Solutions to the November 2012 Course MLC Examination

by Krzysztof Ostaszewski, [Link] krzysio@[Link]

Copyright © 2012 by Krzysztof Ostaszewski
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permission of the copyright owner.

Dr. Ostaszewski’s manual for Course MLC is available at

[Link] (paper) or
[Link] (electronic)
Exam MLC seminar at Illinois State University:
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November 2012 Course MLC Examination, Problem No. 1

For two lives, (80) and (90), with independent future lifetimes, you are given:
k p80+k p90+k
0 0.9 0.6
1 0.8 0.5
2 0.7 0.4
Calculate the probability that the last survivor will die in the third year.

A. 0.20 B. 0.21 C. 0.22 D. 0.23 E. 0.24

Solution.
The probability sought is
2 p80:90 − 3 p80:90 = ( 2 p80 + 2 p90 − 2 p80:90 ) − ( 3 p80 + 3 p90 − 3 p80:90 ) =
Using Poohsticks

= ( 2 p80 + 2 p90 − 2 p80 ⋅ 2 p90 ) − ( 3 p80 + 3 p90 − 3 p80 ⋅ 3 p90 ) =

= ( p80 p81 + p90 p91 − p80 p81 ⋅ p90 p91 ) − ( p80 p81 p82 + p90 p91 p92 − p80 p81 p82 ⋅ p90 p91 p92 ) =
= ( 0.9 ⋅ 0.8 + 0.6 ⋅ 0.5 − 0.9 ⋅ 0.8 ⋅ 0.6 ⋅ 0.5 ) −
− ( 0.9 ⋅ 0.8 ⋅ 0.7 + 0.6 ⋅ 0.5 ⋅ 0.4 − 0.9 ⋅ 0.8 ⋅ 0.7 ⋅ 0.6 ⋅ 0.5 ⋅ 0.4 ) =
= ( 0.72 + 0.3 − 0.216 ) − ( 0.504 + 0.12 − 0.06048 ) = 0.24048.
Answer E.

November 2012 Course MLC Examination, Problem No. 2

You are given:
(i) An excerpt from a select and ultimate life table with a select period of 3 years:
x l[ x ] l[ x ]+1 l[ x ]+2 lx+3 x+3
60 80,000 79,000 77,000 74,000 63
61 78,000 76,000 73,000 70,000 64
62 75,000 72,000 69,000 67,000 65
63 71,000 68,000 66,000 65,000 66
(ii) Deaths follow a constant force of mortality over each year of age.
Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
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Calculate 1000 2 3 q[ 60 ]+0.75 .

A. 104 B. 117 C. 122 D. 135 E. 142

Solution.
Under constant force over each year of age, for 0 ≤ k ≤ 1, and x an integer,
k
⎛l ⎞
= k px = e− kµx = ( e− µx ) = ⎜ x+1 ⎟ ,
lx+k k

lx ⎝ lx ⎠
so that
lx+k = ( lx ) (lx+1 )k .
1−k

We have
l[ 60 ]+2.75 − l[ 60 ]+5.75 l([ 60 ]+2 )+0.75 − l65.75
1000 2 3 q[ 60 ]+0.75 = 1000 ⋅ = 1000 ⋅ =
l[ 60 ]+0.75 l[ 60 ]+0.75

(l[ ] ) ⋅l − l
0.25
60 +2
0.75
63
0.25
65 ⋅l66
0.75

= 1000 ⋅ =
(l[ ] ) ⋅ (l[ ] )
0.25 0.75
60 60 +1

77000 0.25
⋅ 74000 0.75 − 67000 0.25 ⋅ 65000 0.75
= 1000 ⋅ ≈ 116.70.
80000 0.25 ⋅ 79000 0.75
Answer B.

November 2012 Course MLC Examination, Problem No. 3

You are given:
1
⎛ t ⎞4
(i) S0 ( t ) = ⎜ 1− ⎟ , for 0 ≤ t ≤ ω .
⎝ ω⎠
1
(ii) µ65 = .
180
Calculate e106 , the curtate expectation of life at age 106.

A. 2.2 B. 2.5 C. 2.7 D. 3.0 E. 3.2

Solution.
We have
⎛ 1
⎞
⎛ t ⎞4
µt = − ( ln S0 ( t )) = − ⎜ ln ⎜ 1− ⎟ ⎟ =
d d
dt dt ⎜ ⎝ ω ⎠ ⎟
⎝ ⎠
1 d⎛ ⎛ t ⎞⎞ 1 1 ⎛ 1⎞ 1 1
=− ⎜ ln ⎜ 1− ⎟ ⎟ = − ⋅ ⋅⎜ − ⎟ = ⋅ .
4 dt ⎝ ⎝ ω ⎠ ⎠ 4 1− t ⎝ ω ⎠ 4 ω − t
ω
Therefore,
Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
 1 1 1
= µ65 = ⋅ ,
180 4 ω − 65
so that
1 1
= ,
45 ω − 65
and ω = 110. Based on this
1
⎛ 106 + t ⎞ 4
⎜⎝ 1− ⎟
1
S (106 + t ) 110 ⎠ ⎛ 4−t⎞4
= 0 = =⎜
⎝ 4 ⎟⎠
p106 .
S0 (106 )
t 1
⎛ 106 ⎞ 4
⎜⎝ 1− ⎟
110 ⎠
Therefore,
1 1 1
⎛ 4 − 1⎞ 4 ⎛ 4 − 2 ⎞ 4 ⎛ 4 − 3 ⎞ 4
= 1 p106 + 2 p106 + 3 p106 + 
4 p106 + ... = ⎜ +⎜ +⎜ ≈ 2.4786.
⎝ 4 ⎟⎠ ⎝ 4 ⎟⎠ ⎝ 4 ⎟⎠
e106
=0
Answer B.

November 2012 Course MLC Examination, Problem No. 4

For a special fully discrete whole life insurance on (40), you are given:
(i) The death benefit is 50,000 in the first 20 years and 100,000 thereafter.
(ii) Level benefit premiums of 1116 are payable for 20 years.
(iii) Mortality follows the Illustrative Life Table.
(iv) i = 0.06.
Calculate 10V, the benefit reserve at the end of year 10 for this insurance.

A. 13,340 B. 13,370 C. 13,400 D. 13,430 E. 13,460

Solution.
Prospectively, we calculate the reserve as
(
10V = 50,000A50:10 + 100,000 10 A50 − 1116
1
a50:10 = )
= 50,000 ( A50 + 10 E50 ⋅ A60 ) − 1116 ( a50 − 10 E50 ⋅ a60 ) =
= 50,000 ⋅ ( 0.24905 + 0.51081⋅ 0.36913) − 1116 ⋅ (13.2668 − 0.5108 ⋅11.1451) =
≈ 13, 428.
Answer D.

November 2012 Course MLC Examination, Problem No. 5

A special fully discrete 2-year endowment insurance with a maturity value of 2000 is
issued to (x). The death benefit is 2000 plus the benefit reserve at the end of the year of
death. For year 2, the benefit reserve is the benefit reserve just before the maturity benefit
is paid. You are given:
(i) i = 0.10.

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(ii) qx = 0.150 and qx+1 = 0.165.
Calculate the level annual benefit premium.

A. 1070 B. 1110 C. 1150 D. 1190 E. 1230

Solution.
The initial reserve at time 0 is 0V = 0. The terminal reserve at time 2 is 2V = 2000, as the
policy endows at that time. Let us write P for the level annual benefit premium sought.
We use the recursive reserve formula twice to find it:
( 0V + P )(1+ i ) = qx ( 2000 + 1V ) + (1− qx ) 1V,
( 1V + P )(1+ i ) = qx+1 ( 2000 + 2V ) + (1− qx+1 ) 2V.
Substituting known values, we obtain
( 0 + P ) ⋅1.1 = 0.150 ⋅ ( 2000 + 1V ) + 0.850 ⋅ 1V,
( 1V + P ) ⋅1.1 = 0.165 ⋅ ( 2000 + 2000 ) + 0.835 ⋅ 2000.
From the first equation, 1V = 1.1P − 300, and after we put this in the second equation
(1.1P − 300 + P ) ⋅1.1 = 0.165 ⋅ 4000 + 0.835 ⋅ 2000,
or
2660
P= ≈ 1151.52.
2.31
Answer C.

November 2012 Course MLC Examination, Problem No. 6

For a special fully continuous 10-year increasing term insurance, you are given:
(i) The death benefit is payable at the moment of death and increases linearly from
10,000 to 110,000.
(ii) µ = 0.01.
(iii) δ = 0.05.
(iv) The annual premium rate is 450.
(v) Premium-related expenses equal 2% of premium, incurred continuously.
(vi) Claims-related expenses equal 200 at the moment of death.
(vii) tV denotes the gross premium reserve at time t for this insurance.
(viii) You estimate 9.6V using Euler’s method with step size 0.2 and the derivative of tV
at time 9.6.
(ix) Your estimate of 9.8V is 126.68.
Calculate the estimate of 9.6V.

A. 230 B. 250 C. 270 D. 280 E. 290

Solution.
Using Euler’s method with step size 0.2 and the derivative of tV at time 9.6, we obtain

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
 d tV
V ≈ 9.8V − 0.2 ⋅
9.6 .
dt t=9.6
Recall the Thiele’s differential equation when expenses are included:
d
V = δ t tV + Pt − et − ( St + Et − tV ) µ x+t .
dt t
In this case, t = 9.6, δ 9.6 = δ = 0.05, tV is denoted by 9.6V and it is unknown, Pt is a gross
premium with the annual rate of 450, et are premium related expenses at 2% of premium,
St is constant with S9.6 = 106,000, E9.6 = 200, so that
d tV
= 0.05 ⋅ 9.6V + 450 − 0.02 ⋅ 450 − (106,000 + 200 − 9.6V ) ⋅ 0.01 = −621+ 0.06 ⋅ 9.6V.
dt t=9.6
Substituting into the Euler’s formula, we obtain
d tV
9.6V ≈ 9.8V − 0.2 ⋅ = 126.68 − 0.2 ⋅ ( −612 + 0.06 ⋅ 9.6V ) = 250.88 − 0.012 ⋅ 9.6V.
dt t=9.6
This results in
250.88
9.6V ≈ ≈ 247.91.
1.012
Answer B.

November 2012 Course MLC Examination, Problem No. 7

You are calculating asset shares for a universal life insurance policy with a death benefit
of 1000 on (x) with death benefits payable at the end of the year of death.
You are given:
(i) The account value at the end of year 4 is 30.
(ii) The asset share at the end of year 4 is 20.
(iii) At the beginning of year 5:
a. A premium of 20 is paid.
b. Annual cost of insurance charges of 2 and annual expense charges of 7 are deducted
from the account value.
(iv) At the beginning of year 5, the insurer incurs expenses of 2.
(v) All withdrawals occur at the end of the policy year; the withdrawal benefit is the
account value less a surrender charge of 20.
(d ) (w)
(vi) qx+4 = 0.001 and qx+4 = 0.050 are the probabilities of death and withdrawal,
respectively.
(vii) The annual interest rate for asset shares is 0.08; the annual interest rate credited to
the universal life insurance policy is 0.06.
Calculate the asset share at the end of year 5.

A. 39 B. 40 C. 41 D. 42 E. 43

Solution.
The account value (a.k.a., reserve) at the end of year 5 is

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
 ⎛ ⎞
⎜ ⎟
⎜ 30
 + 20
 − 9 ⎟ ⋅ 1.06  ≈ 43.46.
⎜ Account value at Premium Cost of insurance of 2 ⎟ Accumulated at
⎝ the end of year 4 ⎠ credited
plus annual expense the interest rate
charge of 7 (i.e., 6%)

The surrender value at the end of year 5 is therefore this account value of 43.46 reduced
by surrender charge of 20, i.e., 43.46 – 20 = 23.46. The asset share at the end of year 5 is
⎛ AS4 ⎛ Premium Expenses incurred ⎞ ⎞ at asset share rate
Accumulated Expected payout
    
Expected death benefit payout
 
at withdrawal
⎜ 20 + ⎜ 20 − 2 ⎟ ⎟ ⋅ 1.08 − 0.001⋅1000 − 0.05 ⋅ 23.46
⎜ ⎜ ⎟⎟
⎜⎝ ⎜⎝ ⎟⎠ ⎟⎠
≈ 40.96.
1− 0.001−
 0.05
Probability of policy continuing

Answer C.

November 2012 Course MLC Examination, Problem No. 8

For a universal life insurance policy with a death benefit of 50,000 plus the account value,
you are given:
(i)
Policy Year Monthly Percent of Monthly Monthly Surrender
Premium Premium Cost of Expense Charge
Charge Insurance Charge
Rate per
1000
1 300 W% 2 10 500
2 300 15% 3 10 125
(ii) The credited interest rate is i ( ) = 0.054.
12

(iii) The cash surrender value at the end of month 11 is 1200.00.

(iv) The cash surrender value at the end of month 13 is 1802.94.
Calculate W%, the percent of premium charge in policy year 1.

A. 25% B. 30% C. 35% D. 40% E. 45%

Solution.
Let us write CSVk for the cash surrender value at time k, with time counted in months,
and SCk for the surrender charge at time k. Let be COI k be the cost of insurance for
month k. Since i (12 ) = 0.054, the effective monthly interest rate is
i (12 ) 0.054
j= = = 0.0045 = 0.45%.
12 12
Note that the cash surrender value equals the account value (i.e., reserve) minus the
surrender charge. We are given that CSV13 = 1802.94. Based on this,
1802.94 = CSV13 = AV13 − SC13 = AV13 − 125,
so that

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
 AV13 = 1802.94 + 125 = 1927.94.
Similarly,
AV11 = CSV11 + SC11 = 1200 + 500 = 1700.
Now we use the recursive formula for the account value (reserve) for universal life with
increasing total benefit and fixed ADB
( )
AVt−1 + Gt (1− rt ) − et (1+ it ) = qx+t ⋅ ( B + AVt+1 ) + px+t ⋅ AVt = qx+t ⋅ B + AVt .
The cost of insurance in this formula is COI t = qx+t ⋅ B, so that
( )
AVt = AVt−1 + Gt (1− rt ) − et (1+ it ) − COI t .
In this case
( )
AV13 = AV12 + G13 (1− r13 ) − e13 (1+ i13 ) − COI13 ,
AV12 = ( AV 11
+ G12 (1− r12 ) − e12 )(1+ i ) − COI
12 12
.
Substituting known values (note that the cost of insurance figures are given per thousand),
we obtain
(
1927.94 = AV12 + 300 (1− 0.15) − 10 ⋅1.0045 − 50 ⋅3, )
(
AV12 = 1700 + 300 (1− W ) − 10 ⋅1.0045 − 50 ⋅ 2. )
From the first equation
1927.94 + 50 ⋅3
AV12 = + 10 − 300 (1− 0.15) ≈ 1823.63116,
1.0045
and substituting this into the second equation, we obtain
1823.63116 + 50 ⋅ 2
− 1700 + 10
W ≈ 1− 1.0045 ≈ 0.25.
300
Answer A.

November 2012 Course MLC Examination, Problem No. 9

You are given the following about a universal life insurance policy on (60):
(i) The death benefit equals the account value plus 200,000.
(ii)
Age x Annual Premium Annual Cost of Annual Expense
Insurance Rate per Charges
1000
60 5000 5.40 100
61 5000 6.00 100
(iii) Interest is credited at 6%.
(iv) Surrender value equals 93% of account value during the first two years. Surrenders
occur at the ends of policy years.
(v) Surrenders are 6% per year of those who survive.
(vi) Mortality rates are 1000q60 = 3.40 and 1000q61 = 3.80.
(vii) i = 7%.

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
Calculate the present value at issue of the insurer’s expected surrender benefits paid in
the second year.

A. 380 B. 390 C. 400 D. 410 E. 420

Solution.
The account value at time 0, just before the first premium is paid is zero. Then, since
death benefit equals fixed ADB plus account value,
( )
AV1 = AV0 + G1 (1− r1 ) − e1 (1+ i1 ) − q60 B = ( 0 + 5000 ⋅1− 100 ) ⋅1.06 − 200 ⋅5.40 = 4114.
Following into the second year,
(
AV2 = AV1 + G2 (1− r2 ) − e2 (1+ i2 ) − q61 B = )
= ( 4114 + 5000 ⋅1− 100 ) ⋅1.06 − 200 ⋅6.00 ≈ 8354.84.
If a policy is surrendered in year 2 (and for a policy in existence at the end of year 1 this
happens with probability 0.06), then it was not surrendered in year 1 (and for a policy
issued at time 0 this happens with probability 1 – 0.06 = 0.94), so that the present value at
time 0 of the expected surrender benefits in year 2 is
 ⋅ ( 1− 0.06 ) ⋅ (1− 0.0034 ) ⋅ (1− 0.0038) ⋅ 1.07 −2
8354.84

   ⋅ 0.93
 ⋅ 0.06     Present value  ≈
Account value Adjusted for Fraction that
available for surrenders surrender charge surrenders in Fraction that did 1−q60 1−q61 factor
year 2 not surrender
in year 1

≈ 380.01.
Answer A.

November 2012 Course MLC Examination, Problem No. 10

For a special 3-year term life insurance policy on (x) and (y) with dependent future
lifetimes, you are given:
(i) A death benefit of 100,000 is paid at the end of the year of death if both (x) and (y) die
within the same year. No death benefits are payable otherwise.
(ii) px+k = 0.84366, k = 0, 1, 2.
(iii) py+k = 0.86936, k = 0, 1, 2.
(iv) px+k:y+k = 0.77105, k = 0, 1, 2.
(v)
Maturity (in years) Annual Effective Spot Rate
1 3%
2 8%
3 10%
Calculate the expected present value of the death benefit.

A. 9,500 B. 10,100 C. 12,100 D. 12,500 E. 14,100

Solution.
The death benefit of $100,000 is paid at the end of year 1 if both (x) and (y) die during
the first year, or it is paid at the end of year 2 if both (x) and (y) are alive at time 1 and
Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
both die during the second year, or it is paid at the end of year 3 if both (x) and (y) are
alive at time 2 and both die during the third year. Let us note the following, true for k = 0,
1, or 2:
(
qx+k:y+k = 1− px+k:y+k = 1− px+k + py+k − px+k:y+k =
Poohsticks
)
= 1− ( 0.84366 + 0.86936 − 0.77105 ) = 0.05803.
Also,
px:y = px:y ⋅ px+1:y+1 = 0.77105 ⋅ 0.77105 = 0.77105 2.
2

The expected present value we are looking for is therefore

−1 −2
⋅1.03
100,000  ⋅ qx:y

+ 100,000
   ⋅1.08
  px:y qx+1:y+1 +
 
Present value of death benefit Present value of death benefit
Probability that Probability that
payment made at time 1 both ( x ) and ( y ) payment made at time 2
both ( x ) and ( y )
die during first year die during second year
−3
+ 100,000
⋅1.10   2 p x:y q x+2:y+2 =
Present value of death benefit

payment made at time 2 Probability that
both ( x ) and ( y )
die during second year

⎛ 0.05803 0.77105 ⋅ 0.05803 0.77105 2 ⋅ 0.05803 ⎞

= 100,000 ⋅ ⎜ + + ⎟⎠ ≈ 12,062.09.
⎝ 1.03 1.08 2 1.10 3
Answer C.

November 2012 Course MLC Examination, Problem No. 11

For a whole life insurance of 1000 on (70), you are given:
(i) Death benefits are payable at the end of the year of death.
(ii) Mortality follows the Illustrative Life Table.
(iii)
Maturity (in years) Annual Effective Spot Rate
1 1.6%
2 2.6%
(iv) For the year starting at time k − 1 and ending at time k, k = 3, 4, 5, ... , the one-year
forward rate is 6%.
Calculate the expected present value of the death benefits.

A. 520 B. 530 C. 550 D. 570 E. 600

Solution.
It seems like it will be a lot of calculations to go from age 70 to the limiting age if we do
every year calculation separately. But the Illustrative Life Table of course gives us
actuarial present values of whole life insurance death benefits, except that it does so for
the valuation interest rate of 6%. Here, the spot rates for the first two years are well
below 6%, but beyond that all one-year forward rates are 6% (so that all rates for all
periods starting at time 2 or later are also 6%). Thus starting from age 72, we can
determine actuarial present values from the Illustrative Life Table. We have

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
 ⎛ q q p ⋅p ⎞
1000A70 = 1000 ⎜ 70 + p70 ⋅ 71 2 + 70 71 ⋅ A72 ⎟ ,
⎝ 1.016 1.026 1.026 2
⎠
where all values on the right-hand side can now be looked up in the Illustrative Life
Table. From the table: q70 = 0.03318, q71 = 0.03626, A72 = 0.54560, and therefore
p70 = 0.96682, p71 = 0.96374, so that
⎛ 0.03318 0.03626 0.96682 ⋅ 0.96374 ⎞
1000A70 = 1000 ⎜ + 0.96682 ⋅ + ⋅ 0.54560 ⎟ ≈
⎝ 1.016 1.026 2
1.026 2
⎠
≈ 548.89.
Answer C.

November 2012 Course MLC Examination, Problem No. 12

A party of scientists arrives at a remote island. Unknown to them, a hungry tyrannosaur
lives on the island. You model the future lifetimes of the scientists as a three-state model,
where:
State 0: no scientists have been eaten.
State 1: exactly one scientist has been eaten.
State 2: at least two scientists have been eaten.
You are given:
(i) Until a scientist is eaten, they suspect nothing, so µt01 = 0.01+ 0.02 ⋅ 2 t , t > 0.
(ii) Until a scientist is eaten, they suspect nothing, so the tyrannosaur may come across
two together and eat both, with µt02 = 0.5 µt01 , t > 0.
(iii) After the first death, scientists become much more careful, so µt12 = 0.01, t > 0.
Calculate the probability that no scientists are eaten in the first year.

A. 0.928 B. 0.943 C. 0.951 D. 0.956 E. 0.962

Solution.
Note that because it is impossible to return to state 0, the probability we are looking for,
00 00
1 p0 is the same as 1 p0 . We calculate
1 1 1
− ∫ ( µt + µt02 dt ) − ∫ ( µt )
+0.5 µt01 dt ∫ ( )
− 1.5 0.01+0.02⋅2t dt
01 01

1 p0 = 1 p0 = e =e =e =
00 00 0 0 0

t=1
⎛ 0.03 t ⎞ ⎛ 0.06 0.03 ⎞ 0.03
−⎜ 0.015t+ ⋅2 ⎟ −⎜ 0.015+ −0− ⎟ −0.015−
⎝ ln 2 ⎠ t=0
=e =e ⎝ ln 2 ln 2 ⎠
=e ln 2
≈ 0.94338496.
We could also note that
( ) (
µt01 + µt02 = 0.01+ 0.02 ⋅ 2 t + 0.5 0.01+ 0.02 ⋅ 2 t = 0.015 + 0.03⋅ 2 t , )
and this is the Makeham’s Law with A = 0.015, B = 0.03, c = 2. Recall that under
( ) , where g = e− ln c and s = e− A . Here, g = e− ln 2 ,
B 0.03
c x c n −1
Makeham’s Law, n px = s n g

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explicit permission of the copyright owner.
 (
2 x ⋅ 2 n −1 )
⎛ − 0.03 ⎞
s = e−0.015 , and n px = e−0.015n ⋅ ⎜ e ln 2 ⎟ , so that the quantity sought, i.e., 1 p000 = 1 p000 ,
⎝ ⎠
is the same as 1 p0 under this Makeham model, i.e.,
−0.03
(21−1)
−0.015⋅1
1 p0 = 1 p0 = e ⋅ e ln 2 ≈ 0.94338496.
00 00

Answer B.

November 2012 Course MLC Examination, Problem No. 13

You are given:
(i) The following excerpt from a triple decrement table:
x l (τ ) x d (1) d (2) xd x( 3) x
50 100,000 490 8,045 1,100
51 90,365 -- 8,200 --
52 80,000 -- -- --
(ii) All decrements are uniformly distributed over each year of age in the triple decrement
table.
(iii) q′x( 3) is the same for all ages.
′(1) .
Calculate 10,000 q51

A. 130 B. 133 C. 136 D. 138 E. 141

Solution.
Recall the key formula for UDD over each year of age in the multiple decrement table:
q(x j )
p′x ( j)
( )
= px (τ ) q(xτ ) .
We have
(τ )
(τ ) l51 90, 365
p50 = (τ ) = = 0.90365,
l50 100,000
( 3)
( 3) d50 1,100
q50 = (τ ) = = 0.011,
l50 100,000
(τ ) (τ )
q50 = 1− p50 = 1− 0.90365 = 0.09635.
We calculate therefore
( )
3

( )
q50 0.011
( 3) ( 3) ( 3) (τ ) ( )
′ = q50
′ = 1− p50
′ = 1− p50 = 1− 0.90365 0.09635 ≈ 0.0115.
τ
q51 q50

′( 3) ≈ 0.9885 and
This means that p51
( )
3
( )
3 q51

( ) ⎛ 80,000 ⎞
q51 80,000
′( 3) = p51
(τ ) ( )
0.9855 ≈ p51 =⎜
τ 1−

⎝ 90, 365 ⎟⎠
q51 90,365 .

From this we calculate

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
 ⎛ 80,000 ⎞
⎜ 1− ⎟ ⋅ ln 0.9855
( 3) ⎝ 90, 365 ⎠
q51 ≈ ≈ 0.010889815.
⎛ 80,000 ⎞
ln ⎜
⎝ 90, 365 ⎟⎠
This means that
( 3) ( 3) (τ )
d51 = q51 ⋅l51 ≈ 0.010889815 ⋅ 90, 365 ≈ 984.0581,
(1)
d51 (τ )
= d51 (2)
− d51 ( 3)
− d51 (τ )
= l50 ( (τ )
− l51 ) (2)
− d51 ( 3)
− d51 ≈
≈ ( 90, 365 − 80,000 ) − 8200 − 984 = 1,181,
(1)
(1) d51 1,181
q51 = (τ ) ≈ ≈ 0.01306922,
l51 90, 365
and we also have
(τ ) 80,000
p51 = ≈ 0.88529851,
90, 365
(τ ) (τ ) 80,000
q51 = 1− p51 = 1− ≈ 0.11470149.
90, 365
We therefore conclude that
()
1

( )
q51 0.01306922
(1) (τ ) ( )
′ = p51 ≈ 0.885298510.11470149 ≈ 0.98621441.
τ
p51 q51

The quantity sought is

( )
′(1) ≈ 10,000 (1− 0.98621441) ≈ 138.
′(1) = 10,000 1− p51
10,000 q51
Answer D.

November 2012 Course MLC Examination, Problem No. 14

For a special whole life insurance policy issued on (40), you are given:
(i) Death benefits are payable at the end of the year of death.
(ii) The amount of benefit is 2 if death occurs within the first 20 years and is 1 thereafter.
(iii) Z is the present value random variable for the payments under this insurance.
(iv) i = 0.03.
(v)
x Ax 20 E x
40 0.36987 0.51276
60 0.62567 0.17878
( )
(vi) E Z 2 = 0.24954.
Calculate the standard deviation of Z.

A. 0.27 B. 0.32 C. 0.37 D. 0.42 E. 0.47

Solution.
The present value of death benefit random variable is

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explicit permission of the copyright owner.
 ⎧⎪ 2v K +1 , K < 20,
Z = ⎨ K +1
⎩⎪ v , K ≥ 20.
Therefore,
E ( Z ) = 2A40 − 20 E40 ⋅ A60 = 2 ⋅ 0.36987 − 0.51276 ⋅ 0.62567 ≈ 0.41892.
We conclude that the variance of Z is
Var ( Z ) = E ( Z 2 ) − ( E ( Z )) ≈ 0.24954 − 0.41892 2 ≈ 0.07405,
2

and the standard deviation of Z is

σ Z = Var ( Z ) ≈ 0.07405 ≈ 0.27212.
Answer A.

November 2012 Course MLC Examination, Problem No. 15

For a special 2-year term insurance policy on (x), you are given:
(i) Death benefits are payable at the end of the half-year of death.
(ii) The amount of the death benefit is 300,000 for the first half-year and increases by
30,000 per half-year thereafter.
(iii) qx = 0.16 and qx+1 = 0.23.
(iv) i ( ) = 0.18.
2

(v) Deaths are assumed to follow a constant force of mortality between integral ages.
(vi) Z is the present value random variable for this insurance.
Calculate Pr(Z > 277,000).

A. 0.08 B. 0.11 C. 0.14 D. 0.18 E. 0.21

Solution.
Note that the effective half a year interest rate is 9%. Also, under the constant force of
mortality between integral ages assumption, if we write µ x for the constant force
between ages x and x + 1, and µ x+1 for the constant force between ages x +1 and x + 2,
then
−0.5 µ x
0.5 q x = 1− 0.5 p x = 1− e = 1− px0.5 = 1− 1− 0.16 ≈ 0.083485,
0.5 qx+0.5 = 1− 0.5 px+0.5 = 1− px0.5 = 1− 1− 0.16 ≈ 0.083485,
0.5 qx+1 = 1− 0.5 px+1 = 1− e−0.5 µx+1 = 1− px+1
0.5
= 1− 1− 0.23 ≈ 0.122504,
qx+1.5 = 1− 0.5 px+1.5 = 1− e−0.5 µx+1 = 1− px+1
0.5
0.5
= 1− 1− 0.23 ≈ 0.122504.
Based on the above, probabilities of the insured dying in each of the four half-years are:
q = 0.5 qx ≈ 0.083485,
0 0.5 x

0.5 0.5
qx = 0.5 px ⋅ 0.5 qx+0.5 ≈ 0.916515 ⋅ 0.083485 ≈ 0.076515,

1 0.5
qx = 1 px ⋅ 0.5 qx+1 ≈ (1− 0.16 ) ⋅ 0.122504 ≈ 0.102903,
qx = 1 px ⋅ 0.5 px+1 ⋅ 0.5 qx+1.5 ≈ (1− 0.16 ) ⋅ 0.877496 ⋅ 0.122504 ≈ 0.090297.
1 0.5
The random present value of the death benefit is

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explicit permission of the copyright owner.
 ⎧ 300,000
⎪ ≈ 275,229.36 with probability 0.5 qx ≈ 0.083485,
⎪ 1.9
⎪ 330,000
⎪⎪ 1.9 2 ≈ 277, 754.40 with probability 0.5 0.5 qx ≈ 0.076515,
Z=⎨
⎪ 360,000 ≈ 277,986.05 with probability q ≈ 0.102903,
⎪ 1.9 3 1 0.5 x

⎪ 390,000
⎪ 4
≈ 276,285.83 with probability 1 0.5 qx ≈ 0.090297.
⎪⎩ 1.9
Also, Z = 0 otherwise. We conclude that
Pr ( Z > 277,000 ) = 0.5 0.5 qx + 1 0.5 qx ≈ 0.076515 + 0.102903 ≈ 0.179418.
Answer D.

November
You are evaluating 2012 Course
the financial strengthMLC Examination,
of companies Problem
based on No. 16 multiple
the following
You are evaluating the financial strength of companies based on the following multiple
state model:
state model:

State 0 State 1
Solvent Bankrupt

State 2
Liquidated

For each company, you assume the following constant transition intensities:
For each company,
(i) µyou
01
= assume
0.02. the following constant transition intensities:
µ 01 µ = 0.06.
10
(i) (ii) = 0.02
(iii) µ = 0.10.
12

(ii) µ 10 = 0.06
Using
1
Kolmogorov’s forward equations with step h = , calculate the probability that a
2
(iii) company
µ = 0.10
12 currently Bankrupt will be Solvent at the end of one year.

A. 0.048 B. 0.051 C. 0.054 D. 0.057 E. 0.060

Using Kolmogorov’s forward equations with step h = 1/ 2, calculate the probability that a
Solution.
company currently Bankrupt
We have, usingwill
thebe Solventprocess
Markov at the end of one year.
notation:
λ01 ( t ) = λ01 = µ 01 = 0.02,
(A) 0.048 λ02 ( t ) = λ02 = µ 02 = 0.00,
λ0 ( t ) = λ0 = λ01 + λ02 = 0.02 + 0.00 = 0.02,
(B) 0.051
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explicit permission of the copyright owner.
(C) 0.054

(D) 0.057
 λ10 ( t ) = λ10 = µ10 = 0.06,
λ12 ( t ) = λ12 = µ12 = 0.10,
λ1 ( t ) = λ1 = λ10 + λ12 = 0.06 + 0.10 = 0.16,
λ20 ( t ) = λ20 = µ 20 = 0.00,
λ21 ( t ) = λ21 = µ 21 = 0.00,
λ2 ( t ) = λ2 = λ20 + λ21 = 0 + 0 = 0.
This tells us that the generator matrix is:
⎡ − λ (t + t ) λ (t + r ) λ (t + r ) ⎤
⎢ 0 01 02
⎥ ⎡ −0.02 0.02 0 ⎤
Qt+r ⎢ λ10 ( t + r ) − λ1 ( t + t ) λ12 ( t + r ) ⎥ = 0.06 −0.16 0.1 ⎥ . ⎢
⎢ ⎥ ⎢ 0 ⎥
λ
⎢⎣ 20 ( t + r ) λ 21 ( t + r ) − λ 2 ( t + t ) ⎥⎦ ⎢
⎣ 0 0 ⎥⎦

For
⎡ p(t ) p(t ) p(t ) ⎤
⎢ r 00 r 01 r 02 ⎥
r Pt =
⎢ r p10 (t )
r p11
(t ) (t ) ⎥ ,
r p12
⎢ ⎥
(t ) (t ) (t )
⎢ r p20 r p21 r p22
⎥
⎣ ⎦
the resulting Kolmogorov Forward Equation, in matrix form, is
⎡ d (t ) d (t ) d (t )
⎤
⎡ p(t ) (t ) (t ) ⎤
⎢ r p00 r p01 r p02 ⎥
dr dr dr
d d ⎢⎢
r 00 r p01 r p02
⎥ ⎢⎢ ⎥
⎥
(t ) (t ) (t ) ⎥ = d (t ) d (t ) d (t )
r Pt = r p10 r p11 r p12 ⎢ r p10 r p11 r p12 ⎥=
dr dr ⎢ ⎥ ⎢ dr dr dr
⎢ r p20 (t ) (t ) (t )
⎥ ⎥
p p
⎣ r 21 r 22
⎦ ⎢ d p(t ) d p(t ) d p(t ) ⎥
⎢ dr r 20 dr r 21 dr r 22 ⎥
⎣ ⎦
⎡ (t )
p00 (t )
p01 (t ) ⎤
p02
⎢ r r r
⎥ ⎡ −0.02 0.02 0 ⎤
=⎢ (t ) (t ) (t ) ⎥ ⋅ ⎢ ⎥
p10 p11 r p12 ⎢ 0.06 −0.16 0.1 ⎥ =
⎢ r r
⎥
⎢ (t )
p20 (t )
p21 p (t )
⎥ ⎢⎣ 0 0 0 ⎥⎦
⎣ r r r 22
⎦
⎡ −0.02 p(t ) + 0.06 p(t ) 0.02 p(t ) − 0.16 p(t ) 0.1 p(t ) ⎤
⎢ r 00 r 01 r 00 r 01 r 01
⎥
= ⎢ −0.02 r p10 + 0.06 r p11 0.02 r p10 − 0.16 r p11 0.1 r p11
( t ) ( t ) ( t ) ( t ) (t ) ⎥ .
⎢ ⎥
(t ) (t ) (t ) (t ) (t )
⎢ −0.02 r p20 + 0.06 r p21 0.02 r p20 − 0.16 r p21 0.1 r p21 ⎥
⎣ ⎦
(0)
We are looking for an approximate value of the probability 1 p10 . We can actually remove
the superscript related to the starting point in time, because due to constant intensities of
(0)
transition, the starting time does not affect probabilities, so 1 p10 = 1 p10 , and similarly we
will drop the superscript for other probabilities. The equation
d (t ) (t ) (t )
r p10 = −0.02 r p10 + 0.06 r p11
dr

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
gives us this approximation
1 p10 − 0.5 p10
≈ −0.02 0.5 p10 + 0.06 0.5 p11 ,
0.5
or
1 p10 ≈ 0.99 0.5 p10 + 0.03 0.5 p11 .
Additionally
d (t ) (t ) (t ) d (t ) (t ) (t )
r p10 = −0.02 r p10 + 0.06 r p11 r p11 = 0.02 r p10 − 0.16 r p11
dr dr
give us approximations
0.5 p10 − 0 p10 0.5 p11 − 0 p11
≈ −0.02 0 p10 + 0.06 0 p11 , ≈ 0.02 0 p10 − 0.16 0 p11 ,
0.5 0.5
or
0.5 p10 ≈ 0.99 0 p10 + 0.03 0 p11 , 0.5 p11 ≈ 0.01 0 p10 + 0.92 0 p11 .
But 0 p10 = 0, 0 p11 = 1, so that
0.5 p10 ≈ 0.99 0 p10 + 0.03 0 p11 = 0.99 ⋅ 0 + 0.03⋅1 = 0.03,

0.5 p11 ≈ 0.01 0 p10 + 0.92 0 p11 = 0.01⋅ 0 + 0.92 ⋅1 = 0.92.

We conclude that
1 p10 ≈ 0.99 0.5 p10 + 0.03 0.5 p11 ≈ 0.99 ⋅ 0.03 + 0.03⋅ 0.92 ≈ 0.0573.
Answer D.

November 2012 Course MLC Examination, Problem No. 17

For a whole life insurance of 1000 with semi-annual premiums on (80), you are given:
(i) A gross premium of 60 is payable every 6 months starting at age 80.
(ii) Commissions of 10% are paid each time a premium is paid.
(iii) Death benefits are paid at the end of the quarter of death.
(iv) tV denotes the gross premium reserve at time t.
(v) 10.75V = 753.72.
(vi)
t l90+t
0 1000
0.25 898
0.50 800
0.75 706
(vii) i ( ) = 0.08.
4

Calculate 10.25V.

A. 680 B. 690 C. 700 D. 710 E. 730

Solution.
We can use the recursive reserve formula twice, in quarterly steps. Note that the effective
quarterly interest rate is 2%, and that when going from policy duration 10.25 to 10.75, we
only have a premium payment at policy duration 10.50. Thus
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explicit permission of the copyright owner.
 ( 10.25V + 0 ) ⋅1.02 = 0.25 q90.25 ⋅1000 + 0.25 p90.25 ⋅ 10.50V,
( V + 60 (1− 0.10 )) ⋅1.02 = q ⋅1000 + p
10.50 0.25 90.50 0.25 90.50 ⋅ 10.75V.
Now we substitute the following known data:
10.75V = 753.72,

0.25 d90.25 l −l 898 − 800 98

0.25 q90.25 = = 90.25 90.50 = = ,
l90.25 l90.25 898 898
l90.50 800
0.25 p90.25 = = ,
l90.25 898
0.25 d90.50 l −l 800 − 706 94
0.25 q90.50 = = 90.50 90.75 = = ,
l90.50 l90.50 800 800
l90.75 706
0.25 p90.50 = = ,
l90.50 800
we obtain
98 800
10.25V ⋅1.02 = ⋅1000 + ⋅ 10.50V,
898 898
94 706
( 10.50V + 54 ) ⋅1.02 = 800 ⋅1000 + 800 ⋅ 753.72.
From the second equation
94 706
⋅1000 + ⋅ 753.72
V = 800 800 − 54 ≈ 753.3117
10.50
1.02
Using this in the first equation, we obtain
98 800
⋅1000 + ⋅ 753.3117
V ≈ 898 898 ≈ 729.9984.
10.25
1.02
Answer E.

November 2012 Course MLC Examination, Problem No. 18

For a special fully discrete whole life insurance on (40), you are given:
(i) The death benefit is 1000 during the first 11 years and 5000 thereafter.
(ii) Expenses, payable at the beginning of the year, are 100 in year 1 and 10 in years 2
and later.
(iii) Π is the level annual premium, determined using the equivalence principle.
(iv) G = 1.02Π is the level annual gross premium.
(v) Mortality follows the Illustrative Life Table.
(vi) i = 0.06.
(vii) 11 E40 = 0.50330.
Calculate the gross premium reserve at the end of year 1 for this insurance.

A. −70 B. −60 C. −50 D. −40 E. −30

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
Solution.
We begin by finding Π. The actuarial present value of benefits at issue is
1000A40 + 4 ⋅ 11 E40 ⋅1000A51 = 161.32 + 4 ⋅ 0.50330 ⋅ 259.61 ≈ 683.9669.
The actuarial present value of expenses at issue is
100 + 10a40 = 100 + 10 ( a40 − 1) = 100 + 10 ⋅ (14.8166 − 1) = 238.17.
All the values used in calculations above came from the Illustrative Life Table. The
premium is paid as a life annuity due on (40), hence
683.97 + 238.17 683.97 + 238.17
Π≈ = ≈ 62.2365.
a40 14.8166
Therefore, G = 1.02Π ≈ 63.4812. If we calculated the reserve retrospectively, we would
obtain
G − 1000q40 ⋅1.06 −1 − 100 63.4812 − 2.78 ⋅1.06 −1 − 100
≈ ≈ −41.6056.
1 E 40 (1− 0.00278 ) ⋅1.06 −1
But prospectively, we obtain
(
1000A41 + 4 ⋅ 10 E41 ⋅1000A51 ) + 10
   a41 − 63.4812

a41 =
Actuarial present value of future benefits Actuarial present Actuarial present
value of future value of future
expenses gross premiums

= 168.69 + 4 ⋅ 0.53499 ⋅ 259.61+ 10 ⋅14.6864 − 63.48 ⋅14.6864 ≈ −61.2012.

The difference of these two is
( −41.6056 ) − ( −61.2012 ) ≈ 19.60.
Note that the actuarial present value at policy inception of the profit portion of the gross
premium is
0.02 ⋅Π ⋅ a40 ≈ 0.02 ⋅ 62.2365 ⋅14.8166 ≈ 18.4427.
Its actuarial accumulated value at policy duration 1 is approximately
18.4427 18.4427
= ≈ 19.60.
1 E 40 (1− 0.00278 ) ⋅1.06 −1
Let us write the actuarial equivalence for gross premium valuation at policy inception:
Actuarial Present Value of Future Gross Premiums =
= Actuarial Present Value of Future Benefits and Expenses +
+ Actuarial Present Value of Future Profits.
Note that at policy inception, the actuarial present value of future benefits and expenses
minus the actuarial present value of future gross premiums equals the opposite (i.e.,
minus) of the actuarial present value of future profits. Now consider a policy duration k,
where k is an integer. Let us write APV for actuarial present value, and AAV for actuarial
accumulated value. We have at policy inception:
APV (Future Gross Premiums) =
= APV (Future Gross Premiums up to time k) +
+ APV (Future Gross Premiums from time k on) =
APV (Future Benefits and Expenses) + APV (Future Profits) =
= APV (Future Benefits and Expenses up to time k) +
+ APV (Future Benefits and Expenses from time k on) +
+ APV (Future Profits).
Now we accumulate all of these amounts to policy duration k

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explicit permission of the copyright owner.
 AAV (Past Gross Premiums up to time k) +
+ APV (Future Gross Premiums from time k on) =
= AAV (Past Benefits and Expenses up to time k) +
+ APV (Future Benefits and Expenses from time k on) +
+ Actuarial Value (Past and Future Profits).
Therefore, at policy duration k,
Retrospective Reserve =
AAV (Past Gross Premiums) – AAV (Past Benefits and Expenses) =
= APV (Future Benefits and Expenses) – APV (Future Gross Premiums) +
+ Actuarial Value (Past and Future Profits) =
= Prospective Reserve + Actuarial Value (Past and Future Profits).
If you recall that the purpose of the reserve is to provide funds for benefits and expenses
payment that are not paid by remaining premiums, you now should be able to clearly see
that the prospective reserve calculation is the correct one, and if you do the calculation
retrospectively, you must subtraction the actuarial value of all profits at the moment of
calculation from the retrospective calculation result. In this problem, the reserve at policy
duration 1 is:
–61.20 = –41.60 – 19.60.
Interestingly, –40 was one of the answer choices, nice little trap waiting for the
candidates taking the exam. The correct answer choice is –60, the one closest to –61.20.
Answer B.

November 2012 Course MLC Examination, Problem No. 19

For whole life annuities-due of 15 per month on each of 200 lives age 62 with
independent future lifetimes, you are given:
(i) i = 0.06.
(12 ) (12 )
(ii) A62 = 0.4075 and 2 A62 = 0.2105.
(iii) Π is the single premium to be paid by each of the 200 lives.
(iv) S is the present value random variable at time 0 of total payments made to the 200
lives.
Using the normal approximation, calculate Π such that Pr(200 Π > S) = 0.90.

A. 1850 B. 1860 C. 1870 D. 1880 E. 1890

Solution.
Let X1 , X2 , …, X 200 , be the random present values of life annuities-due considered.
These are independent identically distributed random variables, and
S = X1 + X2 + ...+X200 .
This implies that S is approximately normal and
E ( S ) = E ( X1 + X2 + ...+X200 ) = 200E ( X1 )
as well as
Var ( S ) = Var ( X1 + X2 + ...+X200 ) = 200Var ( X1 ) .
⎛ − ⎞
1
Recall that d (12 ) = 12 ⎜ 1− (1+ i ) 12 ⎟ . We have
⎝ ⎠
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explicit permission of the copyright owner.
 (12 )
1− A62 1− 0.4075
E ( X1 ) = 15 ⋅12 ⋅ a62
(12 )
= 15 ⋅12 ⋅ = 15 ⋅12 ⋅ ≈ 1834.7545,
d (12 ) ⎛ − ⎞
1
12 ⎜ 1− 1.06 12 ⎟
⎝ ⎠
and
( )
2
(12 ) (12 )
2
A62 − A62 0.2105 − 0.4075 2
Var ( X1 ) = (15 ⋅12 ) ⋅
2
= 180 ⋅
2
≈ 426,176.9086.
(d( ) )
2 2
12
⎛ ⎛ − ⎞⎞
1

⎜ 12 ⎜⎝ 1− 1.06 ⎟⎠ ⎟
12

⎝ ⎠
Based on this,
E ( S ) = 200E ( X1 ) ≈ 200 ⋅1834.7545 ≈ 366,936.12,
and
Var ( S ) = 200Var ( X1 ) ≈ 200 ⋅ 426,176.9086 ≈ 85,235, 381.71.
We have
⎛ 200Π − E ( S ) S − E ( S ) ⎞
0.90 = Pr ( 200Π > S ) = Pr ⎜ > ⎟.
⎝ Var ( S ) Var ( S ) ⎠
S − E (S ) 200Π − E ( S )
Since is approximately standard normal, must be the 90-th
Var ( S ) Var ( S )
percentile of the standard normal distribution, i.e., 1.282. This gives the equation
200Π − E ( S ) 200Π − 366,936.12
1.282 = = ,
Var ( S ) 85,235, 381.71
resulting in
366,936.12 + 1.282 ⋅ 85,235, 381.71
Π= ≈ 1893.8597.
200
Answer E.

November 2012 Course MLC Examination, Problem No. 20

Stuart, now age 65, purchased a 20-year deferred whole life annuity-due of 1 per year at
age 45. You are given:
(i) Equal annual premiums, determined using the equivalence principle, were paid at the
beginning of each year during the deferral period.
(ii) Mortality at ages 65 and older follows the Illustrative Life Table.
(iii) i = 0.06.
(iv) Y is the present value random variable at age 65 for Stuart’s annuity benefits.
Calculate the probability that Y is less than the actuarial accumulated value of Stuart’s
premiums.

A. 0.40 B. 0.42 C. 0.44 D. 0.46 E. 0.48

Solution.

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
Let us write P for the annual premium that Stuart has paid. Since it was calculated using
the equivalence principle, we have
E ⋅ a
P = 20 45 65 .
a45:20
Let us write K 65 for the curtate future lifetime of (65) (we could also write K(65), but we
need to get used to the new notation, so this is a good time to practice). The probability
we are looking for is (note that a65 = 9.8969 from the Illustrative Life Table)
⎛ P
a ⎞ ⎛ E45 ⋅ a65 a45:20 ⎞
Pr ⎜ 45:20 > aK +1 ⎟ = Pr ⎜ 20
⋅ > aK +1 ⎟ =
⎝ 20 E45 65
⎠ ⎝ a45:20 20 E 45
65
⎠

(
= Pr a65 > aK
65 +1
) = Pr (9.8969 > a ).K 65 +1

If we use BA II Plus Pro, set BGN mode by pushing 2ND, BGN if BGN is not displayed,
and enter 0 FV, –1 PMT, 9.8969 PV, 6 I/Y, CPT N, we obtain 14.0973895. This means
that the probability sought is
Pr ( K 65 + 1 < 14.0973895 ) = Pr ( K 65 + 1 ≤ 14 ) = 1− 14 p65 =
l79 4225163
= 1−
= 1− ≈ 0.43917133.
l65 7533964
For a moment, when you see the formula for P you might worry about working with
mortality from before age 65, when we are told that mortality follows the Illustrative Life
Table only from age 65 on, but as you can see, items related to mortality from before age
65 cancel nicely in the work involved in finding the probability sought.
Answer C.

November 2012 Course MLC Examination, Problem No. 21

For a fully continuous whole life insurance issued on (x) and (y), you are given:
(i) The death benefit of 100 is payable at the second death.
(ii) Premiums are payable until the first death.
(iii) The future lifetimes of (x) and (y) are dependent.
1 3
(iv) t pxy = e−0.01t + e−0.03t , t ≥ 0.
4 4
−0.01t
(v) t px = e , t ≥ 0.
−0.02t
(vi) t py = e , t ≥ 0.
(vii) δ = 0.05.
Calculate the annual benefit premium rate for this insurance.

A. 0.96 B. 1.43 C. 1.91 D. 2.39 E. 2.86

Solution.
Note that the future lifetime of (x) is ruled by constant force of mortality of 1%, and the
future lifetime of (y) is rules by constant force of mortality of 2%. Let us write P for the
annual benefit premium rate sought. We have

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
 100Ax:y
P= .
ax:y
Also,
+∞
⎛1 3 ⎞
∫e
−0.05t
ax:y = ⋅ ⎜ e−0.01t + e−0.03t ⎟ dt =
0
⎝4 4 ⎠
+∞ +∞
1 3 1 1 3 1
∫ e dt + ∫e
−0.06t −0.08t
= dt = ⋅ + ⋅ ≈ 13.5416667,
4 0
4 0
4 0.06 4 0.08
Ax:y =
Poohsticks
Ax + Ay − Ax:y = Ax + Ay − 1− δ ax:y = ( )
0.01 0.02
= + − (1− 0.05 ⋅13.5416667 ) ≈ 0.12946429.
0.01+ 0.05 0.02 + 0.05
Therefore,
100Ax:y 100 ⋅ 0.12946429
P= ≈ ≈ 0.95604396.
ax:y 13.5416667
Answer A.

November 2012 Course MLC Examination, Problem No. 22

You are given the following information about a special fully discrete 2-payment, 2-year
term insurance on (80):
(i) Mortality follows the Illustrative Life Table.
(ii) i = 0.0175.
(iii) The death benefit is 1000 plus a return of all premiums paid without interest.
(iv) Level premiums are calculated using the equivalence principle.
Calculate the benefit premium for this special insurance.

A. 82 B. 86 C. 90 D. 94 E. 98

Solution.
Let us write P for the level annual premium sought. Based on the equivalence principle,
we write
+ P ⋅ ( IA )80:2 ,
1
a80:2 = 1000A80:2
P 1

so that
1
1000A80:2
P= .
a80:2 − ( IA )80:2
1

We calculate
1− q80 1− 0.0803
a80:2 = 1+ vp80 = 1+ = 1+ ≈ 1.90388206,
1.0175 1.0175

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
 ⎛ q p q ⎞
1
1000A80:2 = 1000 ⎜ 80 + 80 81 2 ⎟ =
⎝ 1.0175 1.0175 ⎠
⎛ 0.0803 0.9197 ⋅ 0.08764 ⎞
= 1000 ⎜ + ⎟⎠ ≈ 156.772702,
⎝ 1.0175 1.0175 2
and
q80 2 p80 q81 0.0803 2 ⋅ 0.9197 ⋅ 0.08764
( IA )180:2 = + = + ≈ 0.23462648.
1.0175 1.0175 2 1.0175 1.0175 2
Therefore,
1
1000A80:2 156.772702
P= ≈ ≈ 93.9177342.
a80:2 − ( IA )80:2 1.90388206 − 0.23462648
1

Answer D.

November 2012 Course MLC Examination, Problem No. 23

A life insurance company issues fully discrete 20-year term insurance policies of 1000.
You are given:
(i) Expected mortality follows the Illustrative Life Table.
(ii) Death is the only decrement.
(iii) 3V, the reserve at the end of year 3, is 12.18.
On January 1, 2009, the company sold 10,000 of these policies to lives all aged 45. You
are also given:
(i) During the first two years, there were 30 actual deaths from these policies.
(ii) During 2011, there were 18 actual deaths from these policies.
Calculate the company’s gain due to mortality for the year 2011.

A. 28,100 B. 28,300 C. 28,500 D. 28,700 E. 28,900

Solution.
The mortality gain equals
( Expected deaths − Actual deaths ) ⋅ Net Amount at Risk.
In this case, the net amount at risk is 1000 – 3V = 1000 – 12.18 = 987.82. Expected
deaths are q47 from the Illustrative Life Table, i.e., 0.00466, times the number of alive
policyholders at the beginning of 2011, which is 10,000 – 30 = 9970, which gives
0.00466 ⋅ 9970 ≈ 46.4602.
The actual number of deaths in 2011 is 18. Hence, the mortality gain equals
( 46.4602 − 18 ) ⋅ 987.82 ≈ 28,113.5548.
Answer A.

November 2012 Course MLC Examination, Problem No. 24

An insurance company is designing a special 2-year term insurance. Transitions are
modeled as a four-state homogeneous Markov model with states:

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
 (H) Healthy
(Z) infected with virus “Zebra”
(L) infected with virus “Lion”
(D) Death
The annual transition probability matrix is given by:
H Z L D
H 0.90 0.05 0.04 0.01
Z 0.10 0.20 0.00 0.70
L 0.20 0.00 0.20 0.60
D 0.00 0.00 0.00 1.00
You are given:
(i) Transitions occur only once per year.
(ii) 250 is payable at the end of the year in which you become infected with either virus.
(iii) For lives infected with either virus, 1000 is payable at the end of the year of death.
(iv) The policy is issued only on healthy lives.
(v) i = 0.05.
Calculate the actuarial present value of the benefits at policy issue.

A. 66 B. 75 C. 84 D. 93 E. 102

Solution.
We list all possible cases of payouts, with their probabilities and actuarial present values
(calculated as products of probabilities and discounted benefits)
Possible Probability Discounted Actuarial
transition benefit present
value
250
H à Z 0.05 11.9047619
1.05
250
H à L 0.04 9.52380952
1.05
1000
H à Z à D 0.05 ⋅ 0.7 31.7460317
1.05 2
1000
H à L à D 0.04 ⋅ 0.6 21.7687075
1.05 2
250
H à H à Z 0.9 ⋅ 0.05 10.2040816
1.05 2
250
H à H à Z 0.9 ⋅ 0.04 8.16326531
1.05 2
The total actuarial present value of the benefits at policy issue is the sum of all numbers
in the last column, which is approximately 93.3106576.
Answer D.

November 2012 Course MLC Examination, Problem No. 25

For a fully discrete 10-year term life insurance policy on (x), you are given:
Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.
(i) Death benefits are 100,000 plus the return of all gross premiums paid without interest.
(ii) Expenses are 50% of the first year’s gross premium, 5% of renewal gross premiums
and 200 per policy expenses each year.
(iii) Expenses are payable at the beginning of the year.
1
(iv) Ax:10 = 0.17094.
(v) ( IA )x:10 = 0.96728.
1

(vi) ax:10 = 6.8865.

Calculate the gross premium using the equivalence principle.

A. 3200 B. 3300 C. 3400 D. 3500 E. 3600

Solution.
Let us write G for the gross premium sought. Using the equivalence principle, we write:
+ G ⋅ ( IA )x:10 + 0.45G + 0.05G
1
ax:10 = 100,000Ax:10
G 1
ax:10 + 200
ax:10 .
       
  
APV of death benefit APV of return of % of premium expenses Per policy expenses
premium benefit

We solve for G and obtain

100,000Ax:101
+ 200 ax:10 100,000 ⋅ 0.17094 + 200 ⋅ 6.8865
G= = ≈ 3604.2299.
ax:10 − ( IA )x:10 − 0.45 0.95 ⋅ 6.8865 − 0.96728 − 0.45
1
0.95
Answer E.

Copyright © 2012 by Krzysztof Ostaszewski. All rights reserved. No reproduction in any form is permitted without
explicit permission of the copyright owner.