Chapter 1 - The Relationship B/w Product Pricing And Underwriting Flashcards
What all has a significant impact on the ultimate cost of a product?
Target market, product features, sales approach, and underwriting process
What is surplus?
Capital that is held above the expected needs of the product to ensure that all policyholder claims will be met
Who determines what amount of surplus should be held?
Regulatory bodies and rating agencies
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
This includes things suck as business risk, interest rate risks, political risks
Pricing components
1) Mortality
2) Lapse rates
3) Expense levels
4) Interest rates
What is the single biggest cost in a life insurance product?
Mortality
Common preferred factors
Blood pressure, cholesterol, chol/HDL, family history
Two results of more stringent underwriting
1) Expected mortality decreases for SP/PFD business, leading to lower prices
2) Fewer people will qualify for these classes
What is the largest decrement affecting the number of policies in force?
Lapses
How do lapse rates impact profitability?
They can move it either direction - early duration lapses hurt profitability, while late duration lapses help
How long must a policy be in-force to recoup first year costs?
Five years
Should an underwriter make decisions based on expected duration of the policy?
No
What is included in expense levels built into the product?
Agent’s compensation, corporate overhead, supporting an agency system, advertising, underwriting expenses, etc.
Do term products have significant interest rate risk?
No
Who bears interest rate risk with traditional products? Variable products?
Traditional - insurer
Variable - customer
Regulation components
1) Reserve basis
2) Non-forfeiture laws
3) Surplus needs
4) tax law
What is the purpose of the reserve basis?
To ensure that enough of the premium earned in early durations of the policy is held until the probability of a claim is higher than the premium received
Who sets the reserve basis?
In US - states (generally consistent across the nation)
In Canada - federal regulation
What is the purpose of non-forfeiture laws?
These allow for the return of excess premium if policyholder chooses to lapse the policy (net of covering expenses). These exist because with level premiums, one overpays for covg early in policy duration and underpays later.
In the US, what tax do states charge?
One on the premium received by an insurer.
Three main components of federal tax considerations for US insurance companies
1) Corporate tax rate
2) Tax reserves
3) deferred acquisition cost (DAC) tax
What is the purpose of tax reserves and the DAC tax?
Accelerate income so that taxes are paid more quickly. Overall, income does not change but the timing of the income does
How do taxes work in Canada?
Federal level - income
Provincial level - premiums
What is protective value?
the relationship of mortality savings from a requirement to the cost of administering the requirement
Considerations in a protective value study?
1) Which requirement identified the underlying impairment?
2) What is the impact on customer behavior with more requirements?
Should competitors be considered when constructing the underwriting grid?
Yes, but they are not the only focus
How hard is it to cover the cost of an “exception?”
Depending on magnitude, it can take up to 12 appropriately placed cases to overcome the loss of placing the exception.
What is risk based capital?
A safety net that needs to be provided beyond the level of reserves being held in case a company’s mortality experience is worse than expected
