CT5 Contingencies: Quick Review

Preparing for an interview can really take a toll on us, but when we have the right guidelines and refined support, even the most mammoth task can become an itsy-bitsy one.

CT5 comes under the category of most important papers in CT series. It is a very interesting subject and no doubt, there are a lot of things to learn from it.

This article will give you a quick review of what we have studied in CT5 and what are the main concepts we need to keep in mind while going for an interview.

Q. Difference between Insurance and Assurance contracts?
Ans: Assurance contracts provide cover for a definite event i.e. whose happening is certain like- Death. An Insurance contract provides cover on the happening of an anticipated event i.e. which may or may not happen like- theft, fire, flood etc.

Q. What are the different types of life insurance products/contracts?
Ans: Life Insurance contracts are mainly divided into two categories:
Assurance contracts-

  • Whole life assurance: The sum assured is payable on the policyholder’s death.
  • Term assurance: The sum assured is payable on policyholder’s death only if death occurs during a specified period. No maturity benefit is provided.
  • Endowment assurance: The sum assured is payable either on death during the term or on survival to the end of the term. Hence the sum assured is certain to be paid either the life survives or it dies during the term of the policy.
  • Pure endowment: Pure endowment is a special case of endowment assurance where the benefit is payable only if the life survives to the term of the policy.

Annuity contracts-

  • Whole life annuity: The payments are made for the whole of life i.e. until the policyholder dies.
  • Temporary annuity: The payments are made only during a limited time period.
  • Guaranteed annuity: The payments are made for the whole of life or for a specified term if longer, hence the name guaranteed annuity!

Under each of the following cases, if the start of the payment is deferred for a given term, the annuity is called deferred annuity-like- Deferred whole life, deferred temporary, deferred guaranteed annuity.

Q. How assurance contracts differ from annuity contracts?
Ans: Assurance contracts are the ones where the insurer typically pays a lump sum amount to the policyholder on the occurrence of a specified event (death or maturity). Whereas in annuity contracts, a regular income i.e.
series of incomes is paid to the policyholder/nominee.

Q. How the life insurance products are priced?
Ans: The price of life insurance contracts are the premiums. Premiums are calculated using the principle of equivalence i.e. by equating the expected present value of incomes to the expected present value of outgoes, on the basis of some suitable set of assumptions like-

  • Mortality experience
  • Investment returns
  • Future expenses
  • Bonus rates

Q. What is the difference between select and ultimate mortality?
Ans: The mortality which varies by age only is called ultimate mortality whereas the select mortality is the mortality which depends on age as well as the duration of the policy. The mortality of recently joined policyholders (select mortality) is expected to be lower than that of the policyholders who have a longer duration (ultimate mortality).

Q. What are reserves and why insurance companies hold reserves?
Ans: A reserve is a money that is earmarked for the eventual claim payment. The reserve funds are set aside for the future payments of incurred claims that have not been settled. Premiums may not be sufficient to cover the benefits to be paid to policyholders. The insurance companies therefore, set up reserves to ensure
that the company remains solvent.

Q. What are the two methods of calculating reserves? Under which conditions, in general, these are equal?
Ans: Reserves may be calculated by:

  • Prospective method (looking forward) – By discounting estimated future cash flows.
  • Retrospective method (looking backward) – By accumulating past cash flows.

If this is calculated on the same basis as used in pricing basis and reserving basis, then the reserve calculated under both the methods will be the same.

Q. On the basis of premiums charged, what order can these life insurance policies be ranked (whole life, term, endowment, pure endowment)?

Ans: Let’s first see how these policies are structured:

  • Whole life pays the sum assured on death during the entire life of the individual.
  • Term assurance pays the sum assured on death during a pre-specified period (say 20 years).
  • Pure endowment pays out a sum on the survival of the end of a term.
  • Endowment assurance provides benefit either on death or on maturity whichever is earlier.

Let’s Pw, Pt, and Pe denote the premiums of whole life, term and endowment assurance respectively. Then

Pe > Pw > Pt

The reason being the premium highest for endowment is that the payment is guaranteed to be made (though the amount may vary for death and survival benefit) and that of the term being lowest is that the probability of payment being made is less as no payment is made if the life survives to the end and the death benefit is only for a specified term, not for the entire lifetime (like whole life assurance).

The premium for the pure endowment can’t be specified as of whether it will be higher or lower than that of the whole, it will depend on the terms of the policy.

However, the answer to this question is not specific. It will depend upon a variety of factors like – age, health status, the term of the policy, sum assured etc.

Q. What are some types of bonuses in life insurance contracts?
Ans: Bonus is an additional benefit is given to the policyholders to increase the basic sum assured in respect of any emerging surplus of assets over liabilities in valuation. Types of bonuses are:

  • Reversionary bonus – which is paid at the time of maturity of the policy, but is declared every year during the term of the policy, when the company makes a profit.
  • Terminal bonus– which is paid on the termination of the policy, but may not be declared every year.
  • Interim Bonus– which is paid in case of a policy claim is made between two bonus declaration dates. In such a case, the bonuses which have to be accrued to date is paid and called an interim bonus.

Q. Differentiate between Surrender and lapse of a policy?
Ans: When policyholders want to receive the benefit before the expiration, they can terminate the policy; this is called surrendering the policy. In such cases, the insurance company cut a certain fixed proportion and pays the remaining amount.

When due to some reasons, the policyholder stops paying the premium due to the policy, the company lapses/terminates the policy and no premium or claim payments are made in these scenarios.

Q. What is DSAR?
Ans: Death strain at risk (DSAR) is the extra amount that the company may have to pay to the policyholder if the policy becomes a claim during the year, with some given probability.

Q. Differentiate between multiple state model and multiple decrement model?
Ans: Multiple state model is a model where more than one decrement is available and returns to the same state is possible. Multiple decrement model is the one which has one active state and one or more absorbing exit states. Only one-way decrement is possible i.e. return to the same state is not possible.

Q. Differentiate between defined benefit and defined contribution schemes?
Defined benefit plans are where the employer guarantees a specific retirement benefit amount for the employee, which can be based on the employee’s salary, years of service or a no. of other factors. Employees have a little control over the fund. Defined benefit plans require the complex actuarial projections.

Defined contribution, on the other hand, is contribution-based rather than benefit-based. These plans are funded by the employee, with the employer matching contributions to a certain amount. The accumulating value of each member’s fund may be used to pay for scheme benefits required for the member from time to time and the rest is used for post-retirement benefits.

Q. What are unit-linked contracts/ULIPs?
Ans: Unit Linked Insurance Policies (ULIPs) are the contracts in which the benefits are directly linked to the value of some underlying investment fund, chosen by the policyholders.

A specified proportion of the premiums received are invested in the fund. The investment fund is divided into units which are priced continuously, each policyholder then receives the value of the units allocated to the policy.

To avoid the risk of poor investment performance, sometimes a minimum guaranteed sum assured is specified in the terms of the contract.

Q. What are some unit fund charges?
Ans: Unit fund charges comprise:

  • Fund management charges, basically a percentage of the unit fund.
  • Policy Fee.
  • Charge to cover the cost of providing any additional non-unit benefits.

Q. What is the significance of Profit testing?
Profit testing is the process of projecting the income and outgo emerging from a policy and discounting the results.
Profit testing is a useful tool that can be used for various different purposes, such as setting the premium for a life policy that will give us our required level of profitability, setting reserves and various other applications.

Hope this will help you in preparing for the interviews and time to time revision of the subject.


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  1. Aparna says

    Thanks for this post it is really helpful.
    Kindly make the post on Pension topics of ct5.
    It will really helpfull.

    1. Bharti S says

      Thanks for reading. I will try.

  2. Shubham Kothari says

    Hi i have just started with CT3 and would like you to guide me with some of my doubts

    1. Bharti S says

      Hi Shubham, I have cleared CT3 long time back. You can put your doubts on ActEd forums. There are actuarial tutors and students to help you out. Here’s the link to join the forums:

      Also, try to join some WhatsApp groups for actuarial, people can help you there in your doubts.
      Hope this helps!

  3. Sidd says

    I am in need your help and i have a fewer questions please your reply will surely help me
    1. Can i get a job if i clear 1&5 ,4&6.
    And if yes how much will be the package in india starting???
    2. I have appeared ct1 thrice ct3 twice ct5 once
    And i know i never studied at the level i need to
    Should i continue?

    Please do reply .as of i am in need of your guidance..

    1. Bharti S says

      Hello Sidd

      1. I may not be the right person to answer this question. But as per my knowledge,getting an actuarial job is not solely depends on the no. of papers you have. It also requires good knowledge of actuarial concepts you have studied, your communication skills, computer skills like- Advance Excel, VBA, R etc. CT1,3,4,5,6 are the most required papers to get an entry level job in actuarial domain, however it depends on the requirements of the company hiring the candidates. Salary package also differs company to company. Typically, a fresher with 4 papers passed may be offered a CTC in the range 4–6 lakhs p.a. in India. There can be exceptions, though.

      2. For your second question, the following articles can help you to decide:


      It is solely your decide whether you want to continue or not. If you are really passionate about this career, then making a change your study methods can help you to succeed. Be positive, have patience and think about the methods which suits you best!

      You can connect with me on LinkedIn: http://www.linkedin.com/in/bharti-singla-76603b129

      Hope this helps. All the best!

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