Chapter 4

Question 1

What is the purpose of a financial design for life insurance products?

Answer 1

it implies set premiums and other charges, to create an overall set of values for the numerous elements of the product. the following is included in its calculations.
-payments
-benefit payments
-investment earnings
-company operating expenses
it is designed with the intent of a life expectance of the policy plan.

Question 2

Which employee is most involved in the financial design of products?

Answer 2

actuaries

Question 3

What is an actuary

Answer 3

an expect in financial risk management and the mathematics and modeling of insurance, annuities and financial instruments .

Question 4

what is the equation for financial stability

Answer 4

revenue > expense.

Question 5

what is a financial model?

Answer 5

a computer bawswed mathematical model that approx. the operation of real world financial processes. These models produce projections of potential future financial values.

Question 6

what do you call assumptions that are estimates of future values, created by financial models?

Answer 6

actuarial assumptions

Question 7

what is the legal reserve system?

Answer 7

the system insurers use to set financial values for life insurance products. Insurers are required to establish policy reserves. these reserves are liabilities that represent the amount the insurere estimates it needs to pay future benefits.

Question 8

what 3 premises is the legal reserve system based on?

Answer 8

1. the amount of benefits payable should be specific or calculable in advance of the insured event
2. companies should collect in advance the money needed to fund a policy reserve so that the insurer5 will have sufficient funds available to pau claims and expenses
3. the amount a customer pays for life insurance policy should be related to the amount of risk the insurance company assumes for that policy

Question 9

what 3 elements should be included in a products financial design?

Answer 9

1. the costs of benefits
2. investment earnings
3. operating expenses.

Question 10

what is the equation to calculate cost of life insurance policy benefits?

Answer 10

total potential benefit obligations X probability that potential benefits will be payable

Question 11

define cost of benefits, sometimes known as the cost of insurance, and its primary obligation

Answer 11

the value of all benefits under a product.

its first obligation is the death benefit payout.

Question 12

what is a block of policies?

Answer 12

a group of policies issues to insured who are all the same age, sex, and in the same risk class.

Question 13

what defines the cost of death benefit for a block of policies? ie. what is its dependable factor?

Answer 13

depends in part on the mortality rate. the higher the risk, the higher the chance of payout ie. the higher the premium.

Question 14

what is the term used for the mortality rates shown in a mortality table, and what is their purpose?

Answer 14

tabular mortality rates

these are the starting point numbers to calculate the mortality rates that insurance companies use to project the cost of benefits for a block of policies.

Question 15

where would a company derive a mortality experience table?

Answer 15

is compiled from a companys own records, reflecting its insureds’ actual mortality.

Question 16

what are the 4 categories in which mortality tables are typically separated?

Answer 16

men non smoker
women non smoker
men smoker
women smoker

Question 17

The financial design of a life insurance product must include a provision for investment earnings- define this.

Answer 17

this is the money the insurer earns from investing the funds it receives from customers.

Question 18

how do most investments earn money?

Answer 18

in the form of interest- which is payment received for the use of money. It is expreses in percentage.

Question 19

define principal in terms of investment earnings.

Answer 19

it is the sum of money originally invested, loaned, or borrowed.

Question 20

define simple interrest

Answer 20

the interest on the original principal only.

Question 21

what term is used to define the calculation between an interest amount on both the principal and the accured interest

Answer 21

compounding. The interest on both the principal and the accrued interest is called compound interest.

Question 22

In what situation can an invester earn interrest on both the principal and the accrued interrest?

Answer 22

until the loan is paid, the interest on a compound-interest loan continues to accrue (accumulate)

Question 23

how frequency can interrest be compounded?

Answer 23

any.

Annually, daily, monthly, etc…

Question 24

what is rate of return, in terms of interrest earnings?

Answer 24

the investment earnings expressed as a percentage relative to the principal.

Question 25

what 2 methods are used by insureres to pay benefits?

Answer 25

1) use premiums and charges they collect from customers
2) use investment earnings.

> the ^ the investment earnings, the less money the insurer needs to charge customers.

Question 26

define operating expenses

Answer 26

the expenses that arrive in the normal course of the insurers’ operations.

Question 27

in general foes insueres spend more on life insurance benefit payments or on their operating expenses?

Answer 27

benefit payments

Question 28

what is the significant risk associated with an insueres operating expenses?

Answer 28

customers will terminate or reduce the value of a life insurance policy before the policy becomes profitable.

Question 29

Define lapse rate, in terms of operating costs.

Answer 29

the percentage of a specified group of policies in force at the beginning of a specified period, that are terminated by the end of that period for reasons other than the death of the insured.

Question 30

A FINANCIAL DESIGN CONSIST of projected values for 5 component factors. What are they?

Answer 30

payments from policy owners
mortality rates
benefit payments
company operating expenses
investment earnings.

Question 31

Conservative values for specific life insurance product elements generally take the form of (3 examples)

Answer 31

1. mortality rates that are ^^ than expected
2. investments earnings that are lower than expected
3. operating expenses that are higher than expected

Question 32

what is the advance to using conservative values in financial design?

Answer 32

provides a risk margin against adverse development.

Question 33

define a premium rate

Answer 33

is a charge per unit of insurance coverage. it is typically expressed as the rate per thousand per year. the annual premium amount for a policy is calculated by multiplying the premium rate by the number of coverage unit.

Question 34

define 3 characteristic sought after by actuaries during the construction/development of premium rates and other policy charges.

Answer 34

1. adequate amount
2. equitable
3. not excessive.

Question 35

what is the purpose of a level premium system?

Answer 35

it allows a policy owner to pay the same premium amount each year a policy is in place. this can be done because premiums are higher than needed in the first years to pay claims and expenses.

Question 36

As insureds age, does the cost of providing benefits on a block of policies increase or decrease?

Answer 36

increase. The premium rate for a level premium policy, does not.