chapter 7 Flashcards
what are the 4 steps in the basic process of assigning operating expenses during technical design?
1) describing the characteristics and future behaviors of the operating expenses that will affect the product
2) assigning relevant operating expenses to products and product lines
3) setting margins for risks and profits.
4) incorporating operating expenses into product designs.
Operating expenses that are relevant to product design can be divided into what 4 broad categories?
1) development expenses,
2) acquisition expenses
3) maintenance expenses
4) overhead expense.
What is experience data?
describes real-world observations of specified phenomena.
what is an example of a prodcut source of internal expense experience data?
company’s owne accounting ifnromation system, which father and store historical, company-specific account information.
Where can a company get exertenal expense experience data?
from competitive intelligence activities, experiecen studies or research conducted by independent consultants (MIB, LIMRA, and SOA).
Define the term standard costs.
estimates representing the average amount of a given type of expenditure for normal business operations.
in order to determine the amount of expenses to assign to a particular product, an insurer must translate total costs into unit cots. What is a unit costs
is the amount of incurred expense that can be attributed to a signle measured amount of product.
found by dividing the toal relevant cost by the number of designated units of product.
True or False
unit costs for most fixed expenses are expressed as a flat amount per contract.
true,
For variable expenses, insurers generally calculate unit costs as a percentage of what contractual amounts?
1) death benefit amount
2) initial premium amount
3) account value
4) amount of account activity.
What is cost allocation?
the accounting process of assigning an indirect cost to a particular cost object according to a formal procedure.
Define cost objective.
operation unit for which a business accumulates, tacks and measures cost. For an insurance company, this may be a product line, product, contract, monetary amount of contract calue. etc.
What do you call the formal procedure used to assign indirect costs?
cost allocation method.
Allocated costs can be derived from what sources?
1) expense analysos
2) standard costs.
What do you call the process used to set a product’s expense projections?
costing
What are the two methods used by insueres for costing life insurance and annuity products?
1) Full costing: method for estimating product-related expesnes in which direct and indirect expenses are both counted.
2) Marginal costing: method for estimating product-related expenses in which only direct expesnes are counted.
** difference between these costing methods is how they treat indirect costs.
What is the unpredicted risks that can cause adverse deviations from an insurer’s expense projections?
contingencies.
define lapse
the termination of a life insurance policy for nonpayment of premium.
what is lapse rate?
the ration of business in force that terminates for nonpayment of premium during a given period to the total business in force at the beginning of that period.
What is a surrender?
transaction in which the owner of a cash value life insurance contract or deferred annuity contract elects to receive the contract’s entire cash value or accumulation value, before the contract reaches maturity.
What is surrender rates?
the ratio of the number of contracts surrendered during a contract year to the total number of contracts in force at the beginning of the year.
insurance companies sometimes allow life insurance and annuity customers access to the contract values in the form of withdrawls. Define this
its a transaction in which the oner of a universal life insurance policy of a deferred annuity contract removes a portion of the account value.
Margins can be affected by a variety of product characteristics. name 5
1) competition: forces prices down
2) amount of investment risk assumed by the insurer.
3) amount of investment risk assumed by the customer.
4) deterrents to surrenders or withdrawals.
5) length of interest-rate guarantees.
6)
The margin tends to be small/bigger if the following product characteristics are present
1) marketing place competition is strong
2) investment risk to the insurer is low
3) investment risk to the customer is high
4) deterrents to surrenders or withdwrawals are strong
5) contract gives the customer short-term interest-rate guarantees.
smaller
The margin tends to be small/bigger if the following product characteristics are present
1) Marketplace competition is weak
2) investment risk to the insurer is high
3) investment risk to the customer is low
4) deterents to surrenders or withdrawals are weak
5) the contract gives the customer longer-term interest-rate guarantees
bigger
What is typically inclued in explicit expense charges for fixed insurance and annuity products
administrative charges
transaction charges. (sales charge and surrender charge)
Whats included in administrative charges?
charge an insurer levies to cover the costs of issuing a contract, making administrative changes to the contract and records, preparing contract owner statements, and performing general maintenance activities.
What are transaction charges?
one-time charges assessed when funds are paid into or withdrawn froma customer’s account.
- include sales charges and surrender charges.
what is a surrender charge?
penalty charge imposed when a contract owner surrenders a cash valye life insurance policy or deferred annuity contract or withdraws funds froma contract in excess of specified amounts.
What are the administrative charges most commonly assessed on variable life and annuity products?
1) administrative expense charge.
2) contract maintenance charge
3) mortgality and expense (M&E) risk cahrge
4) asset manageemnt charge
5) fund operating expense cahrge
define administrative expense charge.
periodic cahrge
- covers insurers cost for issuing contract, admin changes, transfers amount variable funds, pauing claims.
- calculated on a percentage of vaiable account assets
define contract maintenance charge
- periodic cahrge
- cover general maintaenance charges
- flat monetary amount per contract per month/year
- sometimes waved if FA is >50K
Define mortality and expense (M&E) risk charge
- period charge assessed to compensate the uinuyere for rislk under the contract
- includes amounts degisned to reimbuse the inerer for admin and distribution costs.
- ranges from 1-1.75% of account valye
What is an asset management charge?
- period charge
- assess cover of operating costs associated with establishing/managing varibale products
- % of account value
define fund operating expense cahrge
annual cahrge that a fund manager assesses to cover the advisory and admin services provied by the manager.
- % of account values
Transaction charges fro variable, unit-linked, products can be divided into what 3 categories?
1) transfer charges
2) sales charges
3) surrender cahrges
Why are many of the funds used to support variable and unit-linked insurance and variable annuity products are classified as no-load funds?
because shares can be purchased or sold without a sales charge or load.
- charges can be structured into 2 ways:
1) front-end sales charge
2) back-end sales charge.
