IFoA CM1 study materials
IFoA CM1 study resources

IFoA CM1 flashcards

IFoA CM1 · Build recall with a focused review session.

34 cards. Read the term and the definition here. The deck at the top of this page is optional.

Accumulation function
Function a(t) giving the accumulated value at time t of an investment of 1 at time 0. It satisfies a(0)=1 and is increasing for positive interest.
Force of interest
The instantaneous rate δ(t) = a'(t)/a(t). For constant δ, the accumulation function is e^{δt}, and the effective annual rate equals e^δ - 1.
Present value factor
The discount function v(t) = 1/a(t). With constant effective rate i, v^t = (1+i)^{-t}; with constant force δ, v(t) = e^{-δt}.
Annuity-immediate formula
a-angle-n = (1 - v^n)/i is the present value of 1 paid at the end of each of n years. Its accumulated value is s-angle-n = (1+i)^n·a-angle-n.
Equation of value
Equating present values of inflows and outflows at a chosen comparison date. The solution interest rate making net present value zero is the internal rate of return.
Spot rate
The yield y_t on a zero-coupon bond maturing at t, with price P(0,t) = exp(-y_t·t). The spot curve plots y_t against maturity t.
Forward rate
The rate f_{t,r} agreed now for investment from time t to t+r. It satisfies exp(-y_{t+r}(t+r)) = exp(-y_t·t)·exp(-f_{t,r}·r).
Macaulay duration
The weighted average time to cashflow: D = Σ t·C_t·v^t / Σ C_t·v^t. Modified duration D/(1+i) approximates the percentage price change per unit yield change.
Lognormal asset returns
If log returns over unit periods are independent N(μ,σ²), then ln S_n ~ N(nμ, nσ²) and S_n is lognormal. E[S_n] = S_0·exp(n(μ+σ²/2)).
Liquidity preference theory
Term structure theory holding that forward rates exceed expected future spot rates because investors demand a premium for holding longer-dated, less liquid bonds.
Present-value random variable
A random variable representing the discounted value of future cashflows whose timing and amount depend on random events such as death or survival.
Equivalence principle
The premium basis is set so that the expected present value of premiums equals the expected present value of benefits plus expenses at outset.
Prospective reserve
At duration t, the expected present value of future benefits and expenses minus the expected present value of future premiums, using the reserving basis.
Thiele's differential equation
d/dt V_t = δ_t·V_t + P_t - b_t - (S_t - V_t)·μ_{x+t}, where S_t is the sum at risk and μ the force of mortality.
Net premium
Premium calculated ignoring expenses, equating expected present value of benefits to that of net premiums. For whole life, P = A_x / a_x.
Curtate expectation of life
e_x = Σ_{k≥1} kp_x, the expected number of complete future years lived by a life aged x. Complete expectation e̊_x ≈ e_x + 0.5 under UDD.
Commutation functions
D_x = v^x·l_x, C_x = v^{x+1}·d_x, N_x = Σ D_{x+k}, M_x = Σ C_{x+k}. Then A_x = M_x/D_x and a_x = N_{x+1}/D_x.
Endowment assurance identity
A_{x:n} = A^1_{x:n} + v^n·_np_x, combining term assurance with a pure endowment. Also A_{x:n} = 1 - d·ä_{x:n}.
Annuity-due relationship
ä_x = (1+i)·a_x, reflecting payment at the start rather than end of each year. For n-year temporary annuities, ä_{x:n} = (1+i)·a_{x:n}.
Reserve recursion
(V + P)(1+i) = q_{x+t}·S + p_{x+t}·_{t+1}V for a sum assured S payable at death, linking consecutive reserves for assurance contracts.
Gompertz law of mortality
μ_x = B·c^x, giving _{t}p_x = exp(-B·c^x·(c^t - 1)/ln c). Mortality increases exponentially with age, with parameters B > 0 and c > 1.
Makeham law
μ_x = A + B·c^x, adding a constant background mortality A to the Gompertz term. It captures mortality at younger ages better than Gompertz alone.
Select mortality
Mortality rates depending on duration since underwriting, written q_{[x]+r}. Select rates are typically lower than ultimate rates q_{x+r} for the same attained age.
Multiple decrement table
A table tracking several modes of exit (death, withdrawal, retirement) from a group. Total force equals the sum of individual forces of decrement.
Kolmogorov forward equations
d/dt p^{ij}(s,t) = Σ_k p^{ik}(s,t)·μ^{kj}(t), governing transition probabilities between states in a multiple-state model.
Profit test
Projection of premiums, benefits, expenses, interest, and reserves to derive expected profits per policy, discounted at a risk discount rate.
Profit signature
The sequence of expected profits per policy in force at inception, obtained by multiplying each year's profit by the survival probability to that year.
Break-even year
The first year in which the cumulative present value of profits becomes positive, indicating when the contract recovers its initial strain.
Analysis of surplus
Decomposition of the change in surplus between valuations into interest, mortality, expense, lapse, and new business components, each comparing actual to expected experience.
Gross premium reserve
Reserve calculated on the valuation basis including future expenses and gross premiums, typically more prudent than the pricing basis assumptions.
Risk margin
Amount added to best estimate liabilities to compensate for the cost of holding required capital, often computed as a cost-of-capital charge on projected solvency capital.
Defined benefit scheme
Pension scheme where the benefit is formula-based, often salary and service related. The employer bears investment and longevity risk.
Pay-as-you-go scheme
Social security arrangement funding current benefits from current contributions rather than accumulated assets. Sustainability depends on the dependency ratio.
Accrued pension liability
Present value of benefits attributable to service already completed, based on current salary. Contrasts with projected liability including future salary growth.