Chapter 11-Gross Premiums

Question 1

What are the components of a premium payment?

Answer 1

• Rate of Mortality
• Rate of Interest
• Rate of Expense

Question 2

How is a premium created?

Answer 2

• Find the net single premium
• Develop more frequent premiums that are equivalent to the net single premium
• Add expenses, contingencies, and profit to the net level premium

Question 3

What is included in a mutual company’s margin for loading?

Answer 3

• Policy owner dividends
• Operating expenses

(Investment expenses-costs to make, service, and safeguard investments-are treated as a reduction of gross investments income-not included in loading formula for premiums)

Question 4

What type of expense is the same for all policies in the loading formula?

Answer 4

Accounting costs for premium remittance

Question 5

What components are typically applied to the expense loading formula?

Answer 5

• A constant per policy
• A percentage of the premium
• A constant per $1,000 of the face amount

(the sum produce a premium that declines as the face amount rises mainly because of the constant per $1,000 of face amount)

Question 6

What type of insurer expenses are covered in a policy fee system?

Answer 6

• Those that are constant per policy
• Those that vary with the amount of insurance

(a policy fee does not vary with the size of the premium)

Question 7

What is the basis for an insurer’s loading formula?

Answer 7

Divide the present value of all estimated expenses during the lifetime of the policy by the present value of an appropriate life annuity due

Question 8

What are some characteristics of insurer expenses incurred at the time of issue?

Answer 8

• There is no law limiting first year total expenses

- Expenses should be amortized over the number of years in the premium paying period

Question 9

What are some characteristics of state premium taxes?

Answer 9

• Their treatment in the loading formula requires no computation of their present value
• Premium taxes occur each year of the premium paying period (including the first)

Question 10

What is involved in testing a tentative loading formula?

Answer 10

• Determining whether resulting gross premiums are competitive
• Using most probable assumptions of mortality, interest, expenses, and lapses

Question 11

What are the steps in calculating the asset share for the end if the sixth year?

Answer 11

• Begin with the total asset share at the end of year X1
• Add premiums at the start of year X2
• Subtract expenses at the start of year X2
• Add investment income at the end of year X2
• Subtract claim payments at the end of year X2
• Allocate the remaining total to each surviving and persisting policy

Question 12

What happens when the asset share for the year is greater than the surrender value but less than the reserve?

Answer 12

• If the insured dies, the insurer experiences a loss
• If the asset share is greater than the surrender value, the insurer will experience a gain when the policy owner surrenders

Question 13

What approach is used in computing a gross nonparticipating premium?

Answer 13

Uses realistic or most probable assumptions of mortality, interest, expenses, and lapses, and include a specific margin for profit

(participating policies uses loading that is more conservative/higher than nonparticipating policies in the above areas with the difference being refunded as a dividend)

Question 14

Of the 4 assumptions used in calculating asset shares on the basis of gross nonparticipating premiums, which assumption exerts an increasing influence over time?

Answer 14

That relating to interest

(the impact of the interest rate increases as the reserve increases and exerts the greatest influence at the later durations)

Question 15

What is the “valuation period” in the context of gross premium determination?

Answer 15

• Acquisition expenses have been fully recovered

- Asset shares equal policy reserves

Question 16

What is the definition of a “model office” when used in constructing a set of gross premiums?

Answer 16

A simplified book of business that is representative of the total book of business of the insurer

Question 17

If gross premiums based on most probable anticipated experience is too high to be competitive, which of the following changes can be made to lower the premium further?

Answer 17

• Adopt more stringent underwriting standards
• Eliminate less persistent policies
• Increase the length of time over which acquisition costs are amortized

Question 18

What are an insurance company’s operating expenses?

Answer 18

• Margin for safety
• Margin for dividends
• Margin for profits

Question 19

What are the considerations for an insurer’s loading?

Answer 19

• Loading that covers operating expenses
• Apportioning expenses and safety margins equitably among the various plans (each class pays its own costs)
• Gross premiums that enable the company to maintain or improve its competitive position

Question 20

What are the 2 broad categories on insurance expenses?

Answer 20

• Insurance expenses (costs of commissions to agents, costs of servicing policy owners, and costs of settling claims with beneficiaries and others)
• Investment expenses (costs to make, service, and safeguard investments are treated as a reduction of gross investments income and not included in loading formula for premiums)

Question 21

When do insurer expenses occur?

Answer 21

• Time of issue (first year commissions, medical exams, other other acquisition costs, and some agency expense allowances)
• During a definite number of renewal years (renewal commissions and some agency expense allowances)
• Every year (premium taxes, premium notification and collection expenses, and general overhead costs)
• Year of death (claim settlement costs, including expenses associated with disputed claims)

Question 22

What is potential developments are included in the margins of the insurer?

Answer 22

• Epidemics
• Major investment loses
• Low investment rate earnings
• Adverse tax legislation
• Unexpected increases in operating

(margins in loading is added to participating policies as a source of the dividends paid)

Question 23

How do insurers deal with per policy expenses to grade premiums?

Answer 23

• Banding (face amounts grouped into broad categories by value and expenses for higher bands is lower per $1,000 and higher for lower bands per $1,000)
• Policy fee approach (fees are the same regardless of policy amount and produces a lower fee per $1,000 of face amount-sometimes modified for lower fees on values below a certain amount and constant for policies above that amount)

Question 24

How is a schedule of competitive premiums developed?

Answer 24

• Tentative premiums (a proposed premium to be charged depending on how well it’s asset share performs and will be adjusted up or down to achieve desired results)
• Validation periods (the number of years the insurer can wait before recovering all acquisition costs on a block of policies-completed when the block of business provides an asset share that exceeds the reserve)