Ch 2 Cost Benefit Analysis of Underwriting Requirements Flashcards
cost
expenses associated with ordering and analyzing the requirement
benefit
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
lemming approach
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
factors to consider when comparing to peer company age-and-amount limits for UW requirements
-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
net single premium (NSP)
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
pricing horizon
identifies # of years mortality covers
discount rate
money can be invested to grow to necessary sum years in the future
lapse rate
NSP considers reduction in benefits paid out due to number of insureds lapsing their coverage
relevant disciplines to be linvolved in study
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
how to determine requirements to evaluate
-competition: appear different from peers
-perception requirement no longer valuable at threshold
-increasing cost of doing business
-significant segment of UW budget
initial source of protective info
if requirement is considered to be protective on its own
contributory source
requirement obtained because of presence of other info. ex MIB or previous UW file
conducting study
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.’
uniquely protective
adverse info is solely contained or solely triggered by requirement
limitations of study
-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
sentinel effect
perception of increased oversight is associated with improved behavior
break-even amount of insurance
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
useful in determining break-even amounts of insurance
- average # of debits per requirement obtained
- estimate dollar value of protection per dollar spent on requirement if solely responsible
- net savings from obtaining requirement estimated by subtracting cost from value
- value of requirements in underwriting supplemental benefits
calculating break-even amount
- assume total cost
- divide total debits uncovered by # of apps
- calculate NSP using $1,000 for face amt of insurance
- 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
