chapter 7

Question 1

what are the 4 steps in the basic process of assigning operating expenses during technical design?

Answer 1

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.

Question 2

Operating expenses that are relevant to product design can be divided into what 4 broad categories?

Answer 2

1) development expenses,
2) acquisition expenses
3) maintenance expenses
4) overhead expense.

Question 3

What is experience data?

Answer 3

describes real-world observations of specified phenomena.

Question 4

what is an example of a prodcut source of internal expense experience data?

Answer 4

company’s owne accounting ifnromation system, which father and store historical, company-specific account information.

Question 5

Where can a company get exertenal expense experience data?

Answer 5

from competitive intelligence activities, experiecen studies or research conducted by independent consultants (MIB, LIMRA, and SOA).

Question 6

Define the term standard costs.

Answer 6

estimates representing the average amount of a given type of expenditure for normal business operations.

Question 7

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

Answer 7

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.

Question 8

True or False

unit costs for most fixed expenses are expressed as a flat amount per contract.

Answer 8

true,

Question 9

For variable expenses, insurers generally calculate unit costs as a percentage of what contractual amounts?

Answer 9

1) death benefit amount
2) initial premium amount
3) account value
4) amount of account activity.

Question 10

What is cost allocation?

Answer 10

the accounting process of assigning an indirect cost to a particular cost object according to a formal procedure.

Question 11

Define cost objective.

Answer 11

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.

Question 12

What do you call the formal procedure used to assign indirect costs?

Answer 12

cost allocation method.

Question 13

Allocated costs can be derived from what sources?

Answer 13

1) expense analysos

2) standard costs.

Question 14

What do you call the process used to set a product’s expense projections?

Answer 14

costing

Question 15

What are the two methods used by insueres for costing life insurance and annuity products?

Answer 15

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.

Question 16

What is the unpredicted risks that can cause adverse deviations from an insurer’s expense projections?

Answer 16

contingencies.

Question 17

define lapse

Answer 17

the termination of a life insurance policy for nonpayment of premium.

Question 18

what is lapse rate?

Answer 18

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.

Question 19

What is a surrender?

Answer 19

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.

Question 20

What is surrender rates?

Answer 20

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.

Question 21

insurance companies sometimes allow life insurance and annuity customers access to the contract values in the form of withdrawls. Define this

Answer 21

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.

Question 22

Margins can be affected by a variety of product characteristics. name 5

Answer 22

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)

Question 23

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.

Answer 23

smaller

Question 24

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

Answer 24

bigger

Question 25

What is typically inclued in explicit expense charges for fixed insurance and annuity products

Answer 25

administrative charges

transaction charges. (sales charge and surrender charge)

Question 26

Whats included in administrative charges?

Answer 26

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.

Question 27

What are transaction charges?

Answer 27

one-time charges assessed when funds are paid into or withdrawn froma customer’s account.
- include sales charges and surrender charges.

Question 28

what is a surrender charge?

Answer 28

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.

Question 29

What are the administrative charges most commonly assessed on variable life and annuity products?

Answer 29

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

Question 30

define administrative expense charge.

Answer 30

periodic cahrge

• covers insurers cost for issuing contract, admin changes, transfers amount variable funds, pauing claims.
• calculated on a percentage of vaiable account assets

Question 31

define contract maintenance charge

Answer 31

• periodic cahrge
• cover general maintaenance charges
• flat monetary amount per contract per month/year
• sometimes waved if FA is >50K

Question 32

Define mortality and expense (M&E) risk charge

Answer 32

• 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

Question 33

What is an asset management charge?

Answer 33

• period charge
• assess cover of operating costs associated with establishing/managing varibale products
• % of account value

Question 34

define fund operating expense cahrge

Answer 34

annual cahrge that a fund manager assesses to cover the advisory and admin services provied by the manager.
- % of account values

Question 35

Transaction charges fro variable, unit-linked, products can be divided into what 3 categories?

Answer 35

1) transfer charges
2) sales charges
3) surrender cahrges

Question 36

Why are many of the funds used to support variable and unit-linked insurance and variable annuity products are classified as no-load funds?

Answer 36

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.