Chapter 1 Flashcards
What are the components considered by the actuary in the pricing of new products?
Mortality, lapse rates, expense levels, and interest rates.
Types of risk that must be covered by the allocated suruplus
Asset risk, underwriting/insurance risk, other risk
2 components of underwriting requirements
Verifying information obtained from P and discovering information that is either new or being concealed
A safety net that needs to be provided beyond the level of reserves in case mortality is much worse than expected.
Risk-based capital and/or surplus needs
Expense levels (5)
agent’s compensation, corporate overhead, support of an agency system, advertising, and underwriting expenses
4 factors that affect the profitability of a product
Mortality, lapse rates, expense levels, interest rates
Single biggest cost in a life insurance product
Mortality
Largest decrement affecting the number of policies in force
Lapse Rate
Plays little to no role in products with little asset accumulation and a significant role in products with significant asset accumulation.
Interest Rate
Exist to make sure enough premium generated early in a policy is held onto for later in the policy when the probability of death is higher.
Reserve basis
Who establishes Reserve basis in the US?
States(generally consistent across the nation)
Who establishes reserve basis in Canada?
Federal Government
Can and does have a discernable impact on the mortality experience that will develop from the block of business but can be effectively priced for if they are known
Exceptions
Asset Risk
The risk that the assets supporting the product line lose some or all of their value
Underwriting/insurance risk
The risk that the price for the insurance product is inadequate and/or underwriting standards were not maintained
Other Risk
All other risks including business, interest rate, political etc…
Two key items of strategy determination
- Skill to appropriately analyze the risk
2. realistic understanding of underlying cost
Non-forfeiture laws
Law that allows the return of excess premium paid early in the policy to the policyholder if he chooses to lapse
Tax law
In the U.S. taxes can be levied on premium revenue
Three main components of Federal Taxes paid by insurance companies
corporate tax rate, tax reserves, deferred acquisition cost (DAC) tax
DAC (Deferred acquisition cost)Tax
A way to disallow full deductibility of acquisition expenses in the year they were incurred (to accelerate payment of taxes)
