Ch 2 Cost Benefit Analysis of Underwriting Requirements

Question 1

cost

Answer 1

expenses associated with ordering and analyzing the requirement

Question 2

benefit

Answer 2

mortality identified by requirement and also means insurance benefits that would be paid out if requirement were not ordered
-requirement’s value based on mortality it identifies

Question 3

lemming approach

Answer 3

tempting to follow age-and-amount requirements of other companies.
-pricing depends on requirements ordered, produces mortality discount included in product pricing
-can undermine pricing philosophy
-if requirement eliminated, can give up some mortality. introducing other requirements into grid can offset loss

Question 4

factors to consider when comparing to peer company age-and-amount limits for UW requirements

Answer 4

-basis used to set limits (results from study)
-other requirements and related limits for them used
-UW manual used, how it is used
-UW philosophy used vs that used by peer companies
-UW proficiency in case workups
-target market
-distribution system
-products marketed
-mortality and other expense expectations
-experience-monitoring capabilities

Question 5

net single premium (NSP)

Answer 5

present value of future mortality, identifies benefit side of cost-benefit study
-company can collect less than $20 to cover all mortality risks associated w/ $1,000 of life insurance 20 yrs into future due to key assumptions of pricing horizon, discount rate, lapse rate

Question 6

pricing horizon

Answer 6

identifies # of years mortality covers

Question 7

discount rate

Answer 7

money can be invested to grow to necessary sum years in the future

Question 8

lapse rate

Answer 8

NSP considers reduction in benefits paid out due to number of insureds lapsing their coverage

Question 9

relevant disciplines to be linvolved in study

Answer 9

underwriting
product development actuary
new business administrator
research & analysis associate
marketing
-diversity of viewpoints assures discussion and facilitates acceptance of results and success of project

Question 10

how to determine requirements to evaluate

Answer 10

-competition: appear different from peers
-perception requirement no longer valuable at threshold
-increasing cost of doing business
-significant segment of UW budget

Question 11

initial source of protective info

Answer 11

if requirement is considered to be protective on its own

Question 12

contributory source

Answer 12

requirement obtained because of presence of other info. ex MIB or previous UW file

Question 13

conducting study

Answer 13

assigning fewer resources reduces variability of opinions
-key factor is consistency, precision
-# cases chosen for study needs to be large enough sample size to produce credible results
-distinguish on case by case basis if requirement was solely responsible for adverse decision.
-identify situations where it was not responsible
-determine why requirement was obtained - due to age/amount or ‘for cause.’

Question 14

uniquely protective

Answer 14

adverse info is solely contained or solely triggered by requirement

Question 15

limitations of study

Answer 15

-cannot account for sentinel effect
-cost of business lost by delay in taking final UW action
-effect of open market on business when there are changes in market and/or risk classifications employed

Question 16

sentinel effect

Answer 16

perception of increased oversight is associated with improved behavior

Question 17

break-even amount of insurance

Answer 17

face amount at which increase in mortality costs anticipated from not obtaining requirement equals acquisition costs associated with UW requirements.
-threshold amount of insurance sufficient to justify routinely requesting requirement

Question 18

useful in determining break-even amounts of insurance

Answer 18

1. average # of debits per requirement obtained
2. estimate dollar value of protection per dollar spent on requirement if solely responsible
3. net savings from obtaining requirement estimated by subtracting cost from value
4. value of requirements in underwriting supplemental benefits

Question 19

calculating break-even amount

Answer 19

1. assume total cost
2. divide total debits uncovered by # of apps
3. calculate NSP using $1,000 for face amt of insurance
4. avg cost of requirement divided by NSP per $1,000 by age to calculate break-even amt above which it becomes cost effective to order requirement