III IC-27 common mistakes
III IC-27 · Understand the traps and how to avoid them.
Computing the net single premium or reserve with the gross (loaded) premium rate instead of the pure mortality plus interest basis, so the answer includes expense loadings that belong only to gross premium valuation.
Candidates memorize one 'premium' formula and reuse it everywhere; the exam deliberately gives both a gross rate table and a mortality table to tempt this. Loadings are easy to add but hard to notice once included.
What to do instead
Before calculating, write at the top of the scratchpad whether the question asks for net (valuation) or gross (office) basis. Net single premium = discounted expected death benefit only; add expense loadings only when the stem mentions gross/office premium or a specified expense per policy.
Discounting the death benefit from the moment of death using an annuity-due factor (a-double-dot) when the problem states claims are paid at the end of the year of death, or vice versa.
Most textbook reserve formulas default to end-of-year payment, but many exam stems specify immediate payment of claims at death, requiring the interest-only continuous adjustment. Candidates skim the claim-timing sentence.
What to do instead
Highlight the claim-payment timing phrase in every reserve and premium question. If paid at end of year, use v^(k+1) with the standard A_x; if paid at moment of death, convert A_x to A-bar-x using the i/delta adjustment factor before discounting.
Treating the cash surrender value as equal to the reserve, ignoring surrender charges, and therefore misstating the insurer's gain or loss on lapse.
Candidates conflate the policy reserve (a liability benchmark) with the CSV actually paid. The exam gives reserves and CSVs side by side, and the difference is the surrender gain that flows to surplus.
What to do instead
Always compute the lapse gain as reserve minus CSV paid (plus any unearned expense allowance). State explicitly that CSV is net of surrender charge and is not the reserve; check whether the stem says the CSV equals the reserve before assuming it.
Projecting cash flows for an asset-liability or surplus question without matching the timing of premium inflows, expense outflows, and claim payments within the same period, netting them as if simultaneous.
Time pressure pushes candidates to sum annual totals and apply one discount factor, but the exam expects period-by-period accumulation with interest credited between events.
What to do instead
Build a vertical timeline with columns for start-of-year reserve, premium, expense, interest, expected claims, and end-of-year reserve. Discount or accumulate each line to its own date; never collapse a mid-year event into the annual total.
Using the portfolio earned rate for discounting when the question asks for a pricing or reserve calculation that specifies a valuation interest rate, or ignoring the difference between net and gross investment yield after investment expenses and taxes.
Candidates grab the most visible interest rate in the stem. The exam plants a gross yield and a net yield to test whether the candidate reads which basis the regulator or pricing actuary uses.
What to do instead
Identify the required interest basis in the stem before touching the calculator: valuation rate for statutory reserves, pricing rate for gross premiums, net-of-expense yield for surplus tests. Write the chosen rate and its justification in one line.
Confusing the roles of the valuation actuary (statutory reserve adequacy and solvency opinion) with the pricing actuary (profitability and gross premium), and answering a governance question with the wrong responsibility.
Both roles use the same mortality and interest tools, so candidates answer the calculation correctly but attach it to the wrong sign-off or reporting requirement.
What to do instead
Memorize a two-column map: valuation actuary signs reserve adequacy and solvency opinions under statutory standards; pricing actuary sets gross premiums and tests profitability. Match the named deliverable in the question to the role before selecting an answer.
Calculating a gross premium by adding expense loadings to the net premium without grossing up the expense portion for the present value of future premiums, understating the required premium.
Candidates add per-policy expenses directly to the net premium and forget that percentage-of-premium expenses and the need to recover acquisition costs through future premiums require solving an equation, not simple addition.
What to do instead
Set up the equivalence principle equation with all cash flows as present values: PV(premiums) = PV(benefits) + PV(expenses). Solve algebraically for the gross premium; verify by substituting back and confirming the equation balances to zero.
Ignoring the distinction between the reserve at the end of year k and the reserve at the beginning of year k+1 when chaining recursive reserve formulas, causing an off-by-one-period error.
The recursive relation (V + G - e)(1+i) = q·S + p·V_next uses beginning-of-year reserve and end-of-year reserve, and stems often label them ambiguously as 'year k reserve'.
What to do instead
Adopt a fixed notation on scratch paper (V_k for end of year k) and translate every stem label into it before computing. Sanity-check the recursion with the terminal condition that the reserve equals the death benefit at the final duration.
Overlooking that a reserve question involves a nonforfeiture or minimum-reserve standard, and computing only the net premium reserve without comparing it to the statutory minimum.
Candidates treat reserve calculation as pure math and forget that the reported reserve is the greater of the net premium reserve and the minimum standard, which can bind when assumptions differ.
What to do instead
After computing the net premium reserve, ask whether the stem references a minimum standard or nonforfeiture basis. If so, compute the minimum and report the larger figure, noting which basis governs.
Producing a surplus or profitability projection that omits the change in required capital or the cost of holding capital, so the profit signature looks positive when the risk-adjusted result is negative.
Candidates focus on cash flows and forget that capital tied up in the line has an opportunity cost that must be charged against profits, especially in later durations.
What to do instead
Add a line for required capital at each duration and a line for the cost of capital (capital × hurdle rate), then compute distributable earnings. Reconcile the present value of distributable earnings to the initial capital outlay before concluding profitability.