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Assurance Of Persons Question Paper

Assurance Of Persons

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2010

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2010/2011
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE

BMS 416:
ASSURANCE OF PERSONS

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DATE: THURSDAY 2ND DECEMBER 2010
TIME: 8.00 A.M. - 10.00 A.M.

INSTRUCTIONS
Answer questions ONE (Compulsory) and any other TWO.

Question One (Compulsory) - (30 marks)
a)
A with profit endowment and a without profit endowment both have an initial sum

assured of Ksh. 500,000. All other things being equal, which would have the higher

premium and why?

(3 marks)

b)
Comment briefly on the extent of the mortality and investment risks that a company

faces on:

i)
A portfolio of regular premium without profit whole life contracts taken out

thirty years ago by men then aged thirty.

(4 marks)

ii)
A portfolio of regular premium without profit whole life contracts taken out in

the last year by men aged sixty.

(4 marks)

Page 1 of 3
c)
A life insurance company sells an immediate annuity assuming initial commission

and expenses of 5% of single premium. (Renewal expenses are ignored). The

interest rate used for pricing is 5.5 %. At this rate, a life annuity of 1 p.a. using the

premium basis mortality is 11.39% for the policyholder concerned.

The insurance company is required to reserve at a valuation interest rate of 4%. The

life annuity for the policyholder at this rate of interest and using the valuation

mortality basis is 12.85. The insurance company is also required to establish a

solvency margin of 40% reserves. On sale, the commission and expenses were equal

to those assumed in the pricing basis. What is the capital strain on the sale as a

percentage of single premium?

(10 marks)

d)
Explain the nature of the mortality, expense and investment risks on long-term

sickness contracts.

(9 marks)

QUESTION TWO (20 MARKS)
a)
The amount of unit fund might become negative during the period between premium

reviews. How might this happen, and what are the implications for the insurance

company and policyholder?

(5 marks)

b)
Each year for many years a life office has issued 10,000 temporary assurance

policies each with a term of ten years and a sum assured of £ 5,000 to lives aged 25

exactly. One third of those who survive to age 35 then effect a without profit whole

life policy and one quarter effect a 25-year without profit endowment assurance for

twice that sum assured. All premiums are payable annually in advance and death

claims are paid at the end of the year of death. Policies are issued uniformly

throughout the year. The office calculates premiums on A1967/70 ultimate 4% ,

ignoring expenses. If the office’s experience follows this basis, calculate the size of

the fund for these contracts.

(15 marks)

Page 2 of 3

QUESTION THREE (20 MARKS)

a)
Explain why unreliable estimates of historical critical illness experiences rates will

increase the company’s risk.

(5 marks)

b)
A life office issues a 25 - year non-profit policy to a life aged exactly 40. The policy

provides a sum assured of £ 10,000 payable immediately on death if this occurs

during the term and, on survival to the end of the term, an annuity ceasing on death of

£ 1,000 p.a payable quarterly in advance. Premiums are payable for 25 years or until

previous death. Initial expenses are 2% of the death sum assured and renewal

expenses are 3% of each premium including that / those in the first year. The basis is

A1967-70 ultimate at 4% p.a. Calculate.

i)
The level annual premium applicable for this policy.

(5 marks)

ii)
The true monthly premium applicable for this policy.

(5 marks)

iii)
The monthly installments premium applicable for this policy.
(5 marks)

QUESTION FOUR (20 MARKS)
a)
“If a company has the money to back the solvency margin for another policy then it

can write it, otherwise it can’t. I don’t see how else solvency margin considerations

can be relevant for a new product cash flow” . Comment.

(10 marks)

b)
An annual premium is paid for a ten-year policy issued to a life aged 40 in connection

with a house purchase mortgage. The sum assured of £ 10,000 decreases each year

by £ 1,000, the sum assured being paid at the instant of death. Find the reserve at

the end of five years. Mortality is A1967/70 select with 4% interest. (10 marks)

Page 3 of 3

Assurance Of Persons Question Paper

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