IAI SP2 common mistakes
IAI SP2 · Understand the traps and how to avoid them.
Treating the pricing exercise as a single 'expected claims + margin' calculation and ignoring the discounting of cash flows, so the candidate answers with an undiscounted or single-premium figure when the question asks for a level annual premium or a net premium reserve.
Candidates carry over intuition from basic probability questions and forget that life insurance pricing is a present-value problem: premiums, benefits, and expenses occur at different times and must be discounted with survival probabilities. The exam deliberately includes distractor answers that match the undiscounted arithmetic.
What to do instead
Before computing, write the time line: when each premium is paid, when the death benefit is paid (end or moment of year), and which discount factor applies. Practice building the equivalence principle equation symbolically first, then substitute numbers. Check that any answer close to the undiscounted value is rejected on principle.
Confusing the reserve (net premium reserve / policy reserve) with the cash value or with the insurer's claim liability, and selecting a reserve figure when the question asks for the amount payable on surrender or death.
Both are 'amounts held for the policy', and exam distractors are built around the gap between gross premium reserve, net premium reserve, and cash surrender value. Candidates who memorised reserve formulas without the definitions pick the most familiar number.
What to do instead
Memorise a one-line distinction for each: reserve = actuarial present value of future benefits minus future net premiums; cash value = contractual surrender amount after surrender charges; face amount = death benefit. When a question asks for a reserve, verify the valuation basis (net vs gross, Zillmer adjustment) stated in the stem before choosing.
Applying a flat extra or a table rating to the whole policy term when the impairment is temporary, or ignoring the difference between a temporary flat extra and a permanent one, and thus choosing the wrong premium or the wrong underwriting offer.
Candidates learn the rating methods as a list and do not link the duration of the extra to the nature of the impairment. The exam phrases stems so the impairment's expected duration is stated in one clause that candidates skim past.
What to do instead
Read the impairment description and underline any duration or recovery language. Build a decision rule: temporary impairment with expected recovery → temporary flat extra with defined term; permanent or progressive impairment → permanent flat extra or table rating; substandard with high mortality → consider table rating or decline. State the rule in the answer rationale, not just the number.
Treating financial underwriting as a formality and missing that the sum assured must be justified against income, existing cover, and business or estate need, so the candidate approves a case that should be referred or reduced.
Candidates focus on medical evidence and forget that over-insurance is itself a risk factor (moral hazard, anti-selection). Questions often present a high sum assured with an unremarkable medical history, and candidates default to 'standard' because nothing medical is wrong.
What to do instead
For every case, run a quick financial check: multiple of income, total in-force and applied-for cover, purpose of cover, and any recent large increases. Learn typical multiple-of-income guidelines and the referral triggers. If the stem gives income and sum assured, compute the multiple before answering.
Confusing the contestable period with the suicide exclusion period, or assuming both run from the same date, and therefore applying the wrong provision to a death shortly after issue.
Both are early-duration exclusions measured in months or years from policy commencement, and reinstatement resets some of them. Candidates remember 'two years' for both and do not check which provision the stem is testing or whether the policy was reinstated.
What to do instead
Learn each provision separately with its trigger, its period, and what happens on reinstatement. On any early-claim question, ask three questions explicitly: how long since issue, how long since any reinstatement, and what is the stated cause of death. Then apply suicide exclusion and contestability independently.
Answering a claims question with the 'correct' benefit amount without addressing the claims process obligations - notification timelines, proof of death requirements, claim investigation, and the duty to pay or give reasons within a stated period.
Candidates treat claims questions as arithmetic or as pure policy interpretation and overlook the procedural and regulatory duties that the exam tests alongside the amount. Distractors are often numerically correct but procedurally wrong.
What to do instead
For every claims scenario, answer in two parts: entitlement (who is the beneficiary, what is payable, any exclusions or deductions) and process (notification, documentation, investigation, decision and payment timeline, communication with claimant). Practise writing both parts even when the question seems to ask only for an amount.
Mixing up the roles and duties of the insurer, the intermediary, and the distributor's principal when a question asks who is responsible for suitability, disclosure, or record-keeping, and answering with the party that 'sold' the product.
Distribution questions describe a chain (insurer → principal/agency → individual adviser) and candidates collapse it into a single seller. Responsibility for advice, for product governance, and for record retention sits at different points in that chain.
What to do instead
Draw the chain for each scenario and label duties: who advises, who discloses remuneration, who approves the product, who keeps records and for how long. When a question asks 'who is responsible', check whether it concerns the advice, the product, or the file, and answer for that specific link.
Ignoring the distinction between treating the customer fairly / conduct obligations and the disclosure-only obligations, and answering a conduct question with 'disclose the conflict' when the required action is to avoid, manage, or decline the arrangement.
Candidates learn disclosure as the universal remedy and apply it to conflicts of interest, inducements, and unsuitable sales where disclosure alone is insufficient. The exam tests the hierarchy: avoid, then manage, then disclose as a last resort.
What to do instead
Memorise the conflict hierarchy and apply it in order. For each scenario ask: can the conflict be avoided, can it be managed by controls, and only then is disclosure sufficient? Also check whether the customer's interests are served by the arrangement at all, and whether the remuneration creates a bias that must be removed.
Treating the balance sheet and the revenue account as interchangeable, or forgetting that policy liabilities and technical provisions are estimates that must be tested for adequacy, so the candidate accepts a profit figure that ignores reserve strengthening.
Candidates learn accounting formats but not the actuarial judgement behind the numbers. Exam items often present a change in assumptions (mortality, lapse, discount rate) and expect the candidate to trace its effect on reserves and hence on reported profit.
What to do instead
Practise tracing a single assumption change through the chain: assumption → best-estimate liability → reserve change → profit or loss → solvency capital. Learn the difference between the revenue account (flows over the period) and the balance sheet (position at a date), and where policyholder liabilities sit in each.
Choosing a solvency or capital answer based on the accounting surplus rather than the regulatory capital requirement, and ignoring the difference between the required solvency margin and available capital.
Both are 'how much money the insurer has', and candidates conflate free assets with the regulatory minimum. The exam tests whether the candidate knows which measure the regulator uses and what happens when available capital falls below the requirement.
What to do instead
Learn two separate definitions: available capital (eligible own funds) and required capital (solvency margin). For each scenario compute or compare both and state the ratio. When a question asks whether the insurer is compliant, answer against the requirement, not against profitability, and note the supervisory consequences of a breach.