a prize is not
awarded due to a failure of the system (a variant of professional indemnity)
death or serious illness of key employees (eg the show host) it may be
necessary to find a replacement at short notice, which may incur significant cost
(keyman insurance, health insurance)
the risk of cancellation of the show two years is a relatively long intended run
time (a type of pecuniary loss insurance)
failure of employees, eg phone operators arranging for their friends to win the
phone-in competition (fidelity guarantee)
the risk of being sued by contestants, eg for unfair treatment (legal expenses
insurance)
the risk that telephone call revenue is lower than expected (if cover can be
obtained for this specific risk)
(ii)
In this type of question it would be good exam technique to firstly define the term moral
hazard. This helps ensure you stay on track with your answer and really do produce
examples that are linked to moral hazard, and there may be marks available on the
schedule for your definition.
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if the company is insured against (too many) jackpot wins, then it might take less
care in ensuring that the jackpot question (and the questions in the build up) is
hard enough (in fact, it might even make questions easier if this made the show
more popular!) the likelihood of this may depend on how much of each
jackpot claim the company is liable to pay
if the company has public liability insurance, it might take less care in ensuring
the safety of its contestants / audience this may depend on any legal
requirements on television companies to provide safety procedures and training,
eg to provide fire extinguishers
if the company is insured against poor ratings, then the company may take less
care to ensure it gets good ratings, eg by not advertising as much or by putting
the show in an unpopular time slot
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if the company has insurance against the show being cancelled and the
broadcasting company can make the decision to cancel the show, this leads to a
serious moral hazard
if the company has insurance against the revenue from viewer competition being
lower than expected, the company will have less incentive to run the viewer
competition well.
(iii)
This part of the question is slightly tricky. You might be able to come up with a couple
of reasons why the insurance company would want to provide cover, but coming up with
3 marks worth (ie around 6 ideas) is harder.
It might help to consider the main objectives of an insurance company. High profits is
obviously a major consideration, but insurance companies will have other
(intermediate) objectives (often with the ultimate aim of increasing profits), such as:
improving its reputation and increasing public awareness of the insurer (which
should in turn increase business volumes)
Note that no marks would be given for stating that risk might be reduced due to
diversification as:
no information has been given on whether the insurer already sells this type of
business
this would be a relatively small policy to the insurer and so wouldnt lead to a
much diversification.
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Try to relate the benefits that you come up with to the company in question, for
example, it might improve its reputation by insuring a high-profile television company.
In addition, the company might let the insurer advertise itself on the show (this could be
invaluable if the previous high viewing figures are repeated).
Other benefits
The company may use this sale to increase its portfolio of business by:
selling the television company other products, eg to cover other shows, or other
risks
It may also be able to advertise its (individual) insurance products (eg domestic
buildings and contents insurance, private motor insurance etc) to employees of the
company and increase its customer base this way.
In addition, it might be able to negotiate with the broadcasting company to arrange
discounts on products linked to the broadcaster (eg board games) for customers who
take out insurance.
The television company may allow the insurance company to advertise its products
during the quiz show, eg just before/after advert breaks. This will be particularly
valuable if the quiz show continues to be successful and enjoy high viewing figures.
There may also be a chance for publicity during the show, eg mentioning the insurers
name.
Insuring the television company might also help to increase the insurance companys
reputation, if knowledge of this is made public. The section of the public who watch
this program may be a target market for the insurer.
It may also be the case that insuring the show leads to opportunities for the insurers
employees to be part of the audience or appear as contestants.
The following question also relates to insuring risks:
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Solution 4
Overview
This question covers the topics of benefit schemes and investment. There is a mixture of
bookwork and application.
Most students should produce a good answer to parts (i) and (ii), which are relatively
straightforward bookwork. Part (iii) is harder, requiring discussion of different bases
and the level of information available for a statutory valuation compared to an
investment strategy investigation.
(i)
to determine the excess of assets over liabilities and whether any discretionary
benefits can be awarded
to review experience.
(ii)
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Information to disclose
how the funding level has changed since the last valuation and why
entitlement on insolvency
Page 16
(iii)
This is a tricky question. It is not immediately clear which part of the course is being
tested. Two chapters of the Course Notes spring to mind:
The question also clearly requires some careful consideration and application to the
specifics of the situation.
You have been told to comment on both the relevant specific assumptions as well as the
broader general issues. The chapters above should help with the latter. For the
former, you need to consider what the main assumptions are for a benefit scheme. The
key assumptions are:
mortality
investment returns
expenses
The Examiners Report commented that students typically scored well on the
appropriate strength of basis, but failed to comment on general issues, such as the time
lapse since the valuation date, or the specific assumptions.
General issues
The main problem with using the results of the supervisory valuation to review the
schemes investment strategy is that the basis used is unlikely to be appropriate for
reviewing the strategy.
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The main factors affecting the strength of the basis used are:
The key features of provisions for demonstrating supervisory solvency are usually:
In addition, the valuation may have been required to assume a going concern basis or,
alternatively, a discontinuance basis.
Other rules governing the preparation of the supervisory results might concern the:
method of valuation used to value both the assets and the liabilities,
eg market-based, discounted cashflow the rules might also specify a link
between the liability valuation basis and the features (usually the yield) of the
backing assets)
assumptions used to value both the assets and the liabilities (discussed below)
types of assets than can be held, and those that can be used to demonstrate an
adequate funding level, eg admissibility requirements.
As a result of the above, the liabilities may be overstated, the assets understated, and
therefore the funding position understated so that the level of investment freedom
available is not fully appreciated.
In contrast, for the review of the schemes investment strategy, it might be preferable to:
use an overall best estimate basis, as this will give a realistic result this is
likely to be more important for setting a future investment strategy
It will also be important to project the likely impact on investment choices on the
supervisory valuation basis to determine the effect.
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the valuation may have been some time ago and factors relating to the scheme
may have changed, eg:
The investment advisor would also want to take account of whether there have been (or
will be) any constraints on fund managers past performance, such as a shortage of
cashflow within the scheme this may restrict the funds available for investment or
lead to disinvestments that may not be timed as well as would otherwise be the case.
Relevance of specific assumptions
The main assumptions used in the supervisory valuation are:
mortality
investment returns
expenses
Mortality
Prudent assumptions (as used in the supervisory valuation and which may be
prescribed) will tend to understate mortality, ie members will be assumed to have a long
life expectancy. This means that benefit payments will be over-estimated.
If the assets used to back these liabilities are chosen to match the liabilities by term,
then longer-dated assets may be included in the supervisory valuation.
Instead, a best estimate approach should be adopted, considering a suitable table, given
the scheme membership, allowing for mortality improvements.
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Investment returns
The investment advisor would want to consider the likely proceeds (in terms of amount
and timing) from a range of asset classes.
Inflation
If the benefit payments are linked to inflation, then prudence in the supervisory
valuation would dictate over- (rather than under-) estimating inflation. Inflation may
affect liabilities, eg:
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The following questions also relate to the purpose of valuing liabilities or the use of
results:
Page 45
(ii)
Question 2
(i)
Consider the definitions in the Glossary. Now relate them to domestic property
insurance.
(ii)
Premiums vary with claim frequency and claim size. Can you identify perils
that are likely to affect different apartments to different extents or to have a
higher / lower resulting cost?
Question 3
(i)
Consider the different insurance products. Which ones could be of use to the
television company?
(ii)
Define moral hazard. How might moral hazard arise for the insurance cover you
have suggested in part (i)? How likely is moral hazard in each case?
(iii)
What other possible objectives might the insurance company have? Increased
market share? Increased publicity? How would these benefit the insurance
company?
Question 4
(i)
Bookwork from Chapter 35, Section 3.2. Remember to phrase the reasons in the
context of a benefit scheme.
(ii)
(iii)
How strong should the basis be for an investment strategy review? In what ways
might the situation have changed since the statutory valuation was carried out?
List the key assumptions and consider how each one may need to be adjusted.
Page 46
Question 5
(i)
Financial risks include: market risks, credit risks, liquidity risks and business
risks. These are described in Chapter 39: do any of them apply to this situation?
Dont forget to consider both the derivative and the bank.
(ii)
(iii)
Work through your risks in part (ii) and suggest a way to mitigate each.
(iv)
Consider the circumstances in which: (a) one derivative will perform well and
the other poorly and (b) both derivatives will perform well (or poorly). One
clear example of each situation will be sufficient.
Question 6
(i)
(ii)
What are the main assumptions used to price general insurance business? How
might these assumptions (particularly those relating to claims) vary for the
different types of insurance listed in part (i)?
Question 7
(i)
(ii)
(iii)
Firstly, make a sensible assumption about when the cashflows occur. Next,
calculate the net present value of each scenario and then take a weighted average
to get an expected net present value.
(iv)(a) At a high level, what might you say about how profitable the project is? What is
the probability of a loss?
(iv)(b) Can you identify four big issues that should be considered? Think about the
money available, and alternative uses for it.