On the day after the October exam, I e-mailed the SOA regarding three of the questions. There may have been issues on other questions, but these are the ones that occurred to me when I took the exam. Feel free to respond to this post with other issues you know of.
The SOA responded to all three e-mails with the same message, that I would receive the exam committee's response after the grades are released. Now that the exam questions have been released, I think it is safe for me to post the text of my three e-mails here. The bold headings indicate the relevant question number.
Question 8b:
I took the ILALFVU exam on October 30, 2014 and I have a concern about question 8b. I am recalling this from memory, so I may have some details incorrect. I understand it is improper for me to release information about exam questions, so I am submitting this information only to you.
The question asked for the SOP reserve at the end of 2013 given actual cashflows, and given the fact that the product was issued 7 years earlier. Since PV(Excess DB) and PV(Assessments) were given, it was possible to recalculate these items from issue date replacing the year 7 projected values with actual values. This determines a new benefit ratio. However, I do not believe sufficient information was provided to determine the SOP reserve at the end of 2013. To use a retrospective formula, one would need to know the 2012 SOP reserve under the new benefit ratio, but that was not available. To use a prospective formula, one would need to know PV(Excess DB) and PV(Assessments) for the future as of the end of 2013.
This is my impression based on my recollection and understanding. If I am correct, I request that the Committee consider this when grading the exam.
Question 3b:
I took the ILALFVU exam on October 30, 2014, and I have a concern about how one of the questions will be graded. The question required one to calculate PVCoC, PVBP, IBV, and EV. I don't think there is anything wrong with the question, but I am concerned regarding which formulas would be accepted as correct.
About a week before the exam, I noticed some inconsistencies between the formulas used in the model solution to problem 10 of the May 2, 2014 ILALFVU exam and formulas in the study note, Embedded Value: Practice and Theory, by Fraca and LaSorella.
The model solution said that book profits = after-tax net income. However, equations 3 and 20 from the study note do not agree with this formula.
The model solution discounted cost-of-capital from the beginning of the year and book profits from the middle of the year. However, this contradicts equation 18 of the study note.
I request that the Committee take this inconsistency into consideration when grading the exam.
Question 10b:
I took the ILALFVU exam on October 30, 2014, and I have a concern about one of the questions which I'd like to bring to your attention. I forget the question number, but it was in the afternoon session and asked for the difference between the STAT and Tax reserves at issue date of a single premium deferred annuity.
Based on the information given, I believe the answer was 0. The reason is that the assumptions and methods under both STAT and Tax are identical. With that answer and justification, I don't think a student would have to demonstrate a knowledge of CARVM.
Since it was a 7 point question, I assumed that I should demonstrate a knowledge of CARVM. In order for such knowledge to be relevant, the STAT and tax interest rates should be different. The problem gave: federally applicable rate = 2.5%, prevailing state rate = 3.5%. I knew the tax interest rate was the larger of the two, so I used 3.5% for tax. I was confused about STAT, thinking it should also be 3.5%. I used 2.5% for the STAT rate, based in part on my reasoning that the 7 point problem can't have such a simple answer.
Nothing I've written indicates anything is wrong with the question. I've discussed it with a few people, and apparently we all used different approaches in handling the question. I wanted to bring this to your attention, in case the problem intended to test CARVM, because a candidate might have to use an incorrect interest rate in order to make an understanding of CARVM necessary.
The SOA responded to all three e-mails with the same message, that I would receive the exam committee's response after the grades are released. Now that the exam questions have been released, I think it is safe for me to post the text of my three e-mails here. The bold headings indicate the relevant question number.
Question 8b:
I took the ILALFVU exam on October 30, 2014 and I have a concern about question 8b. I am recalling this from memory, so I may have some details incorrect. I understand it is improper for me to release information about exam questions, so I am submitting this information only to you.
The question asked for the SOP reserve at the end of 2013 given actual cashflows, and given the fact that the product was issued 7 years earlier. Since PV(Excess DB) and PV(Assessments) were given, it was possible to recalculate these items from issue date replacing the year 7 projected values with actual values. This determines a new benefit ratio. However, I do not believe sufficient information was provided to determine the SOP reserve at the end of 2013. To use a retrospective formula, one would need to know the 2012 SOP reserve under the new benefit ratio, but that was not available. To use a prospective formula, one would need to know PV(Excess DB) and PV(Assessments) for the future as of the end of 2013.
This is my impression based on my recollection and understanding. If I am correct, I request that the Committee consider this when grading the exam.
Question 3b:
I took the ILALFVU exam on October 30, 2014, and I have a concern about how one of the questions will be graded. The question required one to calculate PVCoC, PVBP, IBV, and EV. I don't think there is anything wrong with the question, but I am concerned regarding which formulas would be accepted as correct.
About a week before the exam, I noticed some inconsistencies between the formulas used in the model solution to problem 10 of the May 2, 2014 ILALFVU exam and formulas in the study note, Embedded Value: Practice and Theory, by Fraca and LaSorella.
The model solution said that book profits = after-tax net income. However, equations 3 and 20 from the study note do not agree with this formula.
The model solution discounted cost-of-capital from the beginning of the year and book profits from the middle of the year. However, this contradicts equation 18 of the study note.
I request that the Committee take this inconsistency into consideration when grading the exam.
Question 10b:
I took the ILALFVU exam on October 30, 2014, and I have a concern about one of the questions which I'd like to bring to your attention. I forget the question number, but it was in the afternoon session and asked for the difference between the STAT and Tax reserves at issue date of a single premium deferred annuity.
Based on the information given, I believe the answer was 0. The reason is that the assumptions and methods under both STAT and Tax are identical. With that answer and justification, I don't think a student would have to demonstrate a knowledge of CARVM.
Since it was a 7 point question, I assumed that I should demonstrate a knowledge of CARVM. In order for such knowledge to be relevant, the STAT and tax interest rates should be different. The problem gave: federally applicable rate = 2.5%, prevailing state rate = 3.5%. I knew the tax interest rate was the larger of the two, so I used 3.5% for tax. I was confused about STAT, thinking it should also be 3.5%. I used 2.5% for the STAT rate, based in part on my reasoning that the 7 point problem can't have such a simple answer.
Nothing I've written indicates anything is wrong with the question. I've discussed it with a few people, and apparently we all used different approaches in handling the question. I wanted to bring this to your attention, in case the problem intended to test CARVM, because a candidate might have to use an incorrect interest rate in order to make an understanding of CARVM necessary.
Issues with October 2014 questions
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