Question 1 [50 marks]
Read the following extract and answer the questions that follow:
Suppose a life insurer receives 51 500 proposals for death cover from persons who are 25-years old. They all
want life cover of R60 000. A 3% loading was applied to all the accepted proposals, for the insurer to minimise
underwriting losses. All the premium rates of the insurer were accepted by the registrar.
The actuary found out that the probability of a 25-year-old person living until the age of 26 years, is 0.0015 in
the mortality tables. The insurer rejected five (5) of the twenty (20) received death claims relating to these
proposals. The insurer incurred R350 000, instead of the R258 000 assumed, underwriting expenses. The
interest earned on investments was R310 000, instead of the R210 000 assumed initially. The life insurer
received R800 000 of reinsurance commission during the period.
1. Describe the product/s purchased from the life insurer. (2)
2. Describe two possible reasons for the purchasing of the product/s described in 1.2 (2)
3. Describe the peril which is mitigated by the products purchased from the life insurer. (2)
4. Describe two possible reasons for rejecting of the five (5) death claims. (4)
5. Describe the risk class of the proposals received by the life insurer. (5)
6. Calculate the performance of the life insurer. (20)
7. Calculate the valuation deficit/ surplus which exist in the case of this life insurer. (15)
1.1 Describe the product/s purchased from the life insurer.
• Whole life covers the insured, not only for a stipulated period, but for the whole life.
• Term insurance: the sum assured is payable only if death occurs during the stipulated term
1.2 Describe two possible reasons for the purchasing of the product/s described in 1.2
• It is intended to financial protection to the family or dependants of a deceased person.
• Payment of debts of a deceased person (breadwinner) passes on.
• In commercial insurance is used for key-person insurance, preferred compensation, buy-and-sell
agreements, and contingent liability insurance.
1.3 Describe the peril which is mitigated by the products purchased from the life insurer.
The peril is death of the insured.
1.4 Describe two possible reasons for rejecting of the five (5) death claims.
The following could be some of the reasons:
1. Non-disclosure
2. No underlying insurance policy
3. Invalid claims
4. Lapsed policy
5. Fraudulent claims
6. Claims failing to meet certain policy clauses(such as the suicide clause)
1.5 Describe the risk class of the proposals received by the life insurer.
A 3% loading implies that the insured lives were not standard class. (2)
Read the following extract and answer the questions that follow:
Suppose a life insurer receives 51 500 proposals for death cover from persons who are 25-years old. They all
want life cover of R60 000. A 3% loading was applied to all the accepted proposals, for the insurer to minimise
underwriting losses. All the premium rates of the insurer were accepted by the registrar.
The actuary found out that the probability of a 25-year-old person living until the age of 26 years, is 0.0015 in
the mortality tables. The insurer rejected five (5) of the twenty (20) received death claims relating to these
proposals. The insurer incurred R350 000, instead of the R258 000 assumed, underwriting expenses. The
interest earned on investments was R310 000, instead of the R210 000 assumed initially. The life insurer
received R800 000 of reinsurance commission during the period.
1. Describe the product/s purchased from the life insurer. (2)
2. Describe two possible reasons for the purchasing of the product/s described in 1.2 (2)
3. Describe the peril which is mitigated by the products purchased from the life insurer. (2)
4. Describe two possible reasons for rejecting of the five (5) death claims. (4)
5. Describe the risk class of the proposals received by the life insurer. (5)
6. Calculate the performance of the life insurer. (20)
7. Calculate the valuation deficit/ surplus which exist in the case of this life insurer. (15)
1.1 Describe the product/s purchased from the life insurer.
• Whole life covers the insured, not only for a stipulated period, but for the whole life.
• Term insurance: the sum assured is payable only if death occurs during the stipulated term
1.2 Describe two possible reasons for the purchasing of the product/s described in 1.2
• It is intended to financial protection to the family or dependants of a deceased person.
• Payment of debts of a deceased person (breadwinner) passes on.
• In commercial insurance is used for key-person insurance, preferred compensation, buy-and-sell
agreements, and contingent liability insurance.
1.3 Describe the peril which is mitigated by the products purchased from the life insurer.
The peril is death of the insured.
1.4 Describe two possible reasons for rejecting of the five (5) death claims.
The following could be some of the reasons:
1. Non-disclosure
2. No underlying insurance policy
3. Invalid claims
4. Lapsed policy
5. Fraudulent claims
6. Claims failing to meet certain policy clauses(such as the suicide clause)
1.5 Describe the risk class of the proposals received by the life insurer.
A 3% loading implies that the insured lives were not standard class. (2)
