CT5-Random Flashcards
Revision
Explain how an insurance company uses risk classification to control the profitability
of its life insurance business.
- Insurance works on the basis of pooling independent —homogeneous risks
- The central limit theorem then implies that profit can be defined as a random variable having a normal distribution.
- Life insurance risks are usually independent
- Risk classification ensures that the risks are homogeneous
- Lives are divided by risk factors
- More factors implies better homogeneity
- But the collection of more factors is restricted by
- The cost of obtaining data
- Problems with accuracy of information
- The significance of the factors
- The desires of the marketing department
Explain the difference between a profit vector and a profit signature.
The profit vector is the vector of expected end-year profits for policies which are stillin force at the start of each year.
The profit signature is the vector of expected end-year profits allowing for
survivorship from the start of the contract.
Describe what is meant by adverse selection in the context of a life insurance
company s underwriting process and give an example.
Adverse selection is the manner in which lives form part of a group, which acts against a controlled process of selecting the lives with respect to some characteristic
that affects mortality or morbidity.
An example is where a life insurance company does not distinguish between smokers
and non-smokers in proposals for term assurance cover.
A greater proportion of smokers are likely to select this company in preference to a company that charges
different rates to smokers and non-smokers.
This would be adverse to the company’s selection process, if the company had assumed that its proportion of smokers was similar to that in the general population.
Describe how occupation affects morbidity and mortality.
Occupation can have several direct effects on mortality and morbidity.
Occupation determines a person s environment for 40 or more hours each week. The environment
may be rural or urban, the occupation may involve exposure to harmful substances e.g. chemicals, or to potentially dangerous situations e.g. working at heights.
Much of this is moderated by health and safety at work regulations.
Some occupations are more healthy by their very nature e.g. bus drivers have a sedentary and stressful occupation while bus conductors are more active and less stressed.
Some work environments e.g. pubs, give exposure to a less healthy lifestyle.
Some occupations by their very nature attract more healthy workers. This may be accentuated by health checks made on appointment or by the need to pass regular health checks e.g. airline pilots.
Some occupations can attract less healthy workers,
for example, former miners who have left the mining industry as a result of ill health
and then chosen to sell newspapers. This will inflate the mortality rates of newspaper sellers.
A person s occupation largely determines their income, which permits them to adopt a particular lifestyle e.g. content and pattern of diet, quality of housing. This effect can be positive or negative e.g. over-indulgence.
In the context of with-profit policies, describe the super compound method of adding bonuses.
The super compound bonus method is a method of allocating bonuses (mostly these days on an annual basis) under which two bonus rates are declared each
year. The first rate, usually the lower, is applied to the basic sum assured and the second rate is applied to the bonuses already declared.
Suggest a reason why a life insurance company might use the super compound method of adding bonuses as opposed to the compound method.
The sum assured and bonuses increase more slowly than under other methods for the same ultimate benefit, enabling the office to retain surplus for longer and thereby providing greater investment freedom.
State the main difference between an overhead expense and a direct expense incurred
in writing a life insurance policy and give an example of each.
Overhead expenses are those that in the short term do not vary with the amount of business.
An example of an overhead expense is the cost of the company s premises (as the sale of an extra policy now will have no impact on these costs).
Direct expenses are those that do vary with the amount of business.
An example of a direct expense is commission payment to a direct salesman (as the
sale of an extra policy now will have an impact on these costs).
Outline the forms of selection that the insurer should expect to find in the mortality experience of the lives.
Time selection the experience would be different in different time periods; in developed economies mortality has tended to improve with time.
Class selection The insurer may price policies differently depending on fixed factors such as age/sex. Also different groups of recipients may have different
mortality based on factors such as occupation.
Temporary Initial Selection if there is no evidence of health required then there is an expectation that poor lives would be likely to take out the insurance and in the
short term the experience would be adverse. This effect should reduce with duration.Conversely, if there are medical questions on the application form then we would expect to see some form of self selection and mortality experience would be better in
the short term.
This is also evidence of adverse selection as highlighted above.
Spurious selection If there is no evidence of health required then the duration
effect would be confounded by the differential mortality experience of withdrawals,
as those lives withdrawing would be expected to have lighter mortality
Define the following term
Indirectly Standardised Mortality Rate
Indirectly Standardised Mortality Rate an approximation to the directly standardised mortality rate being the crude rate for the standard population multiplied by the ratio of actual to expected deaths for the region.
This is the same as the crude rate for the local population multiplied by the Area Comparability Factor.
Define the following term
Crude Mortality Rate
Crude Mortality Rate the ratio of the total number of deaths in a category to the total exposed to risk in the same category.
Define the following term
Directly Standardised Mortality Rate
Directly Standardised Mortality Rate the mortality rate of acategory weighted according to a standard population.
State an advantage of using the Indirectly Standardised Rate
The indirectly standardised rate does not require local records of births to be analysed by age grouping.
The standardised rates are similar so the approximation is acceptable.
Both standardised rates are higher than the crude rate, showing that the reason for the low cruder rate compared to the national population is due to population distribution by age.
Both standardised rates are below the crude rate for England and Wales so the birth rate of Tyne and Wear is lower, even allowing for the age distribution.
