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CA1 ASET: Introduction
Page 1
ActEd Solutions with Exam Technique

(ASET)
Subject CA1
Introduction
This document includes all the questions from the April 2011 to September 2014
Subject CA1 exams, ie eight exam sittings in all. You should use this report as part of
your preparation for the 2015 exams.
ActEd Solutions with Exam Technique (ASET) differs from the Examiners Report in
that it includes not only a possible solution to each exam question but also:
comments to help you with your exam technique
alternative approaches to questions
references to the Subject CA1 course material.
How to use ASET

You can use this document to practise exam questions and to gain a feel for the depth
and breadth of knowledge required in the Subject CA1 exam. We recommend that you
work through this report actively, ie you should attempt the questions without reference
to your notes before reading the solutions.
Dont be disconcerted by the length of many of the solutions in ASET. You should be
aware that the solutions given here are often more detailed than would be required to
pass the exam. This is because ActEds study material is specifically designed for
distance learning and so we include extra explanation so that you can understand it
easily. Your task in the exam room is not to produce study material but to demonstrate
that you understand the Core Reading. You need to write enough to convince the
examiner that you understand the course, but not so much that you run into time
pressure.
The Actuarial Education Company
IFE: 2015 Examinations
Page 2
Format of the solutions

The format of the solutions aims to help you easily identify the information you want.
In particular, it includes a number of icons to indicate the purpose of particular
paragraphs. The solution to each question therefore looks like this:
Solution 1
Overview
At the start of the solution to most questions there is a box like this, identified by a
globe icon. The text in this box gives an overview and relates to the question as a
whole. For example, it may include comments on the level of difficulty of the question
or how frequently the topic underlying this question has been tested in the past.
Comments or ideas about exam technique are contained in a box like this, identified
with a light-bulb icon.
The solution itself is written in normal font and without boxes. In order to show as
many valid points as possible, there may be more here than you could reasonably expect
to write in the time available: you should note that you may not need to include
everything in order to earn full marks.
Further explanation is contained in a box like this, identified by a teacher-withblackboard icon. The usual purpose of this is to help you to understand a particular
point in the solution.
At the end of each question (or sometimes each part) you may find an information box,
identified by the i icon. Here you will find other relevant information about the
question.
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ActEds Hints sheet

One of the best forms of preparation for the Subject CA1 exam is to practise answering
past questions. It is important to make a genuine attempt at the question without
looking at the solution or your Course Notes. However, you can sometimes be
frustrated when trying to do this, by getting stuck on a question or even being unable to
start it. In such cases, it may be that all you need is a little help or a hint in order to get
going.
ActEds Hints sheet is intended to address this need. The sheet contains a short hint for
most questions or parts of a question. Each aims to give you a little additional guidance
to help you to make a good attempt at a question, without needing to refer to your
Course Notes or the full ASET solution.
ActEds Hints sheet does not provide you with the answer, nor is it meant to be
comprehensive. Once you have attempted the question you can then look at the full
solutions for a complete analysis.
You will find ActEds Hints sheet at the back of the solutions for each exam paper.
Feedback on the style of the solutions
We welcome your views and feedback on the style of the solutions, including any
further things you would like to see included in ASET in the future. Please let us know
which parts of the material you find useful and where improvements could be made.
Please email your comments to ActEd@bpp.com.
How to increase your chances of success in the exam room

Remember that youll only have three hours (plus reading time) in the exam to prove to
the examiners that you are good enough to pass. Most well-prepared students find it
difficult to write out all of their answers in that time. The key to success in the exam
room is to write your answers efficiently.
Ideally, your answers should be:
sufficiently detailed to convince the examiners that you fully understand what
you have written
as short and succinct as possible (subject to the above).
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Dont be too brief (or you wont score full marks for the point you are making), but
dont waffle (or youll run into time pressures and make your good points hard to find).
Remember that your aim should always be to give just enough information to convince
the examiner that you understand the points you are making.
In summary, write efficiently. Dont be too brief but dont waffle.
Examiners Reports
ASET is independent of the reports issued by the Board of Examiners and is intended to
complement them, not to replace them. (Students may wish to refer directly to the
reports of the Board of Examiners as part of their study programme.) The views
expressed in this document are the views of the ActEd tutors, and are not necessarily
the same as the views of the Examiners. The independence of the Board of Examiners
is an important concept that the profession is keen to safeguard.
There are occasions when the ideas and solutions in this report differ slightly from those
in the Examiners Reports. This is inevitable given the large number of points covered
and the extent to which there is more than one way to answer certain questions. You
should note, however, that the differences are sufficiently minor as to have no impact on
pass/fail type decisions.
Subject CA1 exam pass rates
Sept 2011
April 2012
Sept 2012
April 2013
Sept 2013
April 2014
Sept 2014
% of students passing at
this sitting
April 2011
The table below shows the pass rates for the Subject CA1 exam sittings covered in this
ASET.
43
47
47
51
46
52
43
54
ASET Cross Reference Grid

The grid on the following pages shows you how the past exam questions covered in this
ASET relate to the topics in the Subject CA1 Course Notes for 2015. Numbers in bold
are Paper 1 questions. Number not in bold are Paper 2 questions. Italics indicate that
only part of a question relates to a particular topic.
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CA1 ASET Cross Reference Grid
How to do a professional job
Stakeholders
External environment
Regulation
3,
7
Introduction to financial products and

customer needs
Benefits overview and providers of

benefits
Life insurance overview and products
General insurance overview and

products
Cashflows of simple products
3
5
6,4
7
1
3,
6
2,
4
5,5
1,6
5,6
7,6
3,4
1,7
5
6,
4
2
4
7,1
,7
4,7
1,7
,1
10
Contract design
11
Project management
12
Capital project appraisal
13
Money markets
14
Bond markets
15
Equity markets
16
Property markets
17
Futures and options
18
Collective investment schemes
19
Overseas markets
Sept 2014
April 2014
Sept 2013
April 2013
What is Subject CA1 all about?
Sept 2012
Chap
April 2012
Topic
Sept 2011
Part
April 2011
Exam sitting
7,7
6
5,
4
6
5
1,7
,6
5
4
6
7
5,6
5,6
5,6
,7
6
5
4
6
6,3
5,6
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These conditions remain in force after you have finished using
the course.
CA1 Paper 1 ASET: April 2011 Questions
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Subject CA1 Paper 1 April 2011 Questions

If you get stuck on any question dont look at the solutions (yet!) but have a look at
ActEds Hints sheet, which youll find at the end of the solutions for this paper. Then
have another attempt at the question, using the hints to get you started.
A company provides a range of benefits to its employees.

(i)
Describe the key factors that influence the level and timing of contributions for
these benefits.
[3]
(ii)
Outline why the expected cost of the benefit payments may be different from the
price charged by an insurance company to insure these benefits.
[5]
[Total 8]
(i)
Describe, in the context of domestic property insurance, the following terms:

(a)
Excess
(b)
No claims discount
(c)
Exclusion clause.
[8]
A six storey residential property is divided into three self-contained apartments, each of
which occupies two floors of the building.
(ii)
Explain why property insurance premiums could vary depending on the position
of the apartment within the building.
[3]
[Total 11]
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A commercial television company produces and broadcasts a successful quiz show,

which has had high viewing figures over a number of years. After a short break, the
show is to be re-launched for an expected run of two years.
The format is that contestants, who are members of the public, have to answer a series
of general knowledge questions, which get progressively harder. The contestant wins
prizes depending on how many questions they get right. The more correct questions the
higher the prize. Should the contestant answer twelve questions correctly, they win a
jackpot of 10,000,000. The next highest prize, for answering eleven questions
correctly, is 1,000,000.
In conjunction with the show, the company intends to introduce a new competition for
viewers. A simple multiple-choice question will be asked during each show. Viewers
will be able to phone in their answers. Of the viewers who phone in with the correct
answer, one will be selected at random and a 5,000 cash prize will be given.
(i)
Outline the risks specific to this show for which the company may wish to take
out insurance cover.
[5]
(ii)
Discuss the factors that will contribute to the moral hazard an insurance
company will face when providing such cover.
[4]
(iii)
Set out the benefits to the insurance company, other than profits to be made on
the contract, of providing this cover.
[3]
[Total 12]
(i)
List reasons why a benefit scheme may need to calculate provisions.
[4]
A large benefit scheme has recently completed a valuation for supervisory purposes.
The basis for the supervisory valuation is more prudent than a best estimate of future
experience. The scheme is required to disclose a summary of the supervisory valuation
report to beneficiaries.
(ii)
List the information from the supervisory valuation report that should be
disclosed to beneficiaries.
[4]
The schemes investment advisor is about to conduct a review of the schemes

investment strategy.
(iii)
Discuss why the results of the supervisory valuation may not be appropriate for
use by the investment advisor in conducting this review. Your answer should
include commentary both on relevant specific assumptions and on broader
general issues.
[9]
[Total 17]
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A large bank operates many business lines in many countries. One of the products it
offers is a derivative based on the level of property prices in a particular country with a
developed property market. The derivative increases in value if a specific property
price index (published by a local property surveyor) falls in value. An investor is
considering purchasing the derivative.
(i)
Comment, from the perspective of the investor, on the importance of different

financial risks relating to the derivative and the bank.
[9]
The bank has one employee in this country, who is assigned to price and monitor the
derivative.
(ii)
Describe the operational risks associated with this arrangement.
[4]
(iii)
Suggest ways the bank could reduce the operational risk presented by this
arrangement.
[3]
The derivative is frequently combined with a second derivative linked to the

profitability of the banks mortgage portfolio and then traded as a single investment.
The second derivative increases in value as profitability of the mortgage portfolio
increases.
(iv)
Discuss why the market price of this combined investment:

(a)
may be less volatile than the price of the separate derivatives; or
(b)
may be more volatile than the price of the separate derivatives.
[3]
[Total 19]
A company which writes general insurance business is developing a new line of

insurance policies aimed at university students.
(i)
List the types of insurance it could offer.
(ii)
Outline how the assumptions used to price these policies may differ from those
used for the companys existing business.
[9]
[Total 14]
[5]
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An airline that only operates within its domestic country is considering expanding by
offering overseas flights. It has started a project to decide the geographical region to
which it will commence flights, from a shortlist of three regions.
(i)
Outline the steps necessary to identify the risks facing the project.
[5]
(ii)
Identify the major risks to the airline of operating in overseas markets, and for
each risk suggest a way to mitigate that risk.
[8]
The airline has decided to focus on a region in which the authorities only offer
three-year licences to new airlines. For this region the airlines project team has
identified three possible scenarios which may occur.
Probability of occurrence
Set up costs
Net revenue:
Year 1
Year 2
Year 3
Scenario A
30%
m
Scenario B
59%
m
Scenario C
20%
m
100
110
120
50
50
50
40
40
45
30
30
30
(iii)
Calculate the Net Present Value of the project, using a discount rate of 5% per
annum.
[3]
(iv)
(a)
Comment on the probability of profit and loss on the project; and
(b)
List other factors which may influence the decision on whether to invest
in this project.
[3]
[Total 19]
END OF PAPER
CA1 Paper 1 ASET: April 2011 Solutions
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Subject CA1 Paper 1 April 2011 Solutions
Overview of the paper

This is a reasonable paper, covering a range of topics. There is a distinct focus on risk,
with several (parts of) questions (Question 2(ii), Question 3(i)(ii) and Question 5 and
Question 7(i)(ii)) covering different aspects of this topic.
Broad issues relating to insurance are covered in Question 1(ii) and Question 3(iii),
with general insurance in particular covered in Question 2, Question 3 and Question 6.
Benefit schemes make an appearance in Question 1(i) and Question 4 and investment
topics appear in Question 4(iii) and Question 5(i)(iv). Question 7 is a relatively
straightforward question on Capital project appraisal a topic that is examined very
frequently in Subject CA1 exams.
There is a good mixture of straightforward bookwork, applied bookwork and harder
application questions. Question 4(iii) is probably the toughest question on the paper
and as such, good performance on this question is essential. Question 7 involves a
straightforward net present value calculation.
Although there are some fairly big (19 mark) questions on the exam, each is nicely
broken down into parts. The biggest individual part of a question is 9 marks.
Several questions on the paper may have been inspired by recent events / real-world
situations. For example, Question 3 describes a quiz show that may have been inspired
by the popular (UK) quiz show Who wants to be a millionaire? and Question 6 may
arisen from consideration of specialist insurance companies that target university
students (such as Endsleigh in the UK). That said, do make sure you make your
answers broad enough and not just based on recent experience.
Dont forget the Hints Sheet that youll find at the end of these solutions. If you are
stuck, try using this to get you started on a question.
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Solution 1
Overview
This question is testing the material in Chapter 33, Pricing and financing strategies,
and in fact it does test both pricing and financing. Both parts to the question are
primarily bookwork.
The Examiners Report commented that this question was surprisingly poorly answered.
Students that considered benefits other than just pensions tended to score better.
(i)
Key factors influencing level and timing of contributions
There is no single section / list in the Core Reading that answers this question, however,
the relevant ideas can be found in Sections 3 and 4 of Chapter 33.
Note that the question asks for factors that influence both the level and timing of
contributions, so you may want to split your answer into these sections.
The examiners stated that consideration of the different funding methods that may be
used is not sufficient and that students needed to consider the factors that influence the
funding method.
Level of contributions
The level of contributions will be based on the cost of the benefits accruing over a
certain period.
The certainty of the benefits may affect whether or not the company decides to fund the
benefits in advance. Benefits will typically be more certain if they are:
regular
relatively small.
If the benefits are very predictable and/or small, then a PAYG approach might be
chosen. However, in most cases, money will be set aside in advance.
Timing of contributions
The sponsor may want to change the pace of funding of the scheme by paying a higher
or lower contribution in any year.
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Reasons for changes to the pace of funding include:
changes in the fortunes of the sponsor, eg if the sponsoring company has

performed particularly badly, it may have to cut contributions until it recovers
the opportunity cost of the contributions and alternative investment

opportunities.
(ii)
Difference in expected cost of benefits and price charged
The question asks why the price charged may not be the same as the expected cost of
the benefit payments. Again, this is not straightforward bookwork, however, the
relevant ideas can be found in Section 2 of Chapter 33.
The instruction word is outline, so you should avoid going into too much detail.
The expected cost (ie premium) could be calculated such that:

premium(s)
=
+
+
+
theoretical cost of benefit payments

expenses and commission
contribution to profit
other loadings
The contribution to expenses may be affected by the extent to which the insurer can
achieve economies of scale.
Changes may be needed for:
policyholder perceptions of the cover provided, eg the policyholder might value

having insurance cover highly, perhaps because the benefits are large relative to
the premiums
the level of competition in the market:
the more competitors, the more competitive the premium should be

(indeed the contribution to profit may be negative)
if there are few players in the market, then higher premiums could be
charged
the stage in the underwriting cycle
the strategy being followed, eg the insurance company might decide to sell the
product as a loss leader in order to:
increase market share
sell other more profitable lines of business
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a higher premium may be charged to recoup earlier losses incurred by the insurer
the level of prudence required by the insurance company in its pricing basis.
The following questions also relate to financing:
April 2005, Paper 2, Question 7(i)(ii)
September 2008, Paper 2, Question 6(vi).
The following questions also relate to pricing (and why the premium charged is not
equal to the cost of cover):
September 2005, Paper 2, Question 5(iv)
September 2008, Paper 2, Question 5(iv).
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Solution 2
Overview
This is a general insurance question in particular on domestic property insurance.
Even if you dont work in general insurance, you should have some appreciation of the
concepts being tested from your own experience of buying domestic property insurance,
motor insurance or other general insurance products.
The Examiners Report commented that this question was generally well answered.
(i)
Definitions
This question is testing your knowledge of certain Glossary definitions and your
application of those definitions to a specific product.
Glossary definitions are not frequently tested in Subject CA1 exams, so students could
be forgiven for not knowing the definitions word-for-word (and indeed examiners would
not expect you to know the definitions verbatim as long as you can convey the concept).
In any case, these terms are reasonably straightforward and you should be able to come
up with a reasonable definition yourself, which would satisfy the requirements.
The three descriptions need to merit eight marks between them, so it is worth thinking
about the areas you might want to cover. A good strategy to use here might be to start
by defining each term, give an example to clarify it, and then go on to describe how
each is relevant in the context of domestic property insurance. A good way to relate it to
domestic property insurance is to use examples of claim types / perils that are specific
to this type of insurance.
An idea generation technique that you might sometimes be able to use is to look through
the other questions in the paper and see if they help you to generate any more points.
This might be useful for part (c) here, because claims arising from moral hazard may
not be covered moral hazard is mentioned in Question 3(ii).
(i) (a) Excess
An excess is the sum, specified in the policy, that the insured must bear before any
liability falls upon the insurer. The insured pays the first E of every claim, where E is
the excess.
For example, if the excess is 100 and there is a claim for 500, then the insured will
pay the first 100 and the insurer will pay the remaining 400.
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(i) (c) Exclusion clause

An exclusion clause sets out the events, perils or causes defined within the policy
document as being beyond the scope of the insurance cover, ie circumstances where the
insurer is not liable to pay a claim.
Examples of possible events / perils that may be excluded from domestic property
insurance are:
large-scale events / catastrophes such as war, terrorism, civil unrest
deliberate damage (of building or contents) by the policyholder
general wear and tear
criminal acts by the policyholder.
The insurer may also exclude high-risk situations, for which claims are very likely,
eg insuring a building located on a crumbling cliff face. In addition, there may be
exclusions for other causes, such as negligence (possibly arising from moral hazard),
eg a policyholder being less careful in locking the door when he/she goes out.
Exclusions may be necessary in order to ensure that premiums are affordable.
The following questions also test Glossary definitions:
April 2008, Paper 2, Question 5(i)(a)
September 2008, Paper 2, Question 5(i).
(ii)
Differences in property insurance premiums
This part of the question requires a bit more thought. You have been asked why
property insurance premiums would vary depending on whether the apartment is on the
ground and first floor, the second and third floor or the fourth and fifth floors.
Lets assume that apart from their distance from ground level, the apartments are
identical. This makes sense, given that the Examiners Report noted that better students
focussed on the position of the apartments.
A higher premium will be due to an increased likelihood of claims and/or greater claim
severity. Therefore you need to consider the different perils (ie causes) of claim, for
example, physical risks such as fire, flood, storm damage, burst pipes and also theft
risk, and how they might be different for each of the apartments.
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Solution 3
Overview
This is an inventive applications question primarily on the topic of risk. The good
news is that the scenario you have been given isnt too complex (in fact, fans of the TV
quiz show Who wants to be a millionaire? should find this scenario rather familiar!).
The Examiners Report stated that there were a wide range of marks awarded for this
question. The best students ensured that their answers were specific to the show itself,
and the proposed insurance cover.
(i)
Risks to be insured
This question has asked for the risks specific to this show for which the company may
wish to take out insurance cover. A careful read of the question is very important here,
as you must make sure that you limit your considerations to those linked to the show,
rather than the general insurance requirements of a broadcasting company.
There are two possible ways of approaching this question:
1.
Consider the risks specific to the show and then consider which could be
reduced using insurance. You might be able to use ideas in Chapter 39, Sources
of risk to help generate ideas.
2.
Consider the different insurance products (in Chapters 7 and 8), and then
consider which of these might be appropriate to the television company.
Method 1 seems like the most appropriate approach, however, for some risks the show
might face eg low viewing figures it may be hard to obtain insurance cover.
Method 2 would probably be easier to use if you had been asked to outline the risks to
the broadcasting company, eg you might come up with products such as employers
liability and property damage insurance.
The approach used below is therefore the first approach. In the answer below, we have
linked the risks to a particular type of insurance cover for completeness, however this is
not necessary in order to score full marks.
There are 5 marks on offer, so you should be aiming for close to 10 risks to insure.
Page 10
The main risks are that:
a contestant (or perhaps too many contestants) wins the jackpot the amount
paid out is ten times the amount paid out for the next highest prize
lots of small prizes are won.
The company may be able to buy some insurance to share the cost of this risk.
The additional risks that may be covered insurance include:
the risk of needing to compensate the contestants and members of the audience
(or their estate) for accidental bodily injury, disease or death suffered, owing to
negligence of the company (public liability)
the risk of fines resulting from a failure in the phone-in, eg if a prize is not
awarded due to a failure of the system (a variant of professional indemnity)
death or serious illness of key employees (eg the show host) it may be
necessary to find a replacement at short notice, which may incur significant cost
(keyman insurance, health insurance)
the risk of failure of external suppliers (pecuniary loss insurance)
the risk of cancellation of the show two years is a relatively long intended run
time (a type of pecuniary loss insurance)
failure of employees, eg phone operators arranging for their friends to win the
phone-in competition (fidelity guarantee)
the risk of being sued by contestants, eg for unfair treatment (legal expenses
insurance)
the risk that telephone call revenue is lower than expected (if cover can be
obtained for this specific risk)
the risk of falling viewing figures (if cover can be obtained)
the risk of a fall in advertising revenue (if cover can be obtained).
(ii)
Factors contributing to moral hazard
In this type of question it would be good exam technique to firstly define the term moral
hazard. This helps ensure you stay on track with your answer and really do produce
examples that are linked to moral hazard, and there may be marks available on the
schedule for your definition.
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The definition in the Glossary is:

Moral hazard is the risk that an insured may attempt to take an unfair advantage of
the insurer, for example by suppressing information relevant to the assessment of risk
or by submitting a false claim.
However, moral hazard can also be thought of more widely as involving circumstances
where the policyholder takes less care as a result of having the insurance. For
example, with motor insurance, policyholders might drive less carefully if they know
they are insured!
In the answer to this question, it would be sensible to give examples of all the above
types of moral hazard.
Moral hazard is the risk that an insured may attempt to take an unfair advantage of the
insurer, for example by suppressing information relevant to the assessment of risk or by
submitting a false claim.
Moral hazard can also involve the insured acting differently, eg the insured taking less
care given the insurance cover is in place.
Both of these examples of moral hazard can lead to more and/or larger claims being
submitted.
Note that this is not the same as anti-selection which is also taking advantage of
particular aspects of an insurance contract, but within the terms offered by the insurer.
Moral hazard might arise in the following ways:
if the company is insured against (too many) jackpot wins, then it might take less
care in ensuring that the jackpot question (and the questions in the build up) is
hard enough (in fact, it might even make questions easier if this made the show
more popular!) the likelihood of this may depend on how much of each
jackpot claim the company is liable to pay
if the company has public liability insurance, it might take less care in ensuring
the safety of its contestants / audience this may depend on any legal
requirements on television companies to provide safety procedures and training,
eg to provide fire extinguishers
if the company is insured against poor ratings, then the company may take less
care to ensure it gets good ratings, eg by not advertising as much or by putting
the show in an unpopular time slot
Page 12
if the company has insurance against the show being cancelled and the
broadcasting company can make the decision to cancel the show, this leads to a
serious moral hazard
if the company has insurance against the revenue from viewer competition being
lower than expected, the company will have less incentive to run the viewer
competition well.
The insurer will try to reduce or eliminate moral hazard by:
limiting the number of claim payouts by using exclusions, eg the insurance

company would only pay out if the show gets cancelled where the cancellation is
outside of the broadcasting companys control
limiting the amount of claim payouts, eg by applying excesses and/or maximum

payout limits.
(iii)
Benefits to the insurance company (other than profit)
This part of the question is slightly tricky. You might be able to come up with a couple
of reasons why the insurance company would want to provide cover, but coming up with
3 marks worth (ie around 6 ideas) is harder.
It might help to consider the main objectives of an insurance company. High profits is
obviously a major consideration, but insurance companies will have other
(intermediate) objectives (often with the ultimate aim of increasing profits), such as:
increasing market share by selling other products to this company or to other

companies, hence increasing profits
improving its reputation and increasing public awareness of the insurer (which
should in turn increase business volumes)
achieving special benefits for the insurers employees (such as preferential

treatment to get on the quiz show).
Note that no marks would be given for stating that risk might be reduced due to
diversification as:
no information has been given on whether the insurer already sells this type of
business
this would be a relatively small policy to the insurer and so wouldnt lead to a
much diversification.
Page 13
Try to relate the benefits that you come up with to the company in question, for
example, it might improve its reputation by insuring a high-profile television company.
In addition, the company might let the insurer advertise itself on the show (this could be
invaluable if the previous high viewing figures are repeated).
Other benefits
The company may use this sale to increase its portfolio of business by:
selling the television company other products, eg to cover other shows, or other
risks
selling similar products to other broadcasters.
It may also be able to advertise its (individual) insurance products (eg domestic
buildings and contents insurance, private motor insurance etc) to employees of the
company and increase its customer base this way.
In addition, it might be able to negotiate with the broadcasting company to arrange
discounts on products linked to the broadcaster (eg board games) for customers who
take out insurance.
The television company may allow the insurance company to advertise its products
during the quiz show, eg just before/after advert breaks. This will be particularly
valuable if the quiz show continues to be successful and enjoy high viewing figures.
There may also be a chance for publicity during the show, eg mentioning the insurers
name.
Insuring the television company might also help to increase the insurance companys
reputation, if knowledge of this is made public. The section of the public who watch
this program may be a target market for the insurer.
It may also be the case that insuring the show leads to opportunities for the insurers
employees to be part of the audience or appear as contestants.
The following question also relates to insuring risks:
September 2005, Paper 2, Question 3(ii).
Page 14
Solution 4
Overview
This question covers the topics of benefit schemes and investment. There is a mixture of
bookwork and application.
Most students should produce a good answer to parts (i) and (ii), which are relatively
straightforward bookwork. Part (iii) is harder, requiring discussion of different bases
and the level of information available for a statutory valuation compared to an
investment strategy investigation.
(i)
Reasons for calculating provisions (for a benefit scheme)
This is (nearly) straightforward bookwork from Chapter 35 of the Course Notes on

Valuing liabilities. The only application needed is to and ensure the remaining ones are
stated in the context of a benefit scheme. This is a list question, so no explanation is
required.
A very similar question was asked in September 2009 (Paper 1, Question 5(i)).
The reasons for calculating the provisions needed by a benefit scheme:
to determine the benefit schemes liabilities to be shown in the sponsors

published accounts and reports
to determine the benefit schemes liabilities for supervisory purposes
to determine the liabilities to be shown in internal management accounts and

reports of the sponsor
to value the benefit scheme in case of merger or acquisition of the sponsor
to determine the excess of assets over liabilities and whether any discretionary
benefits can be awarded
to set future contributions to a benefit scheme, given the schemes funding

position
to value benefit improvements for a benefit scheme
to calculate discontinuance benefits, eg transfer values
to influence investment strategy
for disclosure to members
to review experience.
(ii)
Page 15
Information to disclose
This is a question covering material in Chapter 37 of the Course Notes on Accounting

and disclosure. There have been a number of questions on disclosure and there is a
handy acronym (DISCLOSURE) that might help you remember the key ideas:
Directors pension costs
Investment strategy and performance
Surplus / deficit arising in the last year and total accrued to date
Calculation method and assumptions
Liabilities arising in the last year and total accrued to date
Options and guarantees
Sponsors contributions
Uncertainties and risks
Rights on wind up
Expenses
You need to pick well here, given this is a supervisory valuation and the information
will be at a high level. For example, it wont disclose details of individual benefits.
Instead, you should focus on the overall position of the scheme, eg the funding level.
The examiners noted that most students scored well on this part, although some diverted
on to discussing individual benefits.
There are 4 marks on offer and you have been asked to list, so you should be aiming for
8 items of information to disclose, although you can always add a couple of extra items
just in case some of your original 8 arent on the marking schedule!
value of the assets, liabilities and hence the funding level
how the funding level has changed since the last valuation and why
basis / methodology used
cashflows over the period, including benefits, expenses and contributions
investment strategy and investment return achieved
future contribution schedule
risks involved and risk management arrangements
entitlement on insolvency
number of members and changes in membership since the last valuation
Page 16
The following questions also relate to disclosure for a DB scheme:
April 2005, Paper 2, Question 6(i)
September 2010, Paper 1, Question 1
September 2010, Paper 2, Question 6(iii).
(iii)
Why results may not be appropriate for use by investment advisor
This is a tricky question. It is not immediately clear which part of the course is being
tested. Two chapters of the Course Notes spring to mind:
Chapter 35 Valuing liabilities; in particular, Section 2 (Factors affecting the

strength of basis) and Section 3.3 (Setting the assumptions with regard to the
purpose)
Chapter 48 Monitoring; in particular, Section 4 (Use of the results).
The question also clearly requires some careful consideration and application to the
specifics of the situation.
You have been told to comment on both the relevant specific assumptions as well as the
broader general issues. The chapters above should help with the latter. For the
former, you need to consider what the main assumptions are for a benefit scheme. The
key assumptions are:
mortality
investment returns
inflation (price and salary)
expenses
terms for options / guarantees.
The Examiners Report commented that students typically scored well on the
appropriate strength of basis, but failed to comment on general issues, such as the time
lapse since the valuation date, or the specific assumptions.
General issues
The main problem with using the results of the supervisory valuation to review the
schemes investment strategy is that the basis used is unlikely to be appropriate for
reviewing the strategy.
Page 17
The main factors affecting the strength of the basis used are:
the purpose of the valuation
the needs of the client
the requirements of any legislative or regulatory authority.
In many cases, presentation of a range of values, or values for alternative scenarios

may be more useful to the client in making any necessary decisions.
The key features of provisions for demonstrating supervisory solvency are usually:
prudence (this has been stated to be the case here)
prescription of methods / assumptions by the supervisory authority.
In addition, the valuation may have been required to assume a going concern basis or,
alternatively, a discontinuance basis.
Other rules governing the preparation of the supervisory results might concern the:
method of valuation used to value both the assets and the liabilities,
eg market-based, discounted cashflow the rules might also specify a link
between the liability valuation basis and the features (usually the yield) of the
backing assets)
assumptions used to value both the assets and the liabilities (discussed below)
types of assets than can be held, and those that can be used to demonstrate an
adequate funding level, eg admissibility requirements.
As a result of the above, the liabilities may be overstated, the assets understated, and
therefore the funding position understated so that the level of investment freedom
available is not fully appreciated.
In contrast, for the review of the schemes investment strategy, it might be preferable to:
use an overall best estimate basis, as this will give a realistic result this is
likely to be more important for setting a future investment strategy
perform projections / calculations for a potentially large number of options /

potential scenarios.
It will also be important to project the likely impact on investment choices on the
supervisory valuation basis to determine the effect.
Page 18
Other issues for consideration are:
the valuation may have been some time ago and factors relating to the scheme
may have changed, eg:
a significant change in membership, due to a recruitment or redundancy

exercise
a change in market conditions, eg a stock market crash or a different

stage in the economic cycle
one-off events, eg scheme closure
the level of detail in the statutory valuation:
the investment strategy investigation considers cashflows rather than

absolute values
the investment strategy investigation requires a detailed breakdown of

liabilities by category of member.
The investment advisor would also want to take account of whether there have been (or
will be) any constraints on fund managers past performance, such as a shortage of
cashflow within the scheme this may restrict the funds available for investment or
lead to disinvestments that may not be timed as well as would otherwise be the case.
Relevance of specific assumptions
The main assumptions used in the supervisory valuation are:
mortality
investment returns
inflation (price and salary)
expenses
terms for options / guarantees.
Mortality
Prudent assumptions (as used in the supervisory valuation and which may be
prescribed) will tend to understate mortality, ie members will be assumed to have a long
life expectancy. This means that benefit payments will be over-estimated.
If the assets used to back these liabilities are chosen to match the liabilities by term,
then longer-dated assets may be included in the supervisory valuation.
Instead, a best estimate approach should be adopted, considering a suitable table, given
the scheme membership, allowing for mortality improvements.
Page 19
Investment returns
The investment advisor would want to consider the likely proceeds (in terms of amount
and timing) from a range of asset classes.
Inflation
If the benefit payments are linked to inflation, then prudence in the supervisory
valuation would dictate over- (rather than under-) estimating inflation. Inflation may
affect liabilities, eg:
the impact on pension increases, if linked to price inflation
the impact on the revaluation of pensions in deferment.
Instead, a market-related inflation rate assumption is required for the investment

strategy investigation.
Expenses
In the supervisory valuation, prudence will dictate that the expenses (which make up
part of the liabilities of the scheme) are overstated, and there may be a prescribed
loading to liabilities. However, for the investment strategy investigation, a best estimate
of expenses will be required.
Terms for options / guarantees
A best estimate allowance for the likely take up of options and terms of options /
guarantees should be included.
Options may change the timing of cashflows and this should be considered for the
investment strategy investigation. In the statutory valuation, this might have been
ignored, or, alternatively, the most expensive option may have been valued.
A consistent market-related approach should be adopted.
Other assumptions
Other assumptions also need to be considered and a best estimate value obtained,
eg withdrawals, new entrants.
Page 20
The following questions also relate to the purpose of valuing liabilities or the use of
results:
September 2007, Paper 1, Question 7(ii)
September 2008, Paper 1, Question 5(iii)
September 2009, Paper 1, Question 5(ii).
Page 45
Subject CA1 Paper 1 April 2011 ActEds Hints

Question 1
(i)
Mostly bookwork from Chapter 33, Sections 3 and 4.
(ii)
Mostly bookwork from Chapter 33, Sections 1 and 2.
Question 2
(i)
Consider the definitions in the Glossary. Now relate them to domestic property
insurance.
(ii)
Premiums vary with claim frequency and claim size. Can you identify perils
that are likely to affect different apartments to different extents or to have a
higher / lower resulting cost?
Question 3
(i)
Consider the different insurance products. Which ones could be of use to the
television company?
(ii)
Define moral hazard. How might moral hazard arise for the insurance cover you
have suggested in part (i)? How likely is moral hazard in each case?
(iii)
What other possible objectives might the insurance company have? Increased
market share? Increased publicity? How would these benefit the insurance
company?
Question 4
(i)
Bookwork from Chapter 35, Section 3.2. Remember to phrase the reasons in the
context of a benefit scheme.
(ii)
Primarily bookwork from Chapter 37, Accounting and disclosure.
(iii)
How strong should the basis be for an investment strategy review? In what ways
might the situation have changed since the statutory valuation was carried out?
List the key assumptions and consider how each one may need to be adjusted.
Page 46
Question 5
(i)
Financial risks include: market risks, credit risks, liquidity risks and business
risks. These are described in Chapter 39: do any of them apply to this situation?
Dont forget to consider both the derivative and the bank.
(ii)
Operational risks are described in Chapter 39 (Section 6) which of these risks

is most important in this situation. Role play can help: what could happen to the
individual that would mean he/she does not have a correct / available price on
each day?
(iii)
Work through your risks in part (ii) and suggest a way to mitigate each.
(iv)
Consider the circumstances in which: (a) one derivative will perform well and
the other poorly and (b) both derivatives will perform well (or poorly). One
clear example of each situation will be sufficient.
Question 6
(i)
Go through the general insurance products described in Chapter 8 and consider

those which are relevant for university students. Consider other types of
insurance that you may have purchased when you were a student.
(ii)
What are the main assumptions used to price general insurance business? How
might these assumptions (particularly those relating to claims) vary for the
different types of insurance listed in part (i)?
Question 7
(i)
Straightforward bookwork from Chapter 12, Section 5.
(ii)
Consider the different categories of risk (political, natural, economic, financial,

crime, project, business) and make sure you relate to the specific situation,
ie entering the market for overseas flights.
(iii)
Firstly, make a sensible assumption about when the cashflows occur. Next,
calculate the net present value of each scenario and then take a weighted average
to get an expected net present value.
(iv)(a) At a high level, what might you say about how profitable the project is? What is
the probability of a loss?
(iv)(b) Can you identify four big issues that should be considered? Think about the
money available, and alternative uses for it.

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Subject CA1 Paper 1 April 2011 Questions

A company provides a range of benefits to its employees.

Describe, in the context of domestic property insurance, the following terms:

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CA1 Paper 1 ASET: April 2011 Questions

A commercial television company produces and broadcasts a successful quiz show,

List reasons why a benefit scheme may need to calculate provisions.

The schemes investment advisor is about to conduct a review of the schemes

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Comment, from the perspective of the investor, on the importance of different

Describe the operational risks associated with this arrangement.

The derivative is frequently combined with a second derivative linked to the

Discuss why the market price of this combined investment:

may be less volatile than the price of the separate derivatives; or

may be more volatile than the price of the separate derivatives.

A company which writes general insurance business is developing a new line of

List the types of insurance it could offer.

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CA1 Paper 1 ASET: April 2011 Questions