2007DP Exam Question11

[RedCamel]

I got confused by the solution to 2007DP Exam Question11, hope you can help me with it:

Q11 asks:
(i) Determine whether the contract qualifies as life insurance.

How do the maximum CSV come from? Is it qualified as life insurance?

My NSP is (M[X]-M[X+20])/D[X], this is quite different from the solution.I got the csv for year 17 is (M[50]-M[70])/D[50], 11749.301, so it is a life insurance.


(iii) Propose changes to the 20-Year Term product and the ROP rider design to ensure the contract does not become a MEC. Show all work.

Since the question (ii) already make sure it is not a MEC, Why we still need any changes to ensure that? or should the question be "Propose changes to ensure the contract does become a LifeInsurance."

I put the exam question and sulotions in the attachment for your reference.

Thanks a lot......

[Actuary_JB]

For Part i), you need to use the NSP for the attained age (66) rather than the issue age (50). Thus, the formula for the NSP would be (M[66] - M[70])/D[50], which matches up with the solution of 7,135.

For Part iii), I think the question was worded incorrectly. Based on the solution, I believe they are asking to propose changes that would allow the policy to qualify as life insurance.

I hope that helps.

JB

[RedCamel]

For Part i), you need to use the NSP for the attained age (66) rather than the issue age (50). Thus, the formula for the NSP would be (M[66] - M[70])/D[50], which matches up with the solution of 7,135.

For Part iii), I think the question was worded incorrectly. Based on the solution, I believe they are asking to propose changes that would allow the policy to qualify as life insurance.

I hope that helps.

JB


it sure helps a lot.Thanks, Jeremy !!

but i still got questions with it .
1. since in duration 16,the P.H. paid prem 16 times, why the surrender benefit is 17*800*70%,instead of 16*800*70%. if the surrender benefit is applied during duration 16 and paid out at the end of duration 16, why count in the no.17 payment; the P.H. won't pay it.

2. should the NSP be based on the end of every duration or policy year, and then compared to the surrender benefit at the end of that policy year? Why not base the NSP at the begining of the year?
My calculation is :
Since just when the policy enters year 16,my calculation for the surrender benefit is 16*800*70%, and NSP at the beginning of duration 16 becomes A[65]=(M[65]-M[70])/D[65]

:swear: I drift far away from the solution....so ...Help!

Where could i find some detailed clearifications about this in the textbook ?

Thanks again!!

[CDesRochers]

The model solution is incorrect, which has been pointed out to the SOA.

The sample calculations in the model solution are based on the premise that the “test plan,” the plan that is used to measure compliance under section 7702 and 7702A follows the 20-Year Term model of the underlying product. However, the computational rules under section 7702(e) are an Endowment at Age 95 model, regardless of the terms of the plan being tested. This is a consequence of the 7702(e) rules, which provide: (1) the maturity date is deemed to be no earlier than age 95 or no later than age 100; and (2) death benefits are deemed to be provided to the deemed maturity date. This is a fundamental element of the definitional limit that a well-qualified candidate would be expected to know.

The sample solution measures qualification using a maturity date that coincides with the 20-year term period. As a result, the policy is shown not to comply with the section 7702 limits in the later years. However, this is a faulty conclusion, as the comparison would be an E95 plan (or a whole life given the data in the table). The “correct” answer is based on NSPs for CVAT as (M95 - Mage + D95)/Dage. It appears the contract easily passes CVAT. Similarly, the 7-Pay Premium should be (Mx - M95 +D95)/(Nx-Nx+7), and MEC status seems easily avoided. As a practical matter, the question does not provide commutation functions for age 95, so the correct values could be computed as whole life.

[RedCamel]

The model solution is incorrect, which has been pointed out to the SOA.

The sample calculations in the model solution are based on the premise that the “test plan,” the plan that is used to measure compliance under section 7702 and 7702A follows the 20-Year Term model of the underlying product. However, the computational rules under section 7702(e) are an Endowment at Age 95 model, regardless of the terms of the plan being tested. This is a consequence of the 7702(e) rules, which provide: (1) the maturity date is deemed to be no earlier than age 95 or no later than age 100; and (2) death benefits are deemed to be provided to the deemed maturity date. This is a fundamental element of the definitional limit that a well-qualified candidate would be expected to know.

The sample solution measures qualification using a maturity date that coincides with the 20-year term period. As a result, the policy is shown not to comply with the section 7702 limits in the later years. However, this is a faulty conclusion, as the comparison would be an E95 plan (or a whole life given the data in the table). The “correct” answer is based on NSPs for CVAT as (M95 - Mage + D95)/Dage. It appears the contract easily passes CVAT. Similarly, the 7-Pay Premium should be (Mx - M95 +D95)/(Nx-Nx+7), and MEC status seems easily avoided. As a practical matter, the question does not provide commutation functions for age 95, so the correct values could be computed as whole life.


Is that maturity date limit only for endowment plan，not for whole or term plan? since the textbook example using Ax，not A[x:95－x]...,I guess..

[CDesRochers]

Section 7702(e)(1)(B) states that the maturity date shall be no earlier than the day on which the insured attains age 95, and no later than the day on which the insured attains age 100. The DEFRA Bluebook notes that irrespective of the maturity date actually set forth in the contract the deemed maturity date is generally the termination date set forth in the contract or the end of the mortality table (age 100).

For the sample problem, an endowment at age 95 or later will qualify. Since 95 is the earliest age, that produces the highest limit. The textbook examples were whole life, but arguably an E95 limit would have also worked. The point is that the 20-year term model used in the sample solution is a misread of the statute which allows benefits to be deemed to the maturity date, which is between ages 95 and 100.

[tom_47]

I'm a little puzzled by the idea of having to do the CVAT as though the policy wouldn't mature until age 95 when, by it's own terms, it matures much earlier.

Wouldn't adding so many phantom future benefits create a loop-hole big enough to drive a pick-up truck through?

What stops someone selling a 20 year-old a one year product and allowing premium deposits up to the NSP that includes potential benefits for 75 future years?

[Toluca]

I'm a little puzzled by the idea of having to do the CVAT as though the policy wouldn't mature until age 95 when, by it's own terms, it matures much earlier.

Wouldn't adding so many phantom future benefits create a loop-hole big enough to drive a pick-up truck through?

What stops someone selling a 20 year-old a one year product and allowing premium deposits up to the NSP that includes potential benefits for 75 future years?

Just remember that the main concern here is taxes on cash accumulation. With a one year product you would not be able to accumulate that much. After the one year period, you would have to transfer your money (1035 exchange) to another product and so on.

Also, as an actuary you are supposed to follow the reg but also you need to pay attention to the intention of the reg.

Besides, if people start getting creative (like UL with secondary guarantees), the regs would be patched to not allow the loop-hole. that is how the system works.

[tom_47]

Hi, Toluca. Thanks for the reply. My point, however, was just to show that, if the above interpretation of 7702 is correct then on its face it allows vast over-funding. Given the purpose of the statute is the opposite, how can that interpretation be correct?

Also, I suspect that if this were permitted we would be seeing all sorts of products that did it. But we don't.

[CDesRochers]

Rest assured that the interpretation is correct. The deeming of death benefits allows for a partial endowment. It also sets an absolute limit on the cash value in relation to the death benefit irrespective of the actual terms of the policy. Hence, the "test plan" concept.

[inexactuary]

Hi, Toluca. Thanks for the reply. My point, however, was just to show that, if the above interpretation of 7702 is correct then on its face it allows vast over-funding. Given the purpose of the statute is the opposite, how can that interpretation be correct?

Also, I suspect that if this were permitted we would be seeing all sorts of products that did it. But we don't.

I think maybe what you're missing is that the test plan is an endowment, so assuming a later maturity date actually results in lower limits.

[tom_47]

Thanks, C. I'm certainly ready and able to take your word for it. And the plain language you cite above leaves little doubt.

Still, how much sense does it make? lol

What response have you had from the SoA regarding a correction to the solution? I just downloaded it the other day and it was (as yet) unchanged...

[inexactuary]

What response have you had from the SoA regarding a correction to the solution? I just downloaded it the other day and it was (as yet) unchanged...

They aren't going to change it. The solutions they post are answers from candidates getting a 10 on the question and not the official solution, so it's fairly common to see errors.

[tom_47]

Wait, you're saying that the SoA doesn't release actually correct answers to past exams????

What's that about?

[wat?]

Wait, you're saying that the SoA doesn't release actually correct answers to past exams????

What's that about?

I'm not sure where I read it or whether it was an official position of the SOA, but solutions to written answer exams have always been answers written by students during the actual exam sitting rather than a grading outline that specifically outlines what the graders are looking for.

Pretty much the only thing you know about the answer is that the student received a 10 for it. What you don't know is what part of the answer allowed the student to get his/her 10 and what part was superfluous or, in this case, what part was incorrect.

[tom_47]

Classic. God forbid we should learn how to do it correctly...

[rekrap]

Classic. God forbid we should learn how to do it correctly...

Actually, there is value for an exam taker to see that an imperfect answer can still yield a sufficient, even perfect, score.

There is value in understanding the material well enough that the correct application of it is in your work. Especially when answers in real life are less obviously "correct" or "incorrect", and rarely perfect.

[tom_47]

Ah, real life. I thought we were talking about exams.

It's the SoA's game, they make the rules. I just play by them. If they want to release wrong answers then perhaps they could call them something other than "Solutions"?

And, honestly, learning from (undisclosed) wrong stuff isn't a very efficient way to learn.

Oh well, what's a girl to do?

[rekrap]

Ah, real life. I thought we were talking about exams.

It's the SoA's game, they make the rules. I just play by them. If they want to release wrong answers then perhaps they could call them something other than "Solutions"?

And, honestly, learning from (undisclosed) wrong stuff isn't a very efficient way to learn.

Oh well, what's a girl to do?

They call them "Illustrative Solutions".

http://www.soa.org/library/proceedings/record-of-the-society-of-actuaries/1990-99/1993/january/RSA93V19N34.PDF [pdf]

ILLUSTRATIVE SOLUTIONS - ARE THEY USEFUL?
Illustrativesolutions, old style, are of some use if you recognizewhat they are. They are absolutely super perfect answers. They arethe answers of Superman or Wonder Woman. Nobody is sayingthat you shouldhave written that much or been that comprehensive. The point is that they are supposed to be aimed at the heart of the question that was asked. You can check yourself by lookingat the question, sketching out the main points to the answer, and then comparingyour points to the perfect answer to see if you're on target. Your answer doesn't have to be as complete asthat. You can't even write that much informationin the allotted time.
But that is not what they are intended to illustrate. They are provided to show you what the central points of the question were.

New style illustrative solutions are coming soon. They are going to be based on very good papers that received full credit. They will not be as comprehensive. They will not be super perfect. Read the warning on the cover page so you see what the difference is. Make sure you know what you're dealing with. Then they can be of some use to you.

As you can see, a conscious change was made in the mid-90s to move from perfect, comprehensive solutions to illustrative, model solutions. While you may not have been expressly aware of the intention of the "Illustrative Solutions", the SOA E&E presumably feels that they are understood by candidates as model solutions, not perfect solutions, since they have been that way for more than a decade, and doesn't feel the need to put warning labels directly on the files anymore.

[rekrap]

I find this interesting as well. Apparently candidates didn't get solutions before this point:

http://www.soa.org/library/research/transactions-of-society-of-actuaries/1949/january/tsa49v1n14.pdf [pdf]

Now for the Fellowship students. Let's give them the facts. One of the facts in which they are most interested is a set of specific answers which obtained a full mark on various examination questions. I believe this might help the more competent actuary the most because the more successful the actuary is the less accustomed he is to discussing obvious fundamentals and relatively minor details in his daily work. Consequently, he is more likely to omit these fundamentals and details in preparing for and writing the examination.

If publishing solutions that really earn full credit would help the Fellowship students, that would pose a difficulty for the Examination Committee. The Committee has been instructed to "maintain our standards." We are now passing a substantially higher percentage of Fellowship students than 7 years ago. That can be justified on the assumption that panel notes and various educational activities enable students to "assimilate a much greater amount of material" and, hence, that the student has added (probably) 5 points to his grades. I do not have the exact facts as to the
grade distribution, but if the Examination Committee had assumed 5 or 6 additional points as the value of this educational activity, and had lowered the pass mark accordingly, I believe at least one-fourth of those falling on Fellowship parts would have passed last year.

[emphasis mine]

[tom_47]

Quick, Mr. Peabody! To the Way-back machine!

Sadly, unlabeled "illustrative" solutions are even more misleading when they are drawn from fundamentally flawed exam questions (as this thread illustrates).

Ah, but at least I've learned...

[LauraJane]

For Part i), you need to use the NSP for the attained age (66) rather than the issue age (50). Thus, the formula for the NSP would be (M[66] - M[70])/D[50], which matches up with the solution of 7,135.

For Part iii), I think the question was worded incorrectly. Based on the solution, I believe they are asking to propose changes that would allow the policy to qualify as life insurance.

I hope that helps.

JB

If I understand the CVAT test - I believe we are saying that the plan does not qualify as life insurance.....however, if it doesn't qualify as life insurance then there's no reason to test for MEC status.....or am I missing something?!?!?

I realize the solution is wrong (based on the discussions following the initial posts) but this answer obviously matched the grading outline and when I did my calculations my numbers matched, but the periods were wrong.
--> I would think that for time 16: you need to use the NSP for the attained age (66). Thus, the formula for the NSP would be (M[66] - M[70])/D[66], which matches up with the solution of 7,135......but this is their period 17 value.

Not sure why I am so concerned, I doubt we'll see a similar problem....but I think this problem is messing up the basics and I just want to make sure I have those correct.

[Jessie ^]

I also thought that the time periods were off. what they had as period 17, i had period 16.

[rekrap]

I realize the solution is wrong (based on the discussions following the initial posts) but this answer obviously matched the grading outline and when I did my calculations my numbers matched, but the periods were wrong.


First, "obviously matching" is a dangerous assumption. This problem may have had very poor overall performace, meaning the points needs to earn a perfect score were low. Therefore, the best solution presenting the CVAT comparison test, may have actually had a mistake (such as duration 16/17 mismatch) that didn't cost much and affect the aggregate result on that question. Why they chose this as the model solution? The world may never know.

Second, the candidate may have considered that payable on surrender meant at the end of the year, at which point the CV would be duration 17 and therefore used n=17 in calculating the ROP value. I don't see an explicit statement of that fact, but the grader would probably take off a subpoint (or two) for that, and then check the rest of the work ignoring that erroneous assumption.

Third, don't let a past exam question and the provided model solution affect the basis of your understanding. It should only affect the value of the gain above basis. [Or some such play on the outside theory of inside buildup...]

[LifeAct]

If I understand the CVAT test - I believe we are saying that the plan does not qualify as life insurance.....however, if it doesn't qualify as life insurance then there's no reason to test for MEC status.....or am I missing something?!?!?

I realize the solution is wrong (based on the discussions following the initial posts) but this answer obviously matched the grading outline and when I did my calculations my numbers matched, but the periods were wrong.
--> I would think that for time 16: you need to use the NSP for the attained age (66). Thus, the formula for the NSP would be (M[66] - M[70])/D[66], which matches up with the solution of 7,135......but this is their period 17 value.

Not sure why I am so concerned, I doubt we'll see a similar problem....but I think this problem is messing up the basics and I just want to make sure I have those correct.


That was my first thought. The requirements of 7702A is that the policy pass the 7702 requirement and the 7-pay premium test.


My first impression of the upper level exams is that they suck, and there is absolutely no quality control in the process.

[rekrap]

My first impression of the upper level exams is that they suck, and there is absolutely no quality control in the process.

Feel free to volunteer to be on the exam committee once you obtain your FSA and help improve the process.

Also, I know they are still looking for graders for the exams this sitting, too. No one seems to want to spend a weekend in Austin grading our papers.

Good FSA volunteers are busy working their real jobs. That leaves ivory-tower profs and lazy FSAs to handle the process. :viola:

[LifeAct]

Feel free to volunteer to be on the exam committee once you obtain your FSA and help improve the process.

Also, I know they are still looking for graders for the exams this sitting, too. No one seems to want to spend a weekend in Austin grading our papers.

Good FSA volunteers are busy working their real jobs. That leaves ivory-tower profs and lazy FSAs to handle the process. :viola:

I would love to volunteer. I would also like to get more information regarding the process.

[rekrap]

I would love to volunteer. I would also like to get more information regarding the process.

I bet once you're an FSA you'll hear all about how to be a part of it. :tup:

[LifeAct]

Feel free to volunteer to be on the exam committee once you obtain your FSA and help improve the process.

Also, I know they are still looking for graders for the exams this sitting, too. No one seems to want to spend a weekend in Austin grading our papers.

Good FSA volunteers are busy working their real jobs. That leaves ivory-tower profs and lazy FSAs to handle the process. :viola:

I have a lot of work to do, but I will volunteer for this if nobody else will.