Chapter 3-Basis of Risk Management

Question 1

How is the probability of separate events determined?

Answer 1

By multiplying each separate occurrence by the other possibilities for a combined outcome (probability of a spade and an ace is 1/4 and 1/13 which equals 1/52)

Question 2

How is probability written?

Answer 2

The possibility of an occurrence against the total options available (probability of a vowel is 5/26 or 0.19)

Question 3

What is the radix of a mortality table?

Answer 3

The number alive in the beginning or age 0 (the beginning total)

Question 4

Based on mortality tables, when is life expectancy greatest?

Answer 4

Age 1

Question 5

What is life expectancy at a particular age?

Answer 5

The average number of years of life remaining for a group that has attained that age

Question 6

What is the average age at death?

Answer 6

The sum of the life expectancy and the number of years already lived

Question 7

What needs to take place for proper estimation by an American insurance company of the probabilities of death among the insurers?

Answer 7

• Experience should be observed for a period that is as recent as possible
• The observation period should be free from catastrophic events, such as epidemics
• The observation period should be long enough to produce a large volume of data
• The group being observed should be closely representative of the group to be insured (who will be a healthier group than Americans in general) and

Question 8

What determines the mortality rates in a typical mortality table in use today?

Answer 8

• The experience of more than 1 year

- The experience of more than 1 insurance company

Question 9

What types of adjustments are made by the insurer to convert raw mortality rates to useful mortality tables?

Answer 9

• Smoothing the data (mathematical process applied to raw data to eliminate irregularities that theoretically should not exist in data)
• Projecting the data (future uses)
• Adding safety margins to the data (cushion added to raw data to make it more conservative)

Question 10

What are graduation techniques?

Answer 10

statistical methods used for smoothing raw mortality data so that there is a steady progression in mortality rates from age to age

Question 11

How is the addition of safety margins in mortality tables applied?

Answer 11

• Safety margins for nonparticipating policies must be smaller than margins for participating policies
• The addition of safety margins in annuity table entails lowering rates of mortality below the rate anticipated

Question 12

What are the types of mortality tables?

Answer 12

• Select table (the experience of insureds who recently furnished evidence of insurability and likely to have lower mortality rates than the general population or the general insured population)
• Ultimate table (the experience of people who have not shown evidence of insurability in the recent past-excludes the effects of selection so mortality rates are higher/standard rate)
• Aggregate table (the experience of all insured, select and ultimate)

Question 13

What is included in multiple decrement tables?

Answer 13

More than one cause operating to reduce the number of surviving participants in a table

Question 14

What are the characteristics of the 1980 CET mortality table?

Answer 14

It is designed for use with an extended term policy

Question 15

What is the UP 1984 table?

Answer 15

A table used to value pension benefits and the Pension Benefit Guaranty Corporation uses the table to value the obligations of defined-benefit pension plans

Question 16

Calculations:

1. Probability of dying
2. Probability of living
3. Probability of living to an age
4. Probability of death at an age

Answer 16

1. Divide the number dying that year by the number alive at the beginning of the year
2. 1 minus the probability of dying
3. Divide the number alive at an age by the number alive at the base age
4. 1 minus the probability of reaching that age
5. Divide the number dying at an age by the number living at the base age

Question 17

How is a mortality table created?

Answer 17

1. Select a large enough sample population that represents a group to be covered
2. Observe sample population deaths in 1 year
3. Divide deaths by total sample for a crude mortality rate at each age
4. Adjust crude rates by graduation techniques
5. Extend smoothed rates to all ages in the table through statistical interpolation and extrapolation techniques
6. Project the rates into future time periods
7. Add safety margins

Question 18

How are select mortality tables used?

Answer 18

• Develop gross premiums
• Test scales of surrender values and dividends
• Make profit projections
• Make inter-company and intracompany mortality rate comparisons

Question 19

How are public mortality tables used?

Answer 19

-By regulators for solvency accounting (calculating minimum reserves and no forfeiture values for life companies)

(Ex. U.S. Life tables from census tables that measures general population health and statutory tables that protect policyowners by setting standards for life companies)

(1980 CSO table is a commonly used statutory table)

(2001 CSO table is the most recent and the first to show mortality for ages beyond 100-it stops at 120. It separates smokers and non smokers and gender)

Question 20

How are proprietary private tables used?

Answer 20

• Rate making
• Dividend calculations
• Intracompany profit analysis