MID SEMESTER 35 marks 1 hour

QUESTION 1

[12]

Life insurers in most Asian countries sell traditional whole life and endowment contracts. One reason
is that many of these countries have limited public pension or superannuation arrangements, and so
long term savings contracts are important for middle class people.
Compare and contrast these policies with those sold by the Australian life insurance industry
including those offered through superannuation funds. You should comment on the needs of the
policyholders, the role of intermediaries, and the risks to both policyholders and companies.

Answer covers L3,5

Whole life and endowment give investment and mortality guarantees
(2)
(although at a low level and not that onerous)
They require more careful asset liability management and more capital
Often with profit to give better value
Policyholders are given profitable and secure investments that they need for retirement
Australian YRT gives no guarantee of premiums
Less risky & requires little capital except to fund up front commissions (easier to switch)
Policyholders pay more premiums when they are older, when needs decline (cheaper)
Aus DC super gives no guarantee of investment returns
Policyholders/members have more investment risk
Both use brokers & agents financial advisors in Australia.
Australian investment products have no upfront but large trailing commissions
+bonuses
Comments: Many students seem not to have read the text book thoroughly - what are endowment
assurances, intermediaries etc: see sections 4.5.2 and 4.5.3 and 5.7.3 .
Gave 6 marks if on the right track but no more) if you failed to address the question

QUESTION 2

[12]

You meet an old school friend who is doing his Sociology Masters, and he tells you that the actuarial
profession is just like a trade union, and that its main aim and function is to push actuarial salaries up.
a) What reasons (that he might have got from his Sociology readings) could he have for saying
this?
[2]
b) How would you respond to justify the actuarial professional bodies, their functions, and the
legal responsibilities of actuaries?
[8]
c) Which ethical or professional standards do actuaries share with fiduciaries like
superannuation fund trustees?
[2]

Answer covers L2
a) Increase demand by statutory powers, increasing status
Reduce supply by making difficult examinations
(Need to acknowledge that there was possible validity in his argument)
b) Statutory roles because public has neither time nor capacity to judge solvency
Therefore need for ethical and technical standards

(2)
(2)

Standards have to be explicit and in syllabuses if they are to be enforceable

And need a disciplinary body of peers to evaluate failure

(2)
(2)

c) Duties of loyalty and care and integrity

Avoid conflicts of interest (critical max 1.5 without this)
Exercise due diligence and care
Disclosure of relevant information
Comment: Much better answers

QUESTION 3 [11]
Australian retail power distributors buy gas and electricity on the wholesale market at varying prices.
They then sell it to businesses and households on contracts where the unit prices (per kilojoule or
KWH) are fixed for a year or longer. Their customers can use as much gas and electricity as they like
(paying for volume consumed), and can switch to a different distributor when their contracts come up
for renewal.
Describe how these power companies could use the actuarial control cycle to manage the embedded
value of their business. Include a description of the important assumptions as you see them.

Answer Covers L1
ACC problem is to manage/maximise embedded value,
by setting prices at highest levels that attracts and keeps customers
ACC monitors cash flows
In this case payments for electricity and gas depending on demand,
and wholesale prices (which will need to be forecast)
and from customers depending on usage (and set prices)
and churn to different distributors
Set up discounted value of cash flows at suitable interest rates

(2)

Monitor impact of change in wholesale prices & forecasts

Changes in usage
Retail churn
Comment: Poorly answered often because did not know what embedded value is
Gave 6 marks if on the right track but no more) if you failed to address the question