Chapter 2 Flashcards
What are cost-benefit studies
Integral part of the risk-management process
provides info to assess if the dollars invested in obtaining evidence to assess a risk are producing an adequate return on the company’s investment
What is a cost benefit study?
A study that compares cost (expenses) associated w/gathering and analyzing underwriting requirement info, with the benefit dervised from the identification of extra mortality found by the requirement.
Cost benefit studies are an integral component used by companies to do what?
set direction for the underwriting department
are cost-benefit studies similar from company to company?
No, they are unlikely to replicate and may not resemble findings from other companies.
What are some factors to consider in comparing other companies’ age-and-amount limites for underwriting requirements with thoses used by any company in particular, aside from instinct?
- the bases used to set a company’s current limit,
- other requirements used and the related limits used
- the underwriting manual used and how its used
- the uw philosophy used versus that used by peer companies
- underwrirting proficiency in case
- Target market
- distribution system
- products marketed
9.mortality and other expenses
10 experience-monitoring capabilities.
What are the steps in conducting a study?
determine the objectives to be acheived, such as requirements to be reviewed. > this determines the kind of data to capture. > assure its precise. > determine whose involved and play what roles.
What is underwriting judgement?
The underwriter uses their discretion to make a decision
What is the sentinel effect
this deters proposed insurers with known or suspected impairements or abN lab findings from applying for insurance or cause them to apply for amount below the requirement threashold limits. Others walk away when they learn a test is needed.
Will not show up in a cost/benefit study but that does make them unimportant.
What is the objective of the methodology of the Sentinel effect?
Antiselection
This occurs when a company’s age/amt rules result in fewer requirements when compared to other companies.
This might attract applicants who can qualify for coverage because medical conditions they have may not be required.
The 1% rule
“Back of the envelope” model based on converting present value of death benefits to 1% of the face amount.
EX) $500K FA, the PV of future benefits is 1% x $500K = $5K per $500K of life insurance.
When quantifying and analyzing studies. After changes are made based on the results you may find you need to investigate the ripple effect of the changes. For example when changes are made in using underwriting requirements, it can be illuminating to evaluate the potential impact on what other changes?
- broad measures, such as number of applications received,
- incidence of adverse underwriting decisions,
- average time taken to reach a final decision
- incidentce of request from producers for exceptions
- total out of pocket expenses for u/w requirements
- choice of incidence of use of other requirements.
First Step to Cost-Benefit Study
Determine the objectives to be achieved, such as which underwriting requirements to review. The nature of the study to be conducted and the kind of data to capture will depend on which requirement is to be reviewed.
What is the next step to Cost Benefit Study?
Define value. The fundamental goal of underwriting is to identify impairments and assign debits for each impairment.
The study takes it one step further and asks: what requirement(s) found the impairment? A requirement is only valuable when it finds debits.
Age/amt req are the focus on most cost/benefit studies.
Friction refers to what?
the effort expended by the customer to purchase the life insurance.
