St2 Faq: Last updated 24-9-2010

Discussion in 'SP2' started by Robert Chadburn, Oct 16, 2006.

  1. This thread contains the Subject ST2 questions asked most frequently by students, with answers written by ActEd's tutors. Each year, we'll incorporate these questions and solutions into the study material.

    This thread was last updated on 24 September 2010.

    Queston 1
    This question is about revalorisation (Chapter 7). As I understand it, to make a distribution of profit both the sum assured and the premiums increase by x%. But if the premiums paid increase by the same percentage as the sum assured then how can that be of any benefit to the policyholder? (If the sum assured increased while the premiums stayed at their original level than I can see how this is a way of distributing surplus - but this isn't the case here.)

    Answer 1
    Consider any individual policyholder with a policy in force at the time the "bonus" is added. They will, by necessity, be part way through their policy.

    What happens when the bonus is added? The full benefit (sum assured) is increased by x%, but only the future premiums are increased. (For the bonus to have no value to the policyholder, all premiums (including the past premiums) would have to be increased by x%.) In effect, the value of the bonus to the policyholder is the x% of all the past premiums that he won't end up having to pay.

    If that's not clear then Page 2 of Chapter 7 is also worth a re-read, including Question 7.1.

    Note that your alternative - of premiums staying the same but the benefit rising - is also discussed there.

    Question 2
    I was wondering to what extent do we need to know about current developments in the life insurance industry. There doesn't seem to be any questions on (then) current developments in the past papers.

    Answer 2
    At ST level you are not expected to know anything about this. The examiners' brief is that the exam should be possible entirely on the content of the Core Reading. If you know the Core Reading, you should therefore be able to pass the exam (that's the theory).

    Question 3
    If I contradict myself in an answer, does it matter as there is no negative marking. I imagine it would leave a bad impression on the marker.

    Answer 3
    This does matter. You are making the examiner choose the correct answer from a list of possible answers that you have written. In this case you will get no marks at all. How will they know that YOU know what you are talking about, if you put one thing and then contradict yourself? So you must be precise in your answers, totally clear about what you mean, even where you are unsure. Better to be precise all the time and wrong occasionally than to be vague or contradictory. If you are unsure in you rmind as to what is right, then you just have to commit yourself. In this way you will get all the marks you deserve (and if you've had to guess an answer or two, you'll also get the mark when these guesses are right! so it's win win!)

    Question 4
    Is there smoothing in revalorisation or not? I have come across two pieces of information, I can't remember where, one that says there is and another that says there isn't.

    Answer 4
    (First note this is at the very edge of the syllabus and I don't think it has ever come up in the exam, and I'm pretty sure it's not mentioned in Core Reading.) There is no discretion in what the insurer pays as bonus rate, as it follows automatically from the results in the insurer's accounts. But these in turn depend on the way that the assets are valued for the accounts. The backing assets are fixed interest, and in the accounts they are given at a book value (plus appropriate writing up or down), but certainly not market value. In this way, the profit results are smoothed and this smoothing is passed on in the bonus rate declared. But the insurer cannot declare a different rate from the one that emerges from the accounts. (So, do not confuse smoothing with discretion - in the other methods the insurer has discretion over the bonus/dividend to declare on top of any smoothing that's achieved through the profit calculation process.)

    Question 5
    Do the exam questions sometimes contain information that is not needed to answer the question? Do the examiners include extra information to trick students?

    Answer 5
    They are not trying to trick you! Real life is a mixture of pros and cons, and they are trying to replicate real life situations for you to deal with in the exam. So, for example, they may ask you for sources of risk for an insurer or a particular contract design. Some of the factors they list about the contract may lead to high risk, some may cause very litttle risk (just as could happen in real life.) You cannot expect the question to mention only those aspects of the product design that cause high risk, because then they are answering the question for you! They are trying to test that you know what is and what isn't a big factor in causing risk!

    The best strategy is: always CONSIDER all the information given, and discuss/mention it ALL in your answer, but you have to decide/argue as to whether or not it is IMPORTANT with respect to the question being asked.

    In other words, while I would have used different words from you, the short answer is "yes".

    Question 6
    When a question mentions that an endowment assurance has a guaranteed sum assured, does that mean that only the death benefit is guaranteed? I was doing a question on this once and I interpreted it that the guarantee extended to the death benefit and the maturity value. If there was a guaranteed maturity benefit would it be explicitly outlined?

    Answer 6
    It depends on the type of endowment. A conventional (without-profit or with-profit) endowment contract will ALWAYS have a guaranteed maturity benefit (which would be the sum assured). The death benefit will depend on the individual product design. It may have the same sum assured as the maturity benefit (in which case it is called an endowment assurance). Other endowments may have lower death benefits, eg a return of premiums paid - but it would still (probably) be guaranteed - the precise details would have to be given to you in the question.

    If it was a (conventional) with-profit endowment then the sum assured could be increased by bonuses by the time it is paid out (at death or maturity, as applicable).

    On the other hand, a unit-linked policy is quite different. The basic contract design will generally pay out the unit fund value at the time of claim. This is "guaranteed" in the sense that, whatever the unit fund value is at the time, then the policyholder will receive it. But it is not a guaranteed amount in money terms, which is what you are referring to, I think. So, some policies provide additional monetary guarantees. The most common of these by far is to provide a guaranteed (minimum) sum assured on death only. So, on death, the policyholder would receive the higher of the sum assured or the then value of the unit fund. This guarantee could also be applied at maturity, but is much less common, as it so expensive for the insurer. Neither of these should be assumed in any particular case, and you would usually be told what applies in the question. If you are not told (the contract is just described as a unit-linked endowment, say) then you can discuss what would happen if a guaranteed sum assured were to apply on death, on maturity, or both.

    Question 7
    I read in the answer to a paid-up question that paid-up status was possible for endowments. Is it not possible for other types of policies?

    Answer 7
    It is possible for any permanent contract - eg also for whole life assurance, deferred annuity. It is not found for term assurance contracts, where reserves are small.

    Question 8
    Can you define the term risk profile please?

    Answer 8
    It is just a description of the risk involved, really. Eg "contract X is subject to high mortality and expense risk, but fairly insensitive to risk from investment and withdrawals" would be (part of) the description of the risk profile of contract X.

    Question 9
    Why is the bid price 0.95 of the offer price. Why isn't the offer price 1.05 times the bid price?

    Answer 9
    It's really just convention - that's the way it's done. It could be done the other way, but it usually isn't! Taking a more cynical view, if you define the pricies your way, and the company states it has a "bid-offer spread" of 5%, then the cash value (bid price) of the premium allocated to units would be the premium paid multiplied by 1/1.05, ie 95.24% of the premium paid. Done the other way, the cash value would be just 95% of the premium paid. So, for the stated charging rate of 5%, the normal method is meaner!!

    Question 10
    In the notes it says that, with a sudden rise in interest rates, matched asset share falls. I thought asset share was the retrospective accumulation of premiums less expenses. It shouldn't matter what interest rates are doing at the moment as it won't change what has happened in the past.

    Answer 10
    The asset share is the amount of assets that have been built up from past premiums less deductions etc, ie, the money accumulated will be currently part of the company's current investments (hence the term "asset share" - it is that policy's share of the company's assets at a particular time). So if those assets fall in value, then so will the asset shares. (You can think of the fall in asset values as part of that policy's actual experience - ie capital depreciation, that has, in effect, just occurred - and should now be reflected in the current asset share of that policy.)

    Question 11
    Does the maturity value on an endowment have to be less than the asset share for the company to make a profit? I think for a term assurance the asset share will have to be positive at the end of the term for a profit to be made?

    Answer 11
    The answer to both of these questions is "yes". (For the endowment, the asset share has to be greater than the maturity value immediately before it has been paid out.)

    Question 12
    Which old-era subject questions are relevant for the ST2 exam?

    Answer 12
    Nearly all of the old Subject 302 questions are relevant and worth attempting. You may find that a small number (eg those covering the actuarial control cycle and those covering surrenders and alterations) were covered in greater depth in Subject 302. In addition some questions that were very specific to health insurance may not be very useful for Subject ST2. Make sure that you refer to the up-to-date Subject ST2 material when checking your answers to old questions.

    Some of the old Subject 105 questions are relevant and worth attempting, but many of these questions have a more numerical slant than normally found in Subject ST2. The following are the relevant questions from 2000-2004. Note that while questions in brackets cover relevant subject material they are unlikely to be asked in this form in the ST2 exam.

    April 2000 exams: Questions (4), 9, 15, (16) and (17)
    September 2000 exams: Questions 7, (8), 12, (14) and (15)
    April 2001 exams: Questions 1 and (10)
    September 2001 exams: Questions 12, (13) and (14)
    April 2002 exams: Questions (5) and (9)
    September 2002 exams: Questions 2, 4a and (14)
    April 2003 exams: Questions 8, 9 and 12
    September 2003 exams: Questions (4), 8, 10 and (11)
    April 2004 exams: Question 3
    September 2004 exams: Question 8
     
    Last edited by a moderator: Sep 24, 2010
  2. LooLoo

    LooLoo Keen member

    Which old-era subject questions starting from 2005 are relevant for the ST2 exam?
     
  3. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    You should be ok to attempt the majority of the past ST2 questions in your revision. However, the following topics have now been removed from the syllabus, so you should avoid questions on these topics:
    • Groupe Consultatif Reserving Principles
    • Actuarial funding
    • Zillmerisation of net premium reserves
    • Surrender value respread, Accumulation of surplus/arrears, Paid-up plus premium for the balance (these three alteration methods have been deleted, but the course still includes Equating policy values and Proportionate paid-up).
    You should also be aware that solutions to some of the older questions will exclude some ideas that have been more recently added to the syllabus. The biggest change here would be the addition of market-consistent valuations and reserving approaches.

    Good luck with the exam

    Mark
     
  4. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    There have been a number of changes to the course in recent years. Attached is a summary of these changes. It also lists exam questions that are no longer suitable under the 2018 syllabus.

    Best wishes

    Mark
     

    Attached Files:

    Bharti Singla likes this.

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