Chapter 1 Flashcards
There is no greater tie between two functional areas of an insurance company to ensure profitability than the one that exist between which areas?
Pricing actuary in the underwriter.
When can the profitability of a life insurance product be determined?
When the last policy is lapsed or the last policyholder has died, and there are no insured lives left on the company books.
What four things have a significant impact on the ultimate cost of the life insurance product?
Target market, product features, sales approach, and underwriting process.
Define surplus.
Capital that is held above the expected needs of the product to ensure that all policyholder claim will be met.
US companies must hold a certain amount of surplus to satisfy regulatory bodies as well as writing agency concerns.
What three risk are focused on through the Risk Based Capitol (RBC) formula?
Asset risk, underwriting/insurance risk, other risk.
Define asset risk
The risk that the asset supporting the product line lose some or all of their value.
Define underwriting/insurance risk.
The risk that the price for the insurance product is inadequate and/or underwriting standards were not maintained.
Define other risk (RBC formula).
This includes all other risks (business, interest rate, political risk).
Is every risk captured in the formula?
No. The formula focuses on the material risk that are common for the insurance product type.
What is the single biggest cost in a life insurance product?
Mortality.
Are lapse rates predictable?
No. It is not uncommon for a product of 50 to 100 times more lapses than death. Lapse rates that differ from assumptions can move the profitability in either direction.
When does a lapse hurt profitability?
When the premium collected is greater than the mortality cost for the duration.
Early lapses hurt profitability while later lapses increase profitability.
Name some expense levels built into the product.
Agent compensation, corporate overhead, support of an agency system, advertising, and underwriting expenses.
The cost of a requirement.
The corresponding mortality savings that occurs due to obtaining the requirement.
The proposed insurance adverse reaction to being subjected to a battery of requirements for the desired level of coverage.
The time taken to issue a policy
However, for some policy sizes and issue ages, the cost of obtaining an additional requirement cannot be justified by the mortality savings that would occur. There’s a balancing act among the following factors:
- The cost of a requirement.
- The corresponding mortality savings that occurred due to obtaining requirement.
- The proposed insured adverse reaction to being subjected to a battery of require requirements for the desired level of coverage.
- The time taken to issue a policy.
Name the four regulation components
Reserve basis, non-forfeiture laws, surplus needs, tax law
What is the purpose of the reserve standards?
To make sure enough of the premium earned in the early duration of a contract is held until the time when the group of policyholder’s ages and the probability of death is greater than the premium received.
Historically, the orientation of statutory reserve standards is to be quite conservative and is to err in favor of whom?
The policyholder
What is the PBR?
A concept of principles based reserves. This reserve basis focuses much more closely to an appropriately conservatively based best estimate assumption basis.
Non- forfeiture laws
Allow for the return of excess premium in the form of a cash value if the policyholder chooses to lapse a policy.
Tax law
State and federal tax.
Federal taxes are income based and affected by what three components?
Corporate tax rate.
Tax reserves.
Deferred acquisition cost (DAC) tax.
Tax reserves
Since the level of reserves decreases profitability, the lower the reserve are, the higher the insurers current income is, thus increasing the tax burden.
DAC tax
The DAC tax is a way to disallow full deductibility of acquisition expenses in the year they were incurred, and to force them to be recognized over a 10 year period. Again, the effect is to increase current income to speed up the payment of taxes. As a final note, it should be mentioned that income in total is not changed by these procedures. Only the timing of the income is affected.
True or false. A product must be filed with and approved by a state before it is made available for sale in that state.
True
What are the two components of the underwriting requirement process?
- Verifying information obtained from the proposed insured.
- Discovering information that is either new to you or is being concealed by the proposed insured
Define protective value
Protective value refers to the relationship of mortality savings from a requirement to the cost of administering the requirement.
Depending on the magnitude of the exception, it can take up to how many appropriately priced rest to overcome the expected loss of placing the competitive case?
A dozen
True or false. If cases are not underwritten in a financially prudent manner, the organization cannot make that up to the volume of cases put on the books.
True
Underwriting criteria, generally used in the pricing of preferred policies include which three items?
Blood pressure, cholesterol/HDL ratios, family history
Name four pricing components considered for a product offering.
Mortality, lapse rates, expense levels, and interest rates.
Establishing a valid protective value study requires evaluation of the following issues
- Which requirement identified the underlying impairment.
- The proposed insured behavior.
- Most companies look at their competitors when establishing underwriting guidelines. The importance of being “at the market“ cannot be overstated.
