Ch 1 Relationship between product pricing & underwriting

Question 1

what has significant impact on ultimate product cost

Answer 1

target market
product features
sales approach
underwriting process

Question 2

key component of product offering

Answer 2

profit expectation

Question 3

surplus

Answer 3

capital held above expected needs of product in order to ensure all policyholder claims will be met
-assigned based on product’s design

Question 4

RBC formula

Answer 4

focuses on material risks for product type
-amount beyond level of reserves being held

Question 5

RBC focuses on/ surplus must cover

Answer 5

1. asset risk: risk that assets supporting product line lose some or all of their value
2. underwriting/insurance risk: risk that price for product is inadequate and/or UW standards were not maintained
3. other risk: all other risk including business, interest rates, political etc.

Question 6

Pricing components that affect profitability

Answer 6

1. Mortality
2. Lapse rates
3. Expense levels
4. Interest rates
5. Regulation components

Question 7

mortality

Answer 7

single biggest cost
being overly aggressive can erode all expected profitability

Question 8

stringent criteria

Answer 8

to be able to offer competitive rates
ex. cardiovascular risk: better bp, cholesterol, chol/hdl ratio, family hx and other factors

Question 9

stringent UW means

Answer 9

1. expected mortality decreases on block of policies that qualify at tighter level of criteria. lower=more competitive prices.
2. fewer will qualify under more stringent requirements

Question 10

least homogenous group

Answer 10

miss qualifying for preferred but slightly better than standard.
1. will find another company w/ less restrictive criteria
2. will drop out of buying pool
3. will purchase standard policy from you

Question 11

lapse rates

Answer 11

50-100x more lapses than deaths
level premium structure while mortality clearly increasing
early duration lapses hurt profitability, later lapses improve
average 5 yrs to recover expenses incurred upon issue

Question 12

expense levels

Answer 12

include agent compensation, corporate overhead, support of agency system, advertising, UW expenses
balance following factors:
1. cost of requirement
2. corresponding mortality savings that occur due to obtaining requirement
3. PIs adverse reaction to requirements for desired coverage
4. time taken to issue

Question 13

interest rate

Answer 13

higher asset accumulation = more effect by interest rate

Question 14

regulation components

Answer 14

1. reserve basis: US statues by state/Canada statutes by federal
   standards include underlying mortality table, max interest rates, methodology to be used
2. non-forfeiture laws: allows for return of excess premium if choose to lapse policy
3. surplus needs: risk-based capital, safety net beyond reserves
4. tax law: state can levy tax on premium revenue received

Question 15

insurer income based and affected by

Answer 15

corporate tax rate
tax reserves
deferred acquisition cost (DAC) tax

Question 16

tax reserves

Answer 16

lower reserves are, higher current income. increasing tax burden

Question 17

deferred acquisition cost tax (DAC)

Answer 17

upon issue of policy there are immediate expenses, way to disallow full deductibility of acquisition expenses in year incurred and force to be recognized over 10 yr period in effort to increase current income to speed up payment of taxes

Question 18

Canada corporte taxes

Answer 18

federal level: relate to company’s income
provincial: relate to premiums

Question 19

Pricing Development - 2 main decision processes

Answer 19

1. Underwriting Requirements
2. Reasonableness of pricing expectations

Question 20

protective value

Answer 20

relationship of mortality savings from a requirement to cost of administering the particular requirement

Question 21

valid protective value study evaluates

Answer 21

1. which requirement identifies underlying impairment
2. PI’s behavior: requirements can extend process and increase risk of not taken policies

Question 22

protective value studies analyze

Answer 22

policy size
timeliness of info/policy holder behavior
relative competitiveness

Question 23

mortality discount

Answer 23

accounts for amount of selectness or length of select period.
confirmation through UW process that individual does not have given impairment vs group of people where it is unknown if same impairment is present or not. Further one is from UW, greater chance impairment has occurred, lost track as to whether impairment has afflicted an individual at point past issue.
Look at competitors when establishing requirement guidelines, want to be at market.

Question 24

what to consider how UW requirements & UW process relate to mortality results

Answer 24

-judgement of value of set of UW requirements, different set of parameters deliver different mortality results
-get what you pay for concept

Question 25

changes to UW requirements/grid or exceptions

Answer 25

every part of UW process adds significant amount to discount, not all requirements provide same amount of savings. Change in UW process outside published guidelines causes subtle differences.
Red flags: historical behavior of UW dept reflected in underlying cost structure and mortality results. If APS ordering is relaxed, actuary needs to know, affects future assumptions.
Exceptions: have impact on mortality, document and analyze type and frequency.