Actuarial Society of South Africa

EXAMINERS REPORTS

May 2023

Subject A211

A211 May 2023 Examiners Report Page 1 of 11 ©Actuarial Society of South Africa
General comments

Please note that different answers may be obtained to those shown in these solutions depending on
whether intermediary figures were obtained from tables or from calculators, but candidates were
not penalised for this.

Also, note that there are often alternative ways to reach the same final solution so that the solutions
in this report should not be seen as the only solutions available.

The examiners mark with the candidates answers where a question has several parts which follow
on each other. It is therefore essential that candidates work consistently with their answers.

Many candidates can also increase their probability of passing this exam by practising good exam
technique, which is often missing in its most basic form.

Question 1
The objectives of the modelling exercise.
The validity of the model for the purpose to which it is to be put.
The validity of the data to be used.
The validity of the assumptions.
The possible errors associated with the model or that the parameters used is not a perfect
representation of the real-word situation being modeled.
The impact of correlations between the random variables that ‘drive’ the model.
The extent of correlations between the various results produced form the model.
The current relevance of models written and used in the past.
The credibility of the data input.
The credibility of the results output.
The dangers of spurious accuracy.
The ease with which the model and its results can be communicated.
Regulatory requirements.

The question was well done in general.

A211 May 2023 Examiners Report Page 2 of 11 ©Actuarial Society of South Africa
Question 2
i.
The amount and timing of monthly interest payments and the lump sum payment at the end of the
term is known in advance by Bank X, so amounts and timing are certain.

However, these cashflows are subject to default by the Person A, which adds uncertainty to
whether cashflows will be received on time and in full.

ii.
This reduces the uncertainty of whether the principle amount of the loan will be repaid, as Bank X
is sure to receive their original loan amount if the policyholder dies.

However, the timing of the repayment is still uncertain as it is unknown when, or if, the
policyholder will die.

Default risk (credit risk) of the insurance company increases the uncertainty of the payment.

Term assurance do not pay out if cause of death not covered by insurance contract (e.g. suicide) –
increase uncertainty of payment

Part (ii) was one of the worst answered questions in the paper.
Candidates showed poor understanding of a term assurance.
Although assurances are covered in A213, brief descriptions of assurances are part of the
A211 syllabus.

Question 3

i.
4
(1 + 𝑖)2 = exp (∫ 0.002𝑡 3 𝑑𝑡)
2
0.002 4 4
= exp ( 𝑡 ) |2
4
= exp(0.12)
= 1.127496852
𝑖 = 0.06183655 = 6.18%

A211 May 2023 Examiners Report Page 3 of 11 ©Actuarial Society of South Africa
ii.
2
−1
(1 − 𝑑) = exp (∫ 0.002𝑡 3 𝑑𝑡)
1
0.0002 4 2
= exp ( 𝑡 ) |1
4
= exp(0.0075)
= 1.0075
𝑑 = 0.00747195 = 0.75%

iii.
1 2
𝑃𝑉 = 1,000 + 1,000 × exp (− ∫ 0.002𝑡 3 𝑑𝑡) + 1,000 × exp (− ∫ 0.002𝑡 3 𝑑𝑡)
0 0
4
+ 3,000 × exp (− ∫ 0.002𝑡 3 𝑑𝑡)
0

= 𝑅5,631.09

Part (i) and (ii) was well answered.

Common errors in part (iii) were
• Errors in the timeline of the payments.
• Calculating a constant interest rate for the full three/four year period.
When interest rates are a function of t, a separate corresponding constant interest rate must
be calculated for the period of each individual cashflow.

A211 May 2023 Examiners Report Page 4 of 11 ©Actuarial Society of South Africa
Question 4
i.
𝑣 = (1 + 𝑖)−1 with 𝑖 → effective interest rate per unit of time.
𝑖 (𝑝) → nominal interest rate per unit of time compounded 𝑝thly.
𝑛𝑝
(𝑝) 1 𝑡
𝑎𝑛 = ∑ 𝑣 𝑝
𝑝
𝑡=1

1
1 𝑣 𝑝 (1 − 𝑣 𝑛 )
= × 1
𝑝
1 − 𝑣𝑝

1 − 𝑣𝑛
= 1
𝑝 × [(1 + 𝑖)𝑝 − 1]

1 − 𝑣𝑛
= (𝑝)
𝑖

ii.

1
𝑝= = 0.25
4

𝑛 = 60

𝑖 (0.25) = 0.25(1.0754 − 1) = 0.08386

Payment =12,500

(0.25)
𝑋 = 12,500 × 𝑎60

1 − (1.075)−60
= 12,500 × ( )
0.08386

= 12,500 × (11.76803)

= 𝑅147,100.50

A211 May 2023 Examiners Report Page 5 of 11 ©Actuarial Society of South Africa
Alternative

𝑝=1

𝑛 = 15

𝑖 (0.25)
= 0.33546914
0.25

Payment=50,000

𝑋 = 50,000 × 𝑎15

Common errors in part (i) were

• Not defining the notation as asked for in the question.
• Making errors in writing down the initial payment series.
• Appling the geometric series incorrectly.
The common error in part (ii) was using the incorrect payment with the annuity factor.

Question 5

7 3
𝐹𝑉 = 50 × (1 + 𝑓1,7 ) + 50 × 𝑒 𝐹4,1 × (1 + 𝑓5,3 )

7
(1 + 𝑦8 )8 = (1 + 𝑦1 ) × (1 + 𝑓1,7 )

100 100 7
= × (1 + 𝑓1,7 )
45 95

7 95
(1 + 𝑓1,7 ) =
45
3
(1 + 𝑦5 )5 × (1 + 𝑓5,3 ) = (1 + 𝑦8 )8

3 65
(1 + 𝑓5,3 ) =
45

A211 May 2023 Examiners Report Page 6 of 11 ©Actuarial Society of South Africa
 95 65
𝐹𝑉 = 50 × ( ) + 50 × (1.08545) ×
45 45

= 105.555556 + 78.39403071

= 𝑅183.95

This was one of the worst answered questions in the paper.

The common error was the use of spot rates to calculate the accumulation factors.
The accumulation factors used forward rates as the investments were made in the future.
Spot rates were needed to calculate the appropriate forward rates.

Question 6

i.
It is the weighted mean term of the cashflows where the weights are the present values of the
cashflows.

ii.
850 × (𝐼𝑎) 𝑖 (2)
22 @
2
𝐷𝑀𝑇 =
850 × 𝑎 𝑖 (2)
22 @
2
𝑖 (2)
= (1.0350.5 − 1) = 0.01734
2

(𝐼𝑎) 𝑖 (2) = 196.2894

22 @
2

196.2894
𝐷𝑀𝑇 = = 10.81 ℎ𝑎𝑙𝑓 𝑦𝑒𝑎𝑟𝑠 → 5.40 𝑦𝑒𝑎𝑟𝑠
18.1592

A211 May 2023 Examiners Report Page 7 of 11 ©Actuarial Society of South Africa
iii.
The discounted mean term of the assets (bond) is more than the discounted mean term of the
liabilities (annuity).
This means the present value of the assets will be more sensitive to a change in interest rates.
The insurance company will make a profit, as the present value of the assets will increase by more.

A common error in part (ii) was to allow incorrectly for the increasing time period of the
half-yearly cashflows. The easiest way to do this, is to work with half-years as is done in the
examiners report.
In part(iii) a common error was to make comments about immunization although no mention
was made of immunization in the question. Candidates must use the information given which
in the case was only information about the discounted mean term.

Question 7

i.
12
(4) 0.16 4
𝑖 = 4 ((1 + ) − 1) = 0.1621481
12
(4)
𝑅150,000 = 4𝑋𝑎5 × (1 + 2𝑣 5 + 3𝑣 10 )

0.16 −12×5
(4)
1 − (1 + 12 )
𝑎5 = = 3.381521510
0.1621481

𝑣 5 = 0.451710584
𝑣 10 = 0.204042452

150,000
𝑋= = 𝑅4,408.455024307
4 × (3.38152) × (1 + 2𝑣 5 + 3𝑣 10 )

42nd payment is in the third five-year period.

3𝑋 = 𝑅13,225.38

A211 May 2023 Examiners Report Page 8 of 11 ©Actuarial Society of South Africa
ii.
Loan outstanding after 41st payment (after the first payment in the third term):
(4)
𝐿41 = 4 × (13,225.36507292) × 𝑎4.75 = 𝑅172,913.388492408

(4)
𝑎4.75 = 3.268593864

Interest portion of 42nd payment:

𝑖 (4)
𝐼42 = 𝐿41 × = 𝑅7,009.17
4
𝐶42 = 𝑅13,225.38 − 𝑅7,009.17 = 𝑅6,216.21

Part (i) was the best answered question in the paper.

The common error in part (i) was the conversion of the interest rate.
Part (ii) was answered less well with several candidates struggling to calculate the loan
outstanding.

Question 8
i.
Capital Gains Test:

𝑖 (2) = 2 × (1.07250.5 − 1) = 0.07123518

𝐷 × (1 − 𝑡1 ) 0.095 × (0.75)
= = 0.07421875
𝑅 0.96
𝑖 (2) < 0.07421875 → 𝑛𝑜 𝐶𝐺𝑇

(2)
𝑃 = 100 × (0.095 × (0.75) × 𝑎10 + 0.96 × 𝑣 10 )
(2)
𝑎10 = 7.066771

𝑃 = 𝑅98.03 𝑝𝑒𝑟 𝑅100 𝑛𝑜𝑚𝑖𝑛𝑎𝑙

ii.
𝐷 × (1 − 𝑡1 ) 0.095 × (0.75)
𝑛𝑒𝑡 𝑟𝑢𝑛𝑛𝑖𝑛𝑔 𝑦𝑖𝑒𝑙𝑑 = = = 0.072684377 = 7.3%
𝑃 0.9803

A211 May 2023 Examiners Report Page 9 of 11 ©Actuarial Society of South Africa
 Part (i) was answered well but in Part (ii) candidates did not know the definition of a running
yield.

Question 9
i.

1 1
𝑃𝑉𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑣 2 × (99,000 × 𝑎̅4 + 99,000 × (1.01) × 𝑣 4 × 𝑎̅1 (1 + 𝑣 13× 1.01 13
+ ⋯))
+𝑣 × 1.01
+ 3𝑚 × 𝑣 20

𝑃𝑉𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑣 2 × (99,000 × 𝑎̅4 + 99,000 × (1.01) × 𝑣 4 × 𝑎̅1 × (𝑎̈ 14 @𝑗 ))

exp(0.034)
𝑗= − 1 = 0.02434119
1.01

𝑎̈ 14 @𝑗 = 12.0303114

𝑎̅1 = 0.98319
𝑎̅4 = 3.739923

𝑃𝑉𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑅1,310,352.26 + 𝑅1,159,850.98 = 𝑅2,830,203.24

𝑃𝑉𝑜𝑢𝑡𝑓𝑙𝑜𝑤 = 2,514,650 + (13,000 + 14,000𝑣 + 15,000𝑣 2 + ⋯ + 32,000𝑣 19 )

𝑃𝑉𝑟𝑢𝑛𝑛𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠 = 12,000 × 𝑎̈ 20 + 1,000 × (𝐼𝑎̈ )20

𝑎̈ 20 = 14.759354326

(𝐼𝑎̈ )20 = 138.415277994

𝑃𝑉𝑜𝑢𝑡𝑓𝑙𝑜𝑤 = 𝑅2,514,650 + 12,000 × (14.759354326) + 1,000 × (138.415277994)

= 𝑅2,830,177.52990389

𝑁𝑃𝑉 = 𝑅2,830,203.24 − 𝑅2,830,177.24

= 𝑅25.71

A211 May 2023 Examiners Report Page 10 of 11 ©Actuarial Society of South Africa
ii.
𝑁𝑃𝑉𝐷𝑃𝑃 ≥ 0

𝑁𝑃𝑉 = −2,514,650 + 195,000 × 𝑎̈ 𝑛 ≥ 0

(1 − exp(−0.034𝑛)) 2,514,650
𝑎̈ 𝑛 = ≥
0.033428 195,000

𝑛 ≥ 16.58

𝐷𝑃𝑃 = 16

iii.
Project B has the highest internal rate of return.
Project A has an NPV close to 0 at the borrowing rate, indicating that the internal rate of return is
close to 3.4%.
The discounted payback period of project B is at time 16, which is three years before the last
income payment.

Part (i) was answered well with many marks available for the correct discounting of the
cashflows.
A common error was to set the 3.4% equal to the effective interest rate per annum instead
of the continuous interest rate per annum.
In part (ii) candidates should remember that with discrete cashflows the discounted
payback period (DPP) should be an integer value and when setting up the equation to
solve the DPP “ ≥ " should be used.
Also,𝑛 ≥ 16.58 implies the DPP is at the 17th payment. As this is in reference to an annuity
due (where the first payment occurs at t=0) this will occur at time 16.

A211 May 2023 Examiners Report Page 11 of 11 ©Actuarial Society of South Africa