INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

17 April 2023 (am)

Subject CM1 – Actuarial Mathematics

Core Principles
Paper B
Time allowed: One hour and fifty minutes

In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.

If you encounter any issues during the examination please contact the Assessment Team on
T. 0044 (0) 1865 268 873.

CM1B A2023 © Institute and Faculty of Actuaries

1 A company wishes to invest in a fleet of 50 vehicles for use by its workforce and will
choose between two alternative vehicles for the entire fleet – an Electric Vehicle or a
traditional Internal Combustion Engine car.

The Electric Vehicles incur a higher initial cost than the Internal Combustion Engine
cars but have lower running and maintenance costs. Worksheet ‘Q1 Base’ gives
details of the costs involved for each type of vehicle.

The company intends to run the fleet for a period of 5 years. It anticipates that the
average annual mileage for each vehicle type will be 20,000 miles, spread uniformly
over each year.

(i) Calculate, for each vehicle type, the present value of the total cost to the
company of buying and running the fleet. You should use a risk discount rate
of 4.5% per annum. [25]

(ii) Recommend, with reasons, the most suitable type of vehicle for the fleet,
based on your answer to part (i). [2]

The company wishes to consider how its estimate of annual mileage per car would
impact its decision on which vehicle type to choose for the fleet.

(iii) Determine the annual average mileage per car, which would result in the same
cost, in present value terms, for each fleet. [2]

The company has now proposed to run the fleet for a shorter period of 3 years, and to
take account of the sale proceeds of the vehicles at the end of this period, when
making its decision. It expects the residual value of the vehicles at the end of 3 years
to be 40% of the original purchase price for Internal Combustion Engine cars and
50% for Electric Vehicles.

(iv) Copy your Q1(i) (ii) worksheet to the Q1(iv) worksheet and update your
results and recommendation to take account of the company’s new proposal,
based on an annual mileage of 20,000 miles. [7]

(v) Discuss the suitability of this model as a tool for helping the company select
the fleet. [6]
[Total 42]

CM1B A2023–2
2 A life insurance company issues a 15-year unitised with-profits contract to a
policyholder currently aged 50 exact.

The basic policy information, charging structure and the basis used by the company to
carry out profit testing, are all set out in the ‘Q2 Base’ worksheet.

The unit price increases each year in line with the company’s declared bonus interest
rate.

You should ignore non-unit reserves.

(i) Calculate the unit cashflows for each year of the policy, per policy in force at
the start of the year. [5]

(ii) Calculate the expected non-unit cashflows for each year of the policy, per
policy in force at the start of the year. [15]

(iii) Calculate the present value of the profit from the policy at outset. [6]
[Total 26]

CM1B A2023–3
3 A company has privately issued three fixed interest bonds with terms of 10 years,
15 years and 25 years respectively. The bonds offer different coupons which are paid
half-yearly, the first coupon to be paid in 6 months’ time.

The coupon rates, redemption rates and spot rates to use are set out in the worksheet
‘Q3 Base’.

(i) Calculate the duration of each bond. [8]

(ii) Explain why a 10-year bond with a coupon rate of 4% would have a lower
duration than a 10-year bond with a coupon rate of 2%. [3]

Fifteen years after issue, immediately after the coupon payment then due, the
company defaults on the 25-year bond. Bond holders are unable to sell their holdings
as the bonds were privately issued so there is no liquid secondary market. The
company offers two options to the holders of the 25-year bond:

Option 1: the term of the bond remains at the original term of 25 years, no further
coupons will be paid and the bond will be redeemed at 105%.

Option 2: coupons will be immediately reduced to 1.25% per annum, and the term of
the bond will be extended by 5 years.

As a result of the default, bondholders expect a 0.5% risk premium over spot rates
currently used, which are set out in the worksheet ‘Q3 Base’.

(iii) (a) Calculate the present value for the defaulted bond under both options
at time 15. [8]

(b) Determine which option bondholders should choose. [2]

(iv) Calculate the duration of the bond at time 15 under the original conditions and
under each of options 1 and 2. [5]

Many bondholders decide to select the other option than the one determined in part
(iii)(b).

(v) Suggest what other considerations may have driven their decision. [6]
[Total 32]

END OF PAPER

CM1B A2023–4
 INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

12 September 2023 (am)

Subject CM1 – Actuarial Mathematics

Core Principles
Paper B
Time allowed: One hour and fifty minutes

In addition to this paper you should have available the 2002 edition of
the Formulae and Tables and your own electronic calculator.

If you encounter any issues during the examination please contact the Assessment Team on
T. 0044 (0) 1865 268 873.

CM1B S2023 © Institute and Faculty of Actuaries

1 An investor is liable to income tax at 22% (payable 3 months in arrears) and capital
gains tax at 27% (payable 5 months in arrears).

A security, which pays coupons every 6 months in arrears at a rate of 3.75% p.a., has
just been issued at a price of $100 per $100 nominal. It is to be redeemed at $103.50
per $100 nominal on a coupon date between 15 and 20 years after the date of issue.
The date of redemption is at the option of the borrower.

Calculate the minimum net effective yield the investor would achieve if they
purchased the security and held it until redemption. [16]

2 The annual effective forward rate applicable over the period t to t + r is defined as ft,r,
where t and r are measured in years. A set of discrete time forward rates is given on
the ‘Q2 Base’ worksheet.

(i) Derive the 1-year spot rates for time periods 1 to 25 inclusive. [4]

(ii) Explain, briefly, one possible justification for the shape of the (spot rate)
yield curve. [3]

(iii) Calculate the 20-year par yield. [3]

A 20-year bond redeemable at par is issued with coupons equal to the par yield
calculated in part (iii) at a price of £99 per £100 nominal.

(iv) Calculate the yield to maturity. [4]

[Total 14]

3 An insurance company offers a 25-year with-profit endowment assurance. The death

benefit is payable immediately on death. Premiums are payable annually in advance.

The company offers two policy options:

 conventional with profits

 unitised with profits.

The assumptions used to profit test are listed on the ‘Q3 Base’ worksheet.

(i) Calculate the benefit payable on death during each year of the policy under
each policy option. [19]

(ii) Calculate the maturity benefit payable under each policy option. [2]
[Total 21]

CM1B S2023–2
4 An analyst is investigating the historic mortality experience of a life insurance
company. The analyst has been given the claims experience data for the following
portfolio of policies sold on 1 January 2008:

 15-year term assurance policies, with a total sum assured of $12.8 million, issued
to a group of lives aged 32 exact at outset. Death benefits were paid immediately
on death. Premiums were paid annually in advance.
 Temporary level annuities, with a total annual annuity benefit of $640,000, issued
to a group of lives aged 67 exact at outset with a term of 15 years. A single
premium was paid at outset and the annuity payments were made annually in
arrears.

The worksheet ‘Q4 Base’ sets out this claims data as well as the pricing and reserving
assumptions used by the company.

(i) Calculate, for both policy types, the total premium received in the first year
of the policy. [16]

(ii) Calculate, using the actual mortality experience, the reserve held at the end of
each policy year for both policy types. [11]

(iii) Calculate the total mortality profit or loss, accumulated to 1 January 2023,
experienced by the company over the 15-year term for this portfolio of
policies. [16]

(iv) Comment, without performing any further calculations, on the mortality

experience of the company for this portfolio of policies. [6]
[Total 49]

END OF PAPER

CM1B S2023–3
 INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

12 April 2022 (am)

Subject CM1 - Actuarial Mathematics

Core Principles
Paper B
Time allowed: One hour and fifty minutes

In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.

If you encounter any issues during the examination please contact the Assessment Team on
T. 0044 (0) 1865 268 873.

CM1B A2022 © Institute and Faculty of Actuaries

1 A life insurance company issues a 25-year unit-linked policy to a life aged x exact.
The profit vector of the policy and the relevant assumptions used to perform the profit
test on this policy are given on the Q1 Base worksheet.

(i) Determine the reserves required at the end of each year to zeroise future
negative expected cashflows for this policy. [6]

(ii) Calculate the present value of profits both before and after allowing for the
reserves calculated in part (i). [10]

(iii) Discuss the impact on the profits for this policy of setting up these reserves.
[5]
[Total 21]

2 The Q2 Base worksheet contains mortality data and other assumptions used by a life
insurance company for pricing assurances and annuities.

(i) Calculate the expected present value of a reversionary annuity of £10,000 p.a.
payable annually in advance, starting immediately on the death of a female
currently aged 62 exact, to a male currently aged 63 exact. [15]

(ii) Calculate the probability that a male annuity holder currently aged 56 exact
dies after a female annuity holder currently aged 61 exact. [6]

(iii) Calculate the expected present value of a 30-year last survivor term assurance
of £100,000 payable immediately on death, for a male currently aged 27 exact
and a female currently aged 25 exact. [16]
[Total 37]

CM1B A2022–2
3 A piece of land is available for sale for £10,000. Green Energy Ltd believes that it can
install electricity-producing solar panels on the land.

The total cost of development will be £85,000. This cost will be paid monthly in
advance in six equal instalments. The first payment will be made at the same time that
the land is purchased. Electricity production will start 6 months after the land is
purchased.

It is estimated that the development will produce 80,000 units of electricity per year,
with production assumed to be uniform across each year. Green Energy Ltd will sell
the produced electricity to the national power supplier at a rate of £0.12 per unit.
Payments for electricity produced will be received quarterly in arrears.

The level of electricity production will fall as the solar panels start to degrade. It is
estimated that the level of electricity produced will fall by 0.5% p.a. Electricity
production is assumed to fall annually, with the first decrease of 0.5% occurring
6 months after production begins.

Green Energy Ltd will start monthly maintenance work after 6 months of electricity
production. The maintenance costs are expected to be £1,000 p.a. incurred monthly in
arrears. Annual maintenance costs will increase by 3% p.a. with the first increase
taking place 1 year after the maintenance work starts.

The risk discount rate is 6.5% p.a. effective.

(i) Construct an annual cashflow schedule including all income and outgo
payments for Green Energy Ltd for the first 30 years of the project. [23]

(ii) Determine, using the schedule produced in part (i):

(a) the accumulated profit after 30 years.

(b) the project year in which the accumulated profit first becomes positive.
[5]

The local government has decided to offer an incentive to new generators of

renewable electricity. This incentive will be paid at a rate of £0.10 per unit of
electricity produced in the first 5 years of electricity production and will be payable at
the end of every 6-month period.

(iii) Determine, using a revised annual cashflow schedule, how your answer to
part (ii)(b) will change once these incentive payments are taken into account.
[7]

(iv) Comment on the suitability of the model and the assumptions used by Green
Energy Ltd. [7]
[Total 42]

END OF PAPER

CM1B A2022–3
 INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

13 September 2022 (am)

Subject CM1 – Actuarial Mathematics

Core Principles
Paper B
Time allowed: One hour and fifty minutes

In addition to this paper you should have available the 2002 edition of
the Formulae and Tables and your own electronic calculator.

If you encounter any issues during the examination please contact the Assessment Team on
T. 0044 (0) 1865 268 873.

CM1B S2022 © Institute and Faculty of Actuaries

1 An insurance company has estimated the independent probabilities of two decrements
in a population of healthy lives. These are set out in the worksheet ‘Q1 Base’.
Transitions can occur out of the healthy state into one of two absorbing exit states:
ill health or dead.

Healthy Ill health

Dead

Forces of decrement are assumed to be independent and constant over individual

years of age.

(i) Construct a double decrement table, using the template provided, for integer
ages from 50 to 110. Assume a radix of (al)_50 = 100,000. [7]

(ii) Evaluate the probability that a healthy individual aged 65 exact will leave the
population by ill health or death before their 71st birthday. [2]

The insurance company offers a temporary assurance policy to a healthy individual

aged 52 exact. Details of the policy and the premium basis are set out in the
worksheet ‘Q1 Base’.

(iii) Calculate the premium for this policy, expressed as a percentage of salary,
using the equivalence principle. [25]
[Total 34]

CM1B S2022–2
2 A life insurance company has a portfolio of identical single premium endowment
assurances with a combined sum assured of $1.5m. The outstanding term of the
portfolio is exactly 20 years. The endowment assurance death benefit is payable at the
end of the year of death. The endowment assurances were paid for by single
premiums at the outset of the policies. The current age of all policyholders is 30 exact.

The company holds three assets (A, B and C) to meet its liabilities in respect of this
portfolio. The basis used by the company to value its liabilities, together with details
of the assets held, is set out in worksheet ‘Q2 Base’.

(i) Determine the present value of the insurance company’s portfolio of

endowment assurances and the present value of total assets held in respect of
the portfolio. [12]

(ii) Determine the volatility of the portfolio of endowment assurances and the
volatility of total assets held in respect of the portfolio. [9]

The company now wishes to re-balance its holdings of assets B and C such that the
portfolio is immunised against small changes in the rate of interest. The holding of
asset A will remain unchanged.

(iii) (a) Determine the new holdings of assets B and C.

(b) Demonstrate that Redington’s conditions for immunisation are met

with these new holdings.
[17]

(iv) Explain, without performing any further calculations, how the relative values
of the assets and liabilities will change if the interest rate decreases slightly.
[4]
[Total 42]

CM1B S2022–3
3 The Finance Director of a company has been presented with two potential projects.

Project A streamlines financial processes. Further details of this project, including

expected cashflows, are set out in worksheet ‘Q3 ProjectA Data’.

Project B is the development of a new finance administration system. Further details

of this project, including expected cashflows, are set out in worksheet ‘Q3 ProjectB
Data’.

The Finance Director wants to implement one of the two projects and has asked you
for a recommendation.

The company has a policy of using an annual effective target rate of return of 6% p.a.

(i) Determine the Net Present Value (NPV) for each project. [16]

(ii) Explain which project you will recommend, based on your answers to part (i).
[2]

Despite your recommendation, the Finance Director decides to implement the other
project.

(iii) Suggest reasons for the Finance Director’s decision. [6]

[Total 24]

END OF PAPER

CM1B S2022–4
 INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

13 April 2021 (am)

Subject CM1B - Actuarial Mathematics

Core Principles
Time allowed: One hour and forty-five minutes

In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.

If you encounter any issues during the examination please contact the Assessment Team on
T. 0044 (0) 1865 268 873.

CM1B A2021 © Institute and Faculty of Actuaries

1 Mortality tables for males and females are given in the Q1 Base worksheet.

Calculate the probability for a male life aged 25 exact and a female life aged 27
exact that:

(a) both lives are still alive on the date of the female’s 60th birthday.

(b) both lives have died before the date of the female’s 60th birthday.

(c) the female has died before age 60 exact and the male life is still alive at the
end of the year of the female’s death.
[14]

2 The Q2 Base worksheet contains data from 20 different banks, labelled A to T. For
each bank, you are given the effective annual yield available on non-income bearing
investments of different terms ranging from 1 to 10 years.

(i) Calculate the 10-year par yield offered by each bank. [7]

(ii) (a) Determine which bank offers the highest 1-year forward rate at time
3 years.

(b) Determine which bank offers the highest rate of interest on a 2-year
forward investment starting at time 6 years.
[8]

An investor would like to purchase a 10-year increasing annuity certain, payable

annually in arrears, from one of the banks. The first annuity payment, made at the end
of the first year, will be $1,000. Subsequent payments will increase by a fixed amount
of $500 each year.

(iii) Determine which bank would provide the annuity at the lowest cost. [8]

(iv) Calculate the effective annual rate of return achieved by the investor on
purchasing the annuity from the bank as determined in part (iii). [5]

(v) Calculate the duration of the annuity determined in part (iii). [5]
[Total 33]

CM1B A2021–2
3 A life insurance company issues a new 20-year without-profit endowment assurance
to lives aged 40 exact. The sum assured of £100,000 will be paid if the policyholder
dies during the term of the policy or on survival to the end of the policy term. The
death benefit is payable at the end of the policy year of death.

Surrender of the policy is permitted at any time during the policy year. The surrender
value is equal to the net premium reserve held at the beginning of the policy year of
surrender and is payable immediately on surrender.

Premiums of £4,000 are payable annually in advance throughout the term of the
policy or until earlier death.

The company will hold net premium reserves for this policy. The valuation basis is
given in the Q3 Valuation Basis worksheet.

(i) Determine the net premium reserves for each policy year. [10]

All the assumptions used to perform the profit test of the policy are contained in the
Q3 Profit Test Basis worksheet.

(ii) Determine the profit test dependent rates of mortality and surrender for each
policy year. [10]

(iii) Determine the profit margin for the policy. [33]

[Total 53]

END OF PAPER

CM1B A2021–3
 INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

14 September 2021 (am)

Subject CM1 – Actuarial Mathematics

Core Principles
Paper B
Time allowed: One hour and fifty minutes

In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.

If you encounter any issues during the examination please contact the Assessment Team on
T. 0044 (0) 1865 268 873.

CM1B S2021 © Institute and Faculty of Actuaries

1 A 1-year term assurance contract provides a death benefit of £100,000 payable at the
end of the month of death to a life currently aged 70 exact.

(i) (a) Calculate the expected present value of the contract assuming a
constant force of mortality.

(b) Calculate the expected present value of the contract using the Uniform
Distribution of Deaths (UDD) method.
[15]

(ii) Comment on the differences between your answers to parts (i)(a) and (i)(b).

Basis:

Rate of mortality q70 = 0.012437

Interest 1% per month
Expenses Nil
[5]
[Total 20]

2 A couple are buying a house and have taken out a special ‘First-time buyer’ mortgage,
which allows for lower payments in the earlier years.

The mortgage, of £300,000, has a term of 30 years. For the first 6 months, no
repayments are made, although interest still accrues on the loan. Interest-only
repayments are due from this point until the end of the third year. After the end of the
third year, and up to the end of the term, level repayments are due, set at a level such
that the mortgage will be repaid in full at the end of the 30-year term.

All repayments are made monthly in arrears. Interest is charged at an effective rate of
4.5% p.a.

(i) Calculate the amount of each monthly repayment, without using a scenario
solving tool such as Goal Seek or Solver. [7]

(ii) Construct the loan schedule for the mortgage. [8]

The conditions of the loan permit borrowers to make additional payments in order to
reduce the term of the mortgage. These additional payments can be made once each
year, excluding the first year, subject to a maximum of 10% of the outstanding capital
amount, as determined at the beginning of each year of payment. The original
repayments, including the repayments in the first 3 years, will not change but the term
of the mortgage will reduce.

The original repayment schedule will remain unchanged except for the term.

The couple decide to make additional payments to reduce the term of the mortgage as
much as possible.

(iii) Determine the shortest possible term that can be achieved in this way. [11]
[Total 26]

CM1B S2021–2
3 An actuarial team has been tasked with building a model to evaluate the impact of a
change in interest rates on the value of a bond. A student in the team has constructed
two models: Model 1 and Model 2. The results of the models are provided in the
Excel workbook in the Q3 Model 1 and Q3 Model 2 worksheets.

Explain the limitations of each of the two models on the basis of the calculations and
results shown in these worksheets. You are not expected to validate the accuracy of
the models, and you are not required to perform further calculations. [12]

4 A life insurance company issues a 30-year unit-linked joint life endowment assurance
policy to a man aged 32 exact and a woman aged 35 exact.

Should either life die during the term a benefit of $200,000, or the bid value of the
units if higher, is payable at the end of the year of the first death. On survival of both
lives to maturity, 102% of the bid value of the units is payable. On early surrender,
the bid value of the units less a surrender penalty is payable at the end of the policy
year of surrender.

Premiums, which increase at a fixed rate each year, are payable annually in advance
throughout the policy or until the death of the first life.

The premium structure, as well as the mortality, surrender and pricing assumptions,
are set out in the Q4 Base worksheet.

(i) Determine the unit fund cashflows for each year of the policy. [9]

Independent decrement rates have been provided in the Q4(ii) worksheet.

(ii) Calculate the profit margin for this policy. [33]

[Total 42]

END OF PAPER

CM1B S2021–3
 INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

22 September 2020 (am)

Subject CM1B – Actuarial Mathematics

Core Principles
Time allowed: One hour and forty-five minutes

In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.

If you encounter any issues during the examination please contact the Examination Team on
T. 0044 (0) 1865 268 873.

CM1B S2020 © Institute and Faculty of Actuaries

1 A life insurance company issued a 20-year with-profits endowment assurance policy
with a basic sum assured of £30,000 to a life aged 30 exact on 1 January 2000.
Premiums of £1,000 per annum were payable annually in advance throughout the
term of the policy or until earlier death.

To determine the amount of terminal bonus payable at maturity for this policy, the
company calculated the gross premium reserve based on actual experience. The level
of terminal bonus was set such that the total benefit payable on maturity was equal to
this gross premium reserve.

The company does not pay a terminal bonus on the death of the policyholder. Death
benefits are payable at the end of the year of death.

The company does not add any reversionary bonuses on its with-profits policies.

The assumptions to use for this question are set out in the ‘Q1 Base’ worksheet of the
Excel answer workbook.

(i) Construct, using a recursive approach, a schedule showing the gross premium
reserve for each policy year of this policy. [17]

(ii) Determine the terminal bonus rate that would be payable at maturity for this
policy, expressed as a percentage of basic sum assured. [4]
[Total 21]

2 An inflation index is set out in the ‘Q2 Base’ worksheet of the Excel answer
workbook.

(i) Calculate the annual effective inflation rate over the previous 12 months for
each month from January 2004 to December 2019 using the index values
provided. [4]

An investor purchased $10 million nominal of a newly issued 15-year index-linked

security on 15 January 2004, at a price of $100 per $100 nominal. The security paid
coupons half-yearly in arrears at a nominal rate of 1.5% per annum and was redeemed
at par.

The coupons and the redemption payment of the security were indexed in line with
the inflation index values allowing for a three-month time lag.

(ii) Calculate, assuming the investor held the security until redemption,

(a) the annual effective money yield.

(b) the annual effective real yield.

You may assume that all months are of equal length. [16]

(iii) Assess the inflation protection that has been provided by the security. [6]
[Total 26]

CM1B S2020–2
3 A life insurance company issues a deferred annuity contract to a life aged 55 exact.
The annuity starts once the policyholder survives to age 70 exact with payments of
£10,000 made annually in advance and ceasing on death.

Premiums are payable annually in advance from policy outset. The last premium is
payable on the policy anniversary before the start of the deferred annuity payments.

The assumptions to use for this question, as well as details of death and surrender
benefits, are set out in the ‘Q3 Base’ worksheet of the Excel answer workbook.

(i) Show that the cost to the life insurance company of providing this annuity
benefit at age 70 is approximately £135,000. [7]

(ii) Calculate the annual premium the company should charge for this policy.
[34]

The company is considering introducing an early retirement option, whereby

policyholders are given the option to start receiving a reduced annuity benefit before
age 70.

(iii) Discuss the implications to the company of allowing policyholders to start

receiving their benefits at age 65. [12]
[Total 53]

END OF PAPER

CM1B S2020–3
 INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

23 September 2019 (am)

Subject CM1B – Actuarial Mathematics

Core Principles

Time allowed: One hour and forty-five minutes

INSTRUCTIONS TO THE CANDIDATE

1. You are given this question paper and the Excel file.

2. Mark allocations are shown in brackets.

3. Attempt all questions. Each question is to be answered in the allocated tab.

If you encounter any issues during the examination, please contact the Examinations Team at
T. +44 (0) 1865 268 255

CM1B S2019 © Institute and Faculty of Actuaries

1 A company offers a life assurance policy that pays a lump sum of £100,000 on the
death of an employee before age 60. The benefit is payable at the end of the year of
death. In addition, an annuity of £5,000 per annum is paid to a nominated dependant
of the life assured. The first annuity payment is made at the same time as the lump
sum death benefit and continues annually, ceasing when the dependant reaches age 60
exact or on their earlier death.

It estimates the mortality experience of its employees by using mortality tables given
in the answer sheet under the ‘Q1 Base’ tab.

(i) Calculate, for a male life aged 35 exact as the life assured and with a female
life aged 30 exact as the dependant, using the mortality tables provided and an
interest rate of 5% per annum:

(a) the expected present value of the lump sum benefit.

(b) the expected present value of the dependant’s annuity benefit.
[14]

The company has now decided to allow for employees who leave the company. Those
who leave are deemed to have withdrawn from the life insurance policy and as such,
their policy is cancelled and no further benefits are payable. The company has created
a multiple decrement table based on mortality and withdrawal rates experienced in
its own portfolio over the last twenty years. The table for male lives is given in the
answer sheet under the ‘Q1 (ii)’ tab.

(ii) Calculate the independent forces of mortality and withdrawal implied by

this multiple decrement table. You may assume these independent forces are
constant over each year of age and that the different forces are independent of
one another. [10]

The company wishes to adjust the multiple decrement table used in part (ii) to allow
for the tables used in part (i).

(iii) (a)
Calculate the independent forces of mortality for a male life between
ages 35 and 60 inclusive as implied by the tables used in part (i).
(b) Calculate the adjusted dependent rates of mortality and withdrawal for
a male life over this age range based on the revised mortality rates in
part (iii)(a) and the withdrawal rates in part (ii).
(c) Determine the revised expected present value for the lump sum benefit
originally calculated in part (i)(a), assuming that the benefit is paid
only if the life dies while an employee of the company.
[22]

(iv) Comment on the differences in your results for part (i)(a) and part (iii)(c). [6]
 [Total 52]

CM1B S2019–2
2 An investor has a choice between two projects (Project A and Project B) and believes
that a risk discount rate of 10% per annum effective is appropriate to evaluate these
projects.

Project A

The outgo for Project A is as follows:

• £500,000 on 1 January 2018

• £300,000 on 1 April 2018.

Income is received continuously from 1 July 2018. The income starts at £500,000 per
annum for the first year and decreases by £20,000 every year on 1 July.

(i)
(a) Construct a half-yearly cashflow schedule for Project A.
(b) Calculate the accumulated profit for Project A at 31 December 2037.
[15]

Project B

The outgo for Project B is all paid on 1 January 2018.

The project immediately starts earning income. The income will be received
continuously at an initial rate of £70,000 per annum. The income will increase at a
compound rate of 20% per annum every two years with the first increase taking place
on 1 January 2020.

(ii) (a)
Construct a yearly cashflow schedule for Project B.
(b)
Calculate the initial outgo for Project B such that it will have the same
accumulated profit as Project A at 31 December 2037.
[12]

The investor does not have enough capital to cover the outgo for Project B and so
decides to borrow £750,000 from a bank. The loan will be repaid over 20 years.
Level repayments will be made annually in arrears and the bank will charge interest at
a rate of 12% per annum effective for the first 10 years and 14% per annum effective
for the next 10 years.

(iii) Calculate the annual loan repayments. [5]

The company decides that it would like to repay the loan as early as possible and so
pays all of the income from Project B into the loan account as it is received. In years
when the income is not sufficient to cover the regular loan repayments, any shortfall is
added to the outstanding loan amount.

(iv) Construct a loan schedule and calculate the calendar year in which the loan is
fully repaid. [16]
 [Total 48]

END OF PAPER

CM1B S2019–3
 INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

10 April 2019 (am)

Subject CM1B – Actuarial Mathematics

Core Principles

Time allowed: One hour and forty-five minutes

INSTRUCTIONS TO THE CANDIDATE

1. You are given this question paper and three Excel files.

2. Mark allocations are shown in brackets.

3. Attempt all questions. Each question is to be answered in a separate document.

If you encounter any issues during the examination, please contact the Examination Team at
T. +44 (0) 1865 268 255

CM1B A2019 © Institute and Faculty of Actuaries

1 A loan of £250,000 is taken out at an effective rate of interest of 3.5% per annum for
the first three years and an effective rate of interest of 7.5% per annum thereafter.

For the first 18 months, no loan repayments are made. After this time, level loan
repayments are made monthly in arrears such that the loan will be fully repaid
25 years after it is taken out. If repayments are insufficient to cover the interest due
then the loan will be increased to cover the shortfall.

Construct the loan schedule. [14]

2 A coffee company is opening a new store in a large town. The company purchased the
premises for £500,000 on 1 January 2019. The total cost of refurbishing the premises
will be £1,500,000 which will be incurred in six equal instalments payable monthly in
advance with the first payment made on 1 October 2019.

The store is expected to open on 1 May 2020 and is expected to sell cups of coffee
each month as shown in the base sheet of the CM1 Q2 workbook, with each cup of
coffee assumed to sell for £3. All income from coffee sales can be assumed to be
received continuously during the month.

The costs of staffing and maintaining the new store will be £10,000 per month payable
continuously from 1 May 2020 and it is assumed that these will increase on each
1 September by 2% per annum effective. It is also assumed that all costs and income
will cease at the end of 2030.

The risk discount rate is 12% per annum effective.

(i) (a) Calculate the net present value of the proposed store and determine
whether the store is profitable. [16]

(b) Calculate the discounted payback period to the nearest month. [4]

(c) Calculate the internal rate of return. [4]

The company now assumes that the price of cups of coffee increases by 5% at the start
of each calendar year, with the first increase on 1 January 2023.

(ii) Calculate the revised net present value. [6]

(iii) Comment on your answers to part (i)(a) and part (ii) and the suitability of the
underlying assumptions made. [8]
 [Total 38]

CM1B A2019–2
3 A life insurance company issues a 25-year variable premium unit-linked endowment
assurance to a life aged 45 exact. Under this policy, the premiums increase by fixed
monetary amounts for the first five years of the policy and then remain constant
thereafter. The premiums, which are payable annually in advance throughout the term
of the policy or until earlier death, and the allocation rates are as follows:

Policy year Premium payable Allocation rate

£ %
1 1,500  45
2 1,500  45
3 1,850 100
4 2,000 100
5 2,250 100
6–25 inclusive 3,000 105

If the policyholder dies during the term of the policy, the death benefit is £100,000
or the bid value of units, whichever is higher, and is payable at the end of the policy
year of death. The policyholder may surrender only at the end of each policy year.
On survival to the end of the policy term, or on surrender, the bid value of units is
payable.

The units are subject to a bid-offer spread of 6% and an annual management charge of
1% of the bid value of units is deducted at the end of each policy year. Management
charges are deducted from the unit fund before death, surrender and maturity benefits
are paid.

The assumptions used to profit test this policy are given on the “Profit Test
Assumptions” sheet of the CM1 Q3 workbook.

(i) Determine, for each policy, the dependent rates of mortality and surrender for
ages 45 to 70 inclusive. [5]

The unit fund cashflow for this policy is given in tab ii of the of the CM1 Q3
workbook.

(ii) Calculate the profit margin for the policy. [20]

The company is considering making an Accumulating With Profit (AWP) version

available as an investment option for new policyholders. Under the AWP version, all
premiums are paid into an account rather than being allocated to units. The account
grows at a bonus interest rate declared annually by the company. A terminal bonus is
added to the account to give the total benefit payable on maturity or on earlier death.
The benefit on surrender is the value of the AWP account. No terminal bonus is added
on surrender.

CM1B A2019–3
 The company expects to pay an annual bonus of 2% per annum. All other profit
testing assumptions and policy conditions remain unchanged and you may ignore
reserves.

(iii)
Calculate the percentage terminal bonus the company should expect to declare
for the AWP option in order to give the same profit margin as the unit-linked
option in part (ii).
[23]
 [Total 48]

END OF PAPER

CM1B A2019–4