EXAMINERS’ REPORT

CP1 - Actuarial Practice

Core Practices
Paper One

September 2024
 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

Introduction

The Examiners’ Report is written by the Chief Examiner with the aim of helping candidates,
both those who are sitting the examination for the first time and using past papers as a
revision aid and also those who have previously failed the subject.

The Examiners are charged by Council with examining the published syllabus. The
Examiners have access to the Core Reading, which is designed to interpret the syllabus, and
will generally base questions around it but are not required to examine the content of Core
Reading specifically or exclusively.

For numerical questions the Examiners’ preferred approach to the solution is reproduced in
this report; other valid approaches are given appropriate credit. For essay-style questions,
particularly the open-ended questions in the later subjects, the report may contain more points
than the Examiners will expect from a solution that scores full marks.

For some candidates, this may be their first attempt at answering an examination using open
books and online. The Examiners expect all candidates to have a good level of knowledge
and understanding of the topics and therefore candidates should not be overly dependent on
open book materials. In our experience, candidates that spend too long researching answers
in their materials will not be successful either because of time management issues or because
they do not properly answer the questions.

Many candidates rely on past exam papers and examiner reports. Great caution must be
exercised in doing so because each exam question is unique. As with all professional
examinations, it is insufficient to repeat points of principle, formula or other text book
works. The examinations are designed to test “higher order” thinking including candidates’
ability to apply their knowledge to the facts presented in detail, synthesise and analyse their
findings, and present conclusions or advice. Successful candidates concentrate on answering
the questions asked rather than repeating their knowledge without application.

Candidates should note that from the April 2025 exam session, all examinations will
continue to be delivered virtually and will have online proctoring. Exams will be closed
book and closed web. The ability to refer to past examiner reports and past papers
during the exam is not permitted. Candidates attempting to do so will be in breach of
the Assessment Regulations and subject to inappropriate conduct
investigations. Further details of the new exams can be found on the IFOA website.

The report is written based on the legislative and regulatory context pertaining to the date that
the examination was set. Candidates should take into account the possibility that
circumstances may have changed if using these reports for revision.

Sarah Hutchinson
Chair of the Board of Examiners
December 2024

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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

A. General comments on the aims of this subject and how it is marked

The aim of the Actuarial Practice subject is to use the technical and business skills learnt in
the Actuarial Statistics, Actuarial Mathematics, Actuarial Modelling and Business subjects,
combining them with new material on how these skills are applied to solve real world
problems.

The subject provides the essential knowledge of risk management techniques and processes
required by all actuaries and is an essential introduction to Enterprise Risk Management,
subject SP9 and the Chartered Enterprise Risk Actuary qualification.

The subject also underpins the Institute and Faculty of Actuaries SP and SA subjects,
covering essential background material that is common to a number of actuarial practice
areas.

This subject examines applications in practical situations of core actuarial techniques and
concepts. To perform well in this subject candidates require good general business awareness
and the ability to use common sense in the situations posed, as much as learning the content
of the core reading.

The candidates who perform best learn, understand, and apply the principles rather than
memorising the core reading. The examiners set questions that look for candidates to apply
the principles specific to the situation set out in the questions, having read the question
carefully. Candidates gain few marks by writing around the subject matter of the question in a
more general fashion. Detailed specialist knowledge is not required and nor is very detailed
development of particular points.

Good candidates demonstrate that they have spent time in the exam on understanding the
breadth of the question asked and on planning their answers - planning is a big advantage in
making points clearly and without repetition. This also enables candidates to use the later
parts of questions to generate ideas for answers to the earlier parts.

Time management is important so that candidates give answers to all questions that are
roughly proportionate to the number of marks available. Candidates should also consider the
command verb for a question carefully when considering the length of their answers.

The comments that follow the questions concentrate on areas where candidates could have
improved their performance. Candidates approaching the subject for the first time are advised
to use these points to aid their revision.

Candidates who give well-reasoned points, not in the marking schedule, are awarded marks
for doing so.

B. Comments on candidate performance in this diet of the examination

In general candidates scored higher marks for Paper 1 than Paper 2 but the difference in
marks between Paper 1 and Paper 2 for this session was less than for recent previous
sessions. Overall, this exam was more difficult than normal, with candidates finding a couple
of questions in this exam particularly challenging and Paper 1 scoring lower than for previous
recent sessions. As such the pass mark was reduced to reflect the difficulty of those

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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

questions. As per other sessions it is also worth noting that the stronger candidates used the
information provided in the questions to tailor their answers to the question and scored better.

The Examiners concluded that a candidate scoring 53 or above on this specific paper had
demonstrated a minimal level of competence to pass the exam.

C. Pass Mark

The Pass Mark for this exam was 53.

891 presented themselves and 394 passed.

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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

Solutions for Subject CP1-1 September 2024

Q1
Current regulations relating to treating customers fairly may not have been successful
in providing sufficient protection for customers. [1]
Consumers may be vulnerable when dealing with complex insurance products so the
regulator may have made this proposal to increase customer protection. [1]
The new regulation may have been introduced to improve overall confidence in the
insurance industry. [½]
Under current regulations customers’ best interests may not have been taken into
account sufficiently and products sold may not have been the most suitable. [1]
Vulnerable customers may have difficulty accessing suitable products. [1]
and may not have been supported when taking out policies; [½]
they may not fully understand the products offered or the terms and conditions. [½]
Similarly, they may not have been supported when making claims. [½]
The regulator will want to ensure that all consumers will have their insurance needs
met in the most suitable way and the new regulation will aim to achieve this. [1]
The new regulations may be seen as international best practice and so the regulator
will want to implement them in the country. [½]
Complaints may have been increasing and the regulator has responded to that. [½]

[Marks available 8, maximum 5]

[Total 5]

Commentary:
This question was answered reasonably well but those candidates that discussed why the
regulator may have proposed the change received more credit than those that just listed the
purposes of regulation. Only the strongest candidates made sufficient diverse points to score
the highest marks.

Q2
Needs of the customer
Ensure that the product meets the risk profile of the intended customer. [½]
Ideally would like to target customers with a wide range of risk appetites by offering
a range of investment choices. [1]
Some graduates may feel more confident in making their own choices for retirement,
although this will not be true of all graduates. [½]
At the beginning, the graduate income may be lower than the national average, so a
key focus will be to ensure charges are low. [½]
Likely the individuals will have a higher-than-average income in the future, [½]
so may be able to afford to save/invest a greater proportion of their income and value
any flexibility in the product. [½]
Educate individuals on the merits of a pensions product and savings in general, as
they may not view it as a priority. [½]
Design product with long term flexibility in mind to allow graduates to change their
pension plan as their financial situation changes over time. [½]
Ensure product has simple charging structured and can be easily explained to
consumer from outset - recent graduate may not be financially sophisticated. [½]
Online access as younger consumers will expect this. [½]
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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

Needs of the provider

The provider’s risk appetite and desired profits from this product. [½]
The extent of any existing experience and expertise in this market. [½]
The level of capital available to back this product. [½]
How the funds should be invested prior to retirement. [½]
How much should be charged to meet provider’s costs. [½]
Administration requirements. [½]
Expenses. [½]
Distribution channel. [½]
Regulatory environment
Any new product should comply with any legal or regulatory requirements. [½]
May need approval from the regulator before being able to launch the product. [½]
May be tax advantages to either the customer or provider with this product. [½]
Competitive pressures
Price and product features. [½]
Provider should know whether a similar product already exists in the market and who
its main competitors might be. [½]
Likely to be more focussed on any features that differentiate against other products in
the market. [½]
Consider sales and marketing costs of product. [½]
Level and form of benefits to be provided
Any options or guarantees that might be included. [½]
Benefits on discontinuance or transfer of rights. [½]
Any flexibility in how the benefits are taken e.g. take a portion of their benefits early
as a lump sum. [½]

[Marks available 14.5, maximum 5]

[Total 5]

Commentary:
Most candidates picked up the vast majority of the marks, especially those who structured their
answers and hence avoided repetition.

Q3
The insurer can improve its solvency position by increasing its amount of equity by
raising additional equity from new or existing shareholders, [½]
or retaining more profits/paying no or less dividends. [½]
The insurer could raise additional permitted debt, subject to admissibility limits. [1]
Some insurers may be able to raise special types of capital, for example call for
additional mutual subscriptions. [½]
An insurer may be able to sell a subsidiary for more than the value recognised for
solvency to increase its equity. [½]
An insurer may be able to sell part of its existing business and renewal rights, for
example its home/motor insurance to increase its equity and reduce its capital
requirements. [1]
An insurer could:
Increase premiums with the aim of increasing profits so gradually improve
solvency. [½]
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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

Alter claims underwriting to reduce claims costs to improve profitability and

increase equity. [½]
Take steps to improve profitability - for example: [½]
• Reduce expenses
• Improve claim management practices to reduce fraud
• Tighten underwriting procedures
• Any reasonable examples [½ mark for each up to a maximum of 1 mark.] [1]
The insurer could take actions to reduce its capital requirements, such as: [½]
Write lower volumes of business. [½]
Alter the business mix between motor and home insurance to lower capital
requirements by improving diversification. [1]
Enter into a business swap e.g. swapping some home insurance exposure to a
different insurance class than home or motor to lower capital requirements. [1]
Alter excess of loss reinsurance levels to reduce capital requirements. [½]
Increase quota share reinsurance where the counterparty risk capital increase is
less than the reduction in other capital requirement reductions. [½]
Use reinsurance. [½]
Subject to regulatory requirements. [½]
Enter a post loss funding arrangement to reduce capital requirements. [½]
Remove any unnecessary margins in capital calculation. [½]
Negotiate with regulator - e.g. to remove capital add on. [½]
Change asset allocation to ensure assets well matched with liabilities [½]
Improve their modelling to get a more accurate view of capital required. [½]

[Marks available 13.5, maximum 6]

[Total 6]

Commentary:
This question was not answered as well as examiners expected, with only the strongest
candidates writing sufficient number of points in enough detail to score high marks.

Candidates that considered both how the company could reduce capital requirements and
improve profitability scored well.

Q4
(a)
The key risk will be the mortality risk of an individual dying before the end of the
policy term. [1]
Stochastic model can help evaluate uncertainty around mortality experience [½]
particularly in assessing the impact of more extreme tail events. [½]
Which can allow insurer to better understand the financial impact of the range of
potential outcomes. [½]
Other variables could be set on a deterministic approach. [½]
However, need to balance this against the time, cost and complexity of building a
stochastic model. [½]
Cost and effort to build full stochastic model may be unnecessary for term assurance
contract which is relatively simple [½]
so it may be appropriate to only model term assurance using deterministic approach. [½]

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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

[Marks available 4.5, maximum 3]

(b)
A number of the variables can be incorporated as probability distributions [½]
e.g., the future return on different types of assets, inflation. [½ marks for each example
up to 1 mark] [1]
The interaction between the different variables can be set to operate dynamically [½]
There will be a very large number of possible outcomes [½]
especially over a 10 year period [½]
so stochastic modelling will give the user a feel for the size of the likely range e.g.
confidence interval. [½]
However, any such model will be extremely complex to specify and build and have
very long run times. [½]
In that case, it will be necessary to limit the scope of the model by limiting the number
of risk variables that are modelled stochastically to the significant ones [½]
and using a deterministic approach for the other variables. [½]

[Marks available 5, maximum 3]

[Total 6]

Commentary:
This question was not well answered

Both in (a) and (b) there was a tendency to reproduce stochastic modelling bookwork in the
hope this would align with some of the points needed, some candidates not even separating (a)
and (b) out.

Those candidates who built on the scenarios in hand and argued to a reasonable conclusion
performed better.

Q5
The most important thing is the model is suitable for estimating the cost of incurred but
not reported claims related to the specific business that the company has written. [1]
So the company will need to understand whether the model built by the consultancy for
its competitor is appropriate. [½]
If not, why change the model? [½]
Consider the training needs of the internal actuarial function. [½]
In particular is the business written consistent with what the company has written - i.e.
both in terms of products, target markets and specifics of the products. [1]
Are the claims also broadly consistent or is the underwriting processes materially
different that could impact the expected costs over time. [1]
How accurate is the model, that is does the competitor have a different requirement
from the accuracy - i.e. is the model in line with the tolerances it wants to have for
estimating the claims. [1]
How flexible is the model, if it is close enough to the company’s needs could it be
adjusted to meet the specific needs. [1]
What are the relative costs of building a model from scratch - i.e. what are the benefits
of using this model compared to building its own. [1]
There will be a number of operational issues to be considered from using this model: [½]
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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

How well documented is the model and how much would the model need to be
changed to ensure it meets the company’s requirements
Is the model and its results easily understandable or is it a complex model that will be
hard to use and then the results difficult to explain to relevant parties [1]
How easy will it be for the model to be developed and refined [½]
to reflect the company’s product features, underwriting guidelines, claims handling
processes [½]
How easy will it be for the model to be implemented with existing process. [½]
It will need to be reconciled to its existing model to ensure the results are
understood - will this be easily achieved. [1]
Will the model be able to create different sensitivities - this is linked to how flexible it [½]
is
Are there any conflicts of interest from using the model and is the consultancy allowed
to use the possible intellectual property of the competitors model - is the company
liable for this risk. [1]
Consider auditor or other external party. [½]

[Marks available 13.5, maximum 7]

[Total 7]

Commentary:
This was reasonably well answered, although some candidates put too much emphasis on the
contract terms (cost and expertise), a small element of the question rather than considering a
wider range of ideas in their answers.

Q6
(i)
A fixed fee may be attractive to their patients. [½]
Patient feedback may have suggested this [½]
This could lead to attracting more patients and so more income. [1]
They may be better able to plan as they will have a more secure source of income. [1]
A fixed fee plan may make the practice more competitive, or it may be needed to stay
competitive if a similar plan is offered by other local dentists. [1]
Or they could be following industry trends [½]
A fixed monthly fee approach may be easier and therefore cheaper to administer for the
dental practice, rather than collecting the cost of each treatment as it occurs. [1]

[Marks available 5.5, maximum 2]

(ii)
The information relating to the fee for each type of treatment will be known as these
have already been set. [½]
However, will need to consider any changes to these costs over the one-year period of
the plan. [1]
There may be increased costs relating to staff, premises or dental treatments. [1]
Need to consider a mix of treatment types [½]
And whether this is likely to change in the future. [½]
The fee levels may need to be increased to reflect increases in the dental practices’
costs such as staff, premises, or dental treatment costs. [1]
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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

Will need data on the number and type of patients expected to take out the plan and the
treatments they are expected to need over the one-year period. [1]
The dental practice will not have their own data as they are newly set up and will need
data from similar dentists. [1]
This data may be available through the industry. [½]
Margins may be needed to allow for the uncertainty in the data [½]
The level of uncertainty in the new product may be unknown [½]
There will be expenses relating to these policies which will need to be allowed for,
perhaps on past experience. [½]
May need to make an allowance for any investment income. [½]
However, these are short term policies, so this is not likely to be significant. [½]
There may be regulations relating to these plans and this may lead to additional costs. [½]
Allowance for overheads [½]

[Marks available 10.5, maximum 5]

(iii)
The fixed price might be considered too high [½]
Which could lead to anti-selection [½]
as those with good dental health could pay per treatment or they may use other dentists
offering a lower fee. [½]
Or patients could find the overall monthly cost to be unaffordable so the dental practice
will lose patients. [½]
Patients use dental services more frequently than anticipated [½]
Leading to higher costs for the dental practice than anticipated. [½]
The cost of staff, materials etc could be significantly higher than expected leading to
losses. [½]
There is also the risk that the assumptions used were not appropriate leading to losses
on the plans. [½]
Data taken from elsewhere might not be appropriate [½]
Reputational risk if costs too high or demand too high so that service suffers [½]
Operational risk e.g. administrative risk with new payment plan. [½]

[Marks available 5.5, maximum 3]

[Total 10]

Commentary:
Part (i) produced good responses with most candidates scoring full or close to full marks.

In part (ii) very few candidates appreciated that the fees for each type of treatment had already
been set, so that an assumption for the cost of each treatment would not be required. Data
sources for other areas, and their limitations, could have been covered in more detail to score
higher marks rather than bookwork type answers. Examiners were surprised that many
candidates failed to consider the expected take-up, by volume and mix, of the plan. Many
treated this as an approved insurance product rather than an internally arranged option
(although some regulation might still apply).

Part (iii) was answered well.

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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

Q7
(i)
Financial company will need to place a value on expected future revenue from artists
back catalogue and this will require a number of assumptions about: [½]
Revenue per year [½]
How many years to allow for [½]
Potential attractiveness to the market. [½]
Need to consider past profits per annum made by the artist. [½]
Does the financial company have other equivalent transactions that it can use to assess
future income? [½]
Competition - Are their other companies trying to buy the artists future profits? [½]
Need to consider how much this would influence the price. [½]
Tax issues on the different cashflows. [½]
Need to consider terms of the deal [½]
For example, does the deal cover the artists revenue in all markets? [½]
What happens at the end of the term of the deal? [½]
Need to consider possible risks that could influence the future value of the artist’s
material? [½]
Does the financial company have sufficient capital to finance the transaction? [½]
If not it will need to find capital from somewhere? [½]
For example by borrowing? What are the terms it can borrow on. [½]
Consider whether to include any guarantees, e.g. clawback if sales fall [½]
Could offer to sell the product to others in the market to spread risk [½]
Might be attractive to fans of the artist for emotional reasons [½]
So could package as a retail product once the deal is done [½]
[Marks available 10, maximum 4]
(ii)
Artist
That financial markets do not want to provide the finance [½]
Or the terms are too harsh (e.g. not as high a lump sum as they want) [½]
Risk of investing the lump sum [½]
Cost of the artist getting appropriate financial advice and investment management
services could be high [½]
Value of future sales of back catalogue could be higher than then lump sum [½]
Particularly as financial markets will have more experience in pricing cashflows [½]
There is a risk that the artist wastes their lump sum quickly and does not have sufficient
money to live on later in life. [½]
Financial company
Misprice the lump sum and give out more than the value of future sales [½]
Value of future sales less than expected [½]
E.g. streaming services mean people do not pay much for music [½]
e.g. Copyright infringement [½]
e.g. artist goes out of favour. [½]
Sale of product to retail investors does not work leaving more risk with original writer [½]
Might be offset by the emotional connection to the artist [½]

[Marks available 7, maximum 6]

[Total 10]

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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

Commentary:
(i) Many candidates put too much emphasis on the popularity of the artist and their music, and
how this could change (more relevant to (ii)), overlooking the first order elements determining
the actual structure of the transaction.

(ii) Most candidates grasped that the future earnings of the back catalogue could vary relative
to the lump sum changing hands, with good examples of how, but few considered the wider
points.

Q8
(i)
Increasing cost of existing system makes healthcare unaffordable. [½]
For example, due to adverse demographic changes [½]
such as an ageing populations [½]
of higher than expected costs [½]
Government revenue lower than expected so it can’t afford health care costs. [½]
This could be due to poor economic conditions. [½]
Cost of the government borrowing has risen significantly. [½]
Pressure from citizens to reduce taxes [½]
There may have been pressure from citizens to offer a health insurance option which
could offer citizens more choice in health services. [½]
An ideological view that governments should not provide such services [½]
Lobbying from the insurance industry [½]
Either domestic or overseas (e.g. as part of signing trade deals) [½]
[Marks available 6, maximum 4]
(ii)
(a) Government
Advantages:
Include reduction in expenditure. [½]
Reduce government’s responsibility for healthcare provision. [½]
And shifting this responsibility to the private sector. [½]
Way for government to avoid blame for health issues. [½]
Increased health of population if the scheme works. [½]
Leading to better economic growth. [½]
Disadvantages:
Potential increase in inequity in the country if those on lowest incomes cannot afford
healthcare insurance. [½]
Government may still need to meet cost of healthcare of poorest in society to ensure
there is a safety net. [½]
Political unpopularity [½]
Poor health outcomes negatively impacting economic growth if the scheme does not
work. [½]

(b) Insurance companies

Advantages:
Potential increase in profits [½]
Increase size of healthcare insurance market [½]
could lead to new entrants in the market. [½]
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Overseas companies might already have experience and could move in rapidly [½]
Disadvantages:
Might need Government contacts to get the appropriate licences to offer these products. [½]
Reputational risk if the scheme is politically unpopular. [½]
Increased scrutiny of business practices [½]
Insurance companies may not be able to make sufficient profits on this business to
make it viable. [½]
Insurance companies will need to invest significantly to meet demand. [½]
Huge liabilities if misprice and cover all conditions (e.g. another pandemic). [½]
Might not have knowledge and expertise for this type of business. [½]

(c) Individual citizens

Advantages:
Potential better health outcomes [½]
More choice [½]
Employers may cover the cost [½]
Market based model could lead to less rationing for those with good policies (e.g.
jumping waiting lists). [½]
Disadvantages:
Poorer citizens may not be able to afford cover [½]
leading to poorer health outcomes. [½]
Most vulnerable in society may struggle moving to private insurance model. [½]
Does insurance cover all conditions, what about exclusions/excess clauses? [½]
[Marks available 14.5, maximum 7]
[Total 11]

Commentary:
(i) Most candidates appreciated the cost savings to the state, but few dug deeper to
consider why the current system might be becoming unaffordable, both in terms of its inherent
increasing costs and the external climate available to fund it. Candidates also proceeded to
over-egg the ideological benefits of the insurance based model over government funding.
Drawing out the calls from the main groups involved would have generated further creditable
points.

(ii) was answered reasonably well, despite a tendency to repeat the same underlying point
which did not get additional credit.

Q9
(i)
Loss of cargo [½]
Damaged cargo [½]
Destroyed cargo [½]
Delays in delivery of cargo [½]
Theft of cargo [½]
Could be exposed to illegal activities if cargo is not checked [½]
Death or Injury of crew [½]
Operational Risk [½]
Political or conflict risk [½]
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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

Regulatory or tax risk [½]

[Marks available 5, maximum 3]
(ii)
The airline could have built up a fund/reserve to cover any losses should they occur by [½]
using some of the premium charged to cover the delivery of the cargo over time [½]
and then making regular payments into a fund/reserve in case of the risks being [½]
incurred.
The airline could request an upfront deposit. [½]
Alternatively, it could have built up the reserve by maintaining its profits to cover the
risk. [½]
- i.e. not paying out to shareholders and keeping them in reserve in case of adverse
experience/losses. [½]
They could be expecting to pay as they go funded from profits/capital from [½]
shareholders.
or a guarantee from the shareholders that this would be paid in the scenario of
significant losses. [½]
The airline could raise capital from issuance of debt or more equity. [1]
However, this would probably be dependent on how successful the company has been
in the past and expected to be in the future. [1]
[Marks available 6, maximum 4]
(iii)
The risks that the insurance company faces are likely to be low probability but high
cost if they should occur [1]
i.e. an aircraft crashing could be very expensive depending on the cargo [1]
Therefore, tail risk is very important as extreme events are hard to predict [1]
So the company will want to analyse the probability of each of the risks happening [½]
And what the possible cost if they did happen [½]
The company would want to charge a different premium for different risks (i.e. how
much is the Cargo, where is it being delivered etc) [½]
so could be multiple premiums offered [½]
Could consider the experience of the airline - but this could be limited and low in
number of data points given the rarity of risk events [1]
Perhaps obtain data from elsewhere [½]
Other things would need to be consider include:
Profit criteria - likely to be high risk so would want to be rewarded [½]
Commission to brokers if appropriate - likely to use syndicates as per Lloyds [½]
Cost of capital for supporting the product - this could be relatively high given
the risks [½]
Could the risk be reinsured - probably bespoke so cost could be high [½]
Any investment income [½]
could be considered but unlikely to be high [½]
Is there any competition, now or into the future [½]
Expenses [½]

[Marks available 10.5, maximum 5]

[Total 12]

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Commentary:
(i) was answered well, although some candidates strayed into financial risks of air transport
beyond the realms of cargo.

(ii) was not answered well. Some candidates concentrated on how the losses could be
controlled (including the various types of insurance) rather than how the airline could be
internally fund them on actual occurrence. Those that mentioned building up a special reserve
received credit, but candidates often failed to state the sources and means of doing so.

(iii) was not answered as well as expected. Too many candidates concentrated on the rating
factors and/or policy conditions. Few discussed the likely claim characteristics, the primary
source of data (the airline) and its limitations. Most of the final adjustments to the premium
were generally appreciated, but with little comment relevant to the scenario at hand.

Q10
(i)
The insurer will want to meet its liabilities as they fall due subject to an acceptable
level of risk by investing in domestic and overseas bonds. [1]
Provided there are no statutory, legal or voluntary restriction on investing in overseas
assets the insurance company may invest in them. [1]
The insurer’s risk appetite and objectives may permit both domestic and overseas
assets. [1]
The respective tax treatment of domestic and overseas assets will need to be [½]
considered.
For inflation linked annuities this means assets matching the specific inflation index, so
domestic assets for domestic inflation exposures, and overseas assets for overseas
inflation exposures. [1]
This will mean matching the currency of asset and liability cash flows, so for liabilities
in an overseas currency investing in overseas asset of that currency. [1]
Investment in overseas assets denominated in the domestic currency provide a currency
match for domestic currency denominated liabilities. [½]
Derivatives, for example cross currency swaps, are classically used to swap the
proceeds of debt issued in a foreign currency into the domestic currency. [½]
This allow overseas assets denominated in a foreign currency to be invested in
combined with derivatives to be used to match the payment of domestic currency [1]
liabilities.
The available term of overseas assets may provide a better match than domestic assets. [½]
The expect long-term returns from overseas assets may be favourable compared to the
domestic assets. [½]
Favourable returns include allowing for capital requirement differences. [½]
Available nature of domestic and overseas assets may differ improving diversification [½]
for example, infrastructure assets, ESG appropriate assets [½ for each example up to 1 [1]
mark]
Other insurers investment strategy could include domestic and overseas assets. [½]
$100bn is a very large size of liability relative to domestically available assets so the
insurer may need to invest in overseas assets, or want to reduce its concentration risk
for individual exposures, sectors and the domestic economy as a whole. [1]
[Marks available 12, maximum 6]
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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

(ii)
The assets invested in by insurers with either $1bn or $100bn of annuity liabilities will
be influenced by the same main factors, those set out within the answer to part (i). [1]
There will be differences in the asset invested in regardless of size of liabilities due to
insurers having different risk appetites and objectives. [1]
The respective insurers will be individually influenced by the investment strategies
followed by other similar size insurers to themselves. [1]
Both insurers will need to invest in similar assets to match, by:
nature (fixed or inflation linked), [½]
term, [½]
currency, [½]
tax treatment considerations, [½]
capital requirement considerations, [½]
statutory, legal or voluntary restriction on investment in overseas assets, [½]
ESG considerations [½]
The insurer with $1bn of annuity liabilities will be limited in some of its assets held
whereas the $100bn insurer would not, by [½]
minimum individual investment size, for example no $250+m single loans, [1]
minimum asset class size for adequate diversification, for example 100 x $5m
requires $500m, [1]
experience and expertise to invest in a wider range of asset classes or complex
investments [1]
E.g. direct property
investment managers minimum investment mandate sizes for certain asset classes,
for example overseas assets for individual currencies, [1]
the additional fixed cost of certain assets classes isn’t offset by higher expected [½]
returns
Liquidity better for large fund [½]
The issuer with $100bn of annuity liabilities will be limited in some of its assets held
whereas the $1bn insurer would not, by [½]
concentration/exposure to individual counterparties or loan issues, for example
where the $100bn is a high proportion of the market’s available assets. [1]
concentration/exposure to asset classes or sectors, for example where the $100bn is a
high proportion of the market’s available assets. [1]
As a result the larger company may need to invest in overseas assets to improve its
diversification by counterparty, asset class or sector. [1]

[Marks available 15.5, maximum 7]

[Total 13]

Commentary:
(i) was fairly well answered, though few candidates brought the insurer’s level of risk
tolerance into their reasoning. The regulation comments often came from the wrong
direction - most thought some overseas investments could be compulsory, whereas what
would be more plausible would be their prohibition.
(ii) was not answered well. The question did state “compare” and few considered why
the strategies may not be that different, the key differences emanating from the scale.

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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

There was a tendency to introduce information from outside of the question to justify
different assets.

Q11
(i)
The company may expect to make a good profit insuring electric vehicles. [½]
If they focus solely on this business, they can use this in their marketing and hope to
get a greater share of this relatively new business. [1]
Having more policies should help in covering the expenses which could mean that
premiums could be reduced. [1]
They may have decided that electric vehicles are the future, and they no longer want
to be involved in a declining petrol/diesel market. [1]
The move fits in well with their brand/marketing [½]
Tax/regulatory environment might be helpful [½]

[Marks available 4.5, maximum 3]

(ii)
The insurance company will need to check that the methods and assumptions used for
this business are appropriate and if not, what changes should be made. [1]
There may be more or less business than expected. [½]
The customers could be different from those expected. [½]
The frequency and severity of claims may be different from those expected. [1]
The market could be more (or less) competitive than expected. [½]
The methods and assumptions may need to be updated to reflect the expected future
experience more closely. [1]
Will need to monitor any trends in experience and take corrective action. [½]
Information can be provided to management and other key stakeholders. [½]
Regulator may have requested monitoring [½]
Because this is a new product so closer scrutiny required [½]

[Marks available 6.5, maximum 4]

(iii)
The results could be used to change the assumptions used for pricing the product. [1]
Could be used to change the product or the terms and conditions relating to the [1]
product.
Could be used to change the marketing to attract more or different business. [1]
May need to reconsider the focus on solely electric vehicles as the market may not
have grown as expected or it may be more competitive than expected. [1]
The electric vehicle insurance market is likely still to be growing and so the
experience may not reflect the future. [1]
Would need to bear this in mind with any decisions being made. [½]
Identify fraudulent claims [½]
Optimising reinsurance plans [½]

[Marks available 6.5, maximum 4]

(iv)
Reports by loss assessors could reduce claims at the larger end [½]

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 CP1-1 ‑ Actuarial Practice ‑ Core Practices September 2024 - Examiners’ report

e.g. they can assess the credibility of personal injury claims [½]
Provider could ask for proof/photos of any items that were taken from the vehicle by
theft [½]
although it may be hard to verify that they actually belong to the policyholder or were
in the vehicle at the time. [½]
Quotations estimate for damage repairs enable the provider to control the costs [½]
and ensure the scope of the repair is commensurate with the cost of the claim. [½]
Use an approved repair garage [½]
to increase confidence that the claim amount is appropriate [½]
Police reports can verify whether an accident has taken place, as claimed by the
policyholder. [½]
Maximum claim limits [½]
Excess or cost sharing [½]
Use of telematics [½]
Better trained staff to spot fraud. [½]

[Marks available 6.5, maximum 4]

[Total 15]

Commentary:
(i) Was well answered.
Candidates struggled to tell apart the requirements of parts (ii) and (iii), the examiners
effectively marked (ii) and (iii) as one question part.

(ii) Was answered less well with many overlooking the basic reasons to monitor
experience as part of the ACC, and some candidates tended to want to display their
knowledge of electric vehicles.

(iv) Was answered well, although more distinct points could have been made.

[Paper Total 100]

END OF EXAMINERS’ REPORT

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