ILA-LPM A Flashcards

Question

Describe pricing considerations for term * UW

Answer 1

shifting to AUW (accelerated UW) and predictive analytics

Answer 2

(anti-selection, premium slope) * high early lapses - no acquisition cost recovery * low ultimate lapses - hurt lapse supported design

Answer 3

\*\*\*very important assumption * **decreases** as policy size **increases** * aggregate term mortality \< aggregate WL * high face term mortality \> high face WL * other: * improvement * anti-selection * credibility at old ages

Answer 4

1. profit margin 2. ROE 3. IRR 4. Surplus strain 5. Break-even year (BEY)

Answer 5

PV(Profits)/PV(Premiums)

Answer 6

Net Income/Equity (discounted or undiscounted)

Answer 7

discount rate such that PV(Profits)=0

Answer 8

first year income/first year premium

Answer 9

year accumulated assets \>= reserves

Answer 10

1. charge only PH who exercise option 2. charge only PH who _want_ option available 3. charge everyone

Answer 11

1. proportion expected to **elect** option 2. **percentage of coverage** avaiable to be exercised 3. **lapse** assumption (low following conversion) 4. **mortality** (high when election rate is low)

Answer 12

The PV of the survival prob times prob of conversion times increase in AR for a converted policy

Answer 13

1. permanent life insurance 2. guarantees coverage for life 3. offers tabular CSV 4. can be participating 5. multiple premium patterns

Answer 14

* cash * apply to premiums * PUAs (purchase paid-up) * OYT

Answer 15

1. ordinary level for life 2. indeterminate 3. limited

Answer 16

* trending toward AUW like term

Answer 17

* May affect other assumptions like mortality and expense * (takeaways from 2012 SOA WL persistency study)

Answer 18

* significant risk * lack of premium flexibility + very long coverage periods

Answer 19

1. lapse rates have been **declining** 2. lapse increase in **poor economy** 3. **smaller** policies lapse **earlier** 4. male lapses ≈ female lapses 5. **stricter underwriting** leads to lower early lapses

Answer 20

CVt = (CV_t-1 + Prem_t - Charges_t)(1+r)

Answer 21

1. guaranteed minimum 2. portfolio 3. new money

Answer 22

investment earned rate - credited rate

Answer 23

1. **Surrender charges** 2. **Expenses** (front-end loads, fixed charges) 3. **DB options** (face or face + CV) 4. **Face amount** may be changed after issue 5. **Premiums** can be flexible 6. **Partial withdrawals** 7. **Policy loans** (with lower credited rate) 8. **Riders** (similar to term) 9. **Persistency** bonuses

Answer 24

* guaranteed max * attained age vs. S&U

Answer 25

spread compression if interest rates fall

Answer 26

1. MNLP (minimum no-lapse premium) 2. Shadow account design

Answer 27

1. most basic ULSG design 2. SG based on if cumulative min premiums have been paid 3. premiums generate little of no CSV

Answer 28

1. policy will stay in force if SA \> 0 2. shadow account has it's own set of charges/credis (SA does not equal CSV!)

Answer 29

1. AXXX greatly increased ULSG reserves 2. AG 48 from insurers needing reserve relief from financing 3. VM-20 should replace XXX and AXXX and result in a simpler ULSG design

Answer 30

=max [min (Index Charge x Participation Rate, Cap), Floor]

Answer 31

1. Point-to-point: based on index change between two points 2. Averaging: annual index change is based on average monthly index level

Answer 32

1. a.k.a "interest-sensitive WL" 2. premium is fixed like a permanent product 3. CV = max(guaranteed CV, net accumulation value) 4. vanishing premium design is most popular

Answer 33

**Advantages**: 1. more similar to WL 2. pays higher commission to agents 3. better persistency **Disadvantages**: 1. Lack flexibility 2. Administrative complexity 3. Vanishing premiums don’t always vanish

Answer 34

1. flexibility creates challenges 2. scenario testing is important 3. UL sources of profit 4. asset/liability analysis (interest rate risk)

Answer 35

1. interest earned - interest credited 2. cost of insurance charges - DBs Paid 3. (expense charges + surrender charges) - (expenses + commissions)

Answer 36

**VUL is SIMILAR to UL:** 1. flex or fixed premiums 2. face only DB or (face+CV) DB 3. DB changes allowed 4. similar monthly charges (mort, riders) 5. similar commissions 6. treatment of policy loans

Answer 37

**VUL is DIFFERENT from UL:** 1. premiums invest in separate account asset 2. CSVs vary w/ separate account performance 3. no guaranteed CVs 4. sales load more limited by regulation

Answer 38

1. CSVs uncertain - vary w/ separate account 2. no guaranteed minimum 3. DBs vary by intervals (monthly or yearly)

Answer 39

1. most **popular** FPVL in US 2. gross premiums **fixed** 3. uses excess investment performance to buy **paid-up additions** to increase DB 4. As long as **S.A outperforms AIR**, DB continues to rise

Answer 40

1. joint and survivor - pays benefit on last insured's death 2. used for wealth preservation 3. high face amounts 4. Par WL is common - dividends buy PUA/term

Answer 41

1. rate of return on death at specified duration 2. min premium payable to fund benefits 3. min premium to vanish in specified # of years 4. mim CV needed to vanish premiums 5. PHs value DBs more than CSVs

Answer 42

1. PUAs and term 2. policy split 3. estate preservation 4. first-to-die term

Answer 43

* allows policy to be split in future * few sold * very valuable to those that have it

Answer 44

increases DB to cover estate taxes

Answer 45

* estate planning * pays benefit when 1st person dies * can use * to pay-up policy after 1st death * to pay estate taxes on first death * recover premiums paid before first death

Answer 46

* status = blend of "one-alive and two-alive" * smoother CSVs and reserves * values don't change a lot after 1st death

Answer 47

* status change depending on who is alive * X & Y both alive * X alive only * Y alive only * CSVs and reserves jump after 1st death

Answer 48

1. perceived **marketability** 2. **administrative** feasibility 3. **regulators**' attitudes 4. perceived **risk profile** 5. implications of increased dual-status term rider **costs**

Answer 49

1. exact age 2. joint equal age 3. equivalent single age

Answer 50

* 1st principles using mort of exact ages * cumbersome: calculation, storing, validating

Answer 51

Example: (55,52) ≈ (53, 53)

Answer 52

* equates 2 ages to a single age * overcharges in early years, undercharges later

Answer 53

1. **Age Rateup** - assigns higher age to a substandard insured 2. **Extra Premium** - increase premium for substandards 3. **COI Multiple** - Increase UL COI by a multiple

Answer 54

1. can't be **terminally ill** 2. must undergo **standalone UW** 3. must have **life expectancy** of at least 1-2 yrs 4. must not increase **contagion factors** 5. can't be **highly rated** (Table D max)

Answer 55

1. mortality 2. persistency 3. expenses 4. reinsurance

Answer 56

1. single life mortality of joing PHs does NOT equal single life market 2. UW - concessions, medical 3. contagion risk 4. socio-economic class of insured lives 5. impact of low lapses

Answer 57

very low lapse rates are common

Answer 58

usually higher than single life business

Answer 59

1. very important in pricing 2. retention rates may be higher than other places

Answer 60

1. flat extra: extra amount per 1000 2. table rating: multiple of standard mort

Answer 61

1. numerical rating system (credits and debits sum) * arbitrary - doesn't properly evaluate risk 2. advance in age 3. lien method (increase DB) 4. ROP 5. charge extra premiums _and_ have different NFF values

Answer 62

1. Charge higher premium 2. Reduce coverage

Answer 63

1. male/female (e.g. setback) 2. smoker/non-smoker (e.g. "forgive" classes for non-smoker) 3. by plan * if substandard/standard ratio high → higher lapses, NT rates * steeper slope → higher sales

Answer 64

1. **allocation approaches** (all business, substandard only, combo) 2. **premium taxes and commissions** - allocate directly to substandard 3. **aquisition expenses** - higher than standard 4. **maintenance expenses** - similar to standard

Answer 65

**higher** than standard business

Answer 66

good practice to **limit** premium paying period

Answer 67

ratings may be **removed later**

Answer 68

CSVs are **slighly higher** than standard

Answer 69

**asset share tests** - use to fit premiums to profit objectives

Answer 70

1. Calculate standard gross premium GP 2. Calculate substandard GP (GP_R) using same formula * use substandard (rated) mortality and expense assumptions 3. Extra substandard gross premium: GP_{R -}GP

Answer 71

SPDAs may have **minimum required premiums** (e.g. $5,000 or higher)

Answer 72

* can be qualified or non-qualified * qualified contracts get tax-favored treatment (like 401K) * non-qualified SPDAs are sold by stockbrokers, financial institutions, and life brokers

Answer 73

* **SPDAs:** guarantee rate for 1-7 years * **FPDAs:** lower minimum guaranteed rates

Answer 74

* **front-end loads (FELs)**: % deducted from premium before applying to account value * **surrender charges**: to recover acquisition costs (FPDAs based on premiums paid) * **periodic fees** (FPDAs - annual maintenance charge)

Answer 75

1. CD 2. Market Value Adjusted (MVA) 3. Two-tiered 4. Non-Surrenderable

Answer 76

* work like CDs (want to compete with) * penalty-free WD 30-60 days after interest rate guarantee period (high lapses) * pay low commissions

Answer 77

* account value multiplied by MVA factor to reflect change in MV of assets backing account factor * MVA factor **protects company** from interest rate risk * **decrease** AV as interest rates **rise** * **increases** AV as interest rates **fall**

Answer 78

* 2 account values - annuitization and surrender * annuitization account rate \> surrender account rate * ^encourages persistency * COMPLEX! for PH and company

Answer 79

* "personal GICs (guaranteed investment certificates)" * surrenders not allowed between guarantee period end dates * illiquid * difficult to market

Answer 80

Final CSV_t= AV_t x MVA_t x (1 - SC%_t)

Answer 81

1. bailout provisions 2. penalty-free withdrawal provision 3. return of principal guarantee provisions 4. death benefits 5. waiver of surrender charge on annuitization 6. guaranteed settlement rates 7. account value enhancement bonuses

Answer 82

* waivers SC on portion of AV * may be a constant % or % of premiums paid * may be tied to persistency

Answer 83

bonuses intended to increase persistency: 1. annuitization 2. persistency 3. large account value 4. higher credited rate first year

Answer 84

1. no SCs if credited rate \< bailout rate 2. medical bailouts (popular w/ 50+) 3. total cost of bailout = cost of option + add. surplus 4. option cost = avg lost SC x excess lapse rate x probability of trigger 5. higher reserves and capital

Answer 85

1. interest rate risk 2. interest spread 3. target spread components 4. crediting strategies

Answer 86

* Also called C-3 Risk * risk that rising interest rates will trigger high WDs and depress asset market values * Also called DISINTERMEDIATION RISK * as rates rise, value of company's assets falls faster than liability value

Answer 87

investment earned rate - credited rate

Answer 88

1. expenses (e.g. maintenance, commissions) 2. product features (e.g. bailouts) 3. risk charges (e.g. disindermediation) 4. expected profit

Answer 89

1. ignore competition (fixed spread) 2. use competitor's rate as a cap or floor 3. use weighted average of #1 and competitor's rate

Answer 90

1. **withdrawal** (really important) 2. **partial withdrawal provisions** 3. **mortality** (less important) 4. **commissions and marketing expenses** 5. **expenses** (lower than life insurance)

Answer 91

* Percent of premium * Affected by competitive pressures * Examples: SPDA 3–10%, FPDA 7% FY then 3%

Answer 92

* affected by SCs * credited rates * distribution system * guarantees * policyholder characteristics

Answer 93

1. 1st year strain sources 2. should consider mult interest rate scenarios 3. profit objectives 4. pricing horizon usually 10-20 yrs

Answer 94

* commissions * reserves * required capital

Answer 95

* profit margin, IRR, BEY, GAAP ROE * make decisions w/ all 4 together * low IRR and high profit margin = surplus strain

Answer 96

ratio of the first year loss to premium

Answer 97

1. Nearly all SPDAs 2. Pass C-3 risk to PH 3. NO guaranteed min on CSV for separate account funds 4. Basic VA DB - full AV (waive SCs) 5. VA GMDBs and GLBs add SUBSTANTIAL risk

Answer 98

* Front-end loads (FELs) * SCs * periodic fees * % of asset charges * mortality * expense * profit * guarantee riders

Answer 99

1. GMDBs = max(AV, GMDB) on _death_ 2. GLBs - contractholder must be _alive_ to exercise benefit

Answer 100

* Step up = highest AV on any past anniversary - sum(WDs since anniversary w/ highest AV) * Roll-up = GMDB_t-1 x (1 + r) + Premiums_t - WDs_t

Answer 101

1. GMIB - income 2. GMAB - accumulation 3. GMWB - withdrawal 4. GLWB - life (MOST POPULAR)

Answer 102

1. convert each annual payment to 1-year fixed annuity 2. floor payment at 75% of initial payment 3. floor payment at 100% and track actual payment separately

Answer 103

* if actual payment \< floor, insurer "loans" shortfall * "loans" are repaid when actual payments \> floor * outstanding loan amount forgiven on death

Answer 104

1. **lapse rates** (affect asset charge income, dynamic assumptions critical) 2. **premium persistency** (difficult to estimate) 3. **average size** (higher premium = high profit) 4. **expenses** (higher than fixed annuities) 5. **commissions** (lower than life insurance) 6. **acquisition costs** (recovery subject to equity risk

Answer 105

1. GMDBs and GLBs require **stochastic** pricing 2. company must **hold reserve** for GMDBs and GLBs 3. pricing considerations to **fund cost** of guarantees

Answer 106

1. assumtion for **future fund** allocations 2. mean and variance of **total returns** 3. **mortality** for GMDBs and GLWBs 4. GLB **utilization** (% electing and how much benefit elected)

Answer 107

_fixed_ deferred annuity w/ a GMAV and index credit potential

Answer 108

1. **GMAV** must be \>= min SNL value (standard nonforfeiture law) 2. **credited interest** for IAV based on index growth (S&P 500) floored at zero 3. index credits for IAV are **hedged w/ call options** (or equivalents)

Answer 109

1. **point-to-point (PTP)** - based on % change in index during policy year 2. **average monthly sum** - sums each of 12 monthly index % changes during year

Answer 110

1. **binary returns** - e.g index credit = 5% if index gains; else 0% 2. **high water** - based on the highest index level 3. **index choice** - policyholder can choose their index (common) 4. **fixed interest account option** 5. **fund transfers on anniveraries** 6. **purchase inducements** - e.g. upfront bonuses or higher FY participation rates 7. **GMAB** (a.k.a "GMAV") - guaranteed min value above SNL minimum 8. **GMWBs** (cost less than VA GMWBs due to index credit floor)

Answer 111

IndexGrowth = Max Index Level/Initial Index Level

Answer 112

= Net Earned Rate - Pricing Spread - Hedging Budget

Answer 113

* pricing spread covers anticipated **expenses and profit** * hedging budget = **cost of options** as a % of fund value * adjust caps, participation, etc. to ensure the **option cost \<= hedging budget**

Answer 114

* failling reinvestment rates * high index credits - increases IAVs, leads to high option costs * higher actual option costs in future caused by * higher future equity volatility * higher future risk-free rates * anything else

Answer 115

uses OTC call spread options

Answer 116

* Price = call struck at current index - call struck at cap * Payoff_t = max(0, Index_t - lower strike) - max(0, Index_t - upper strike)

Answer 117

**Funding ratio** = % of IAV hedged by the call spread options **Outcomes:** * often \< 100% due to expected lapses * if actual lapses \> expected, insurer gains * if actual lapses \< expected, insurer loses profit

Answer 118

expected change in option value per unit change in index

Answer 119

* hold a portfolio that **replicates** the call spread option * **main goal**: hold delta x notional amount of index * must be **rebalanced** on a regular basis since Delta changes

Answer 120

1. involves "buying high and selling low" 2. no downside protection like static hedging provides

Answer 121

Funded with **fixed interest bonds** _Key risks:_ * Bonds could **default or lose value** if interest rates rise * Insurer may have to **sell bonds early at a loss** to fund surrenders

Answer 122

* AG 33 * AG 35

Answer 123

* prescribes CARVM for all fixed deferred annuities * **reserve** = largest projected future CSV on a PV basis CARVM - commissioner's annuity reserve valuation method

Answer 124

prescribes 4 AG 33-consistent methods specifically for FIAs * Type 1 method = HaR criteria **must be met** * Type 2 methods - HaR criteria **do not have to be met** * More complex and volatile than Type 1

Answer 125

**Hedged as requested**: ensures that options purchased by insurer will hedge the index interest regardless of market conditions

Answer 126

1. payment certain 2. specialty markets 3. life contingent 4. joint and survivor 5. variable payment

Answer 127

* structured settlements * lottery winnings * gift annuities * reverse mortages

Answer 128

* life only * life with n years certain * unit refund (refund = cash value - total payments recieved)

Answer 129

* pays until death of last insured * payment may change after first death

Answer 130

adjust payment for investment performance

Answer 131

1. **interest rates** (discount at spot rates) 2. **mortality** (lower = higher PVFB) 3. **expenses:** premium taxes, maintenance expenses, commissions 4. **regulatory costs**: taxes, cost of capital 5. **surplus strain's impact on profitability** 6. **CF pattern** varies greatly on product type

Answer 132

* lower mortality = higher PVFB * assume mortality improvement (e.g. 1% per year: q_x+t x (1-0.01)^t) * substandard methods * rated age * constant multiple * constant extra deaths

Answer 133

* wants lower price -\> higher sales * better guarantee than mutual funds * downside floor attracts fixed DA owners * solves psychological problems with GMIB * maintain access to principal * no loss on death

Answer 134

* wants higher price -\> less risk * annuity price wars are ruinous * hedging could be expensive, even impossible * rating downgrade risk

Answer 135

1. solvency is regulated by states (like life insurance) 2. sales licensing (very tedious)

Answer 136

* assets are held in a **general account** * **liquidation and rehabilitation state laws** govern insolvencies * **guaranty associations** collect assessments from *solvent* insureres

Answer 137

* insurers must get approval in each state where DAs will be sold * agents must also get their own license (written tests, licenses, continuing ed, etc.)

Answer 138

1. even **slightly higher rate** can be huge competitive advantage 2. main **competition**: CDs and other deferred annuities 3. **surrender charges** reduce risk of early lapse 4. **higher rating** = competitive advantage 5. customers expect a **fair crediting rate** KEY ASPECT COMPARED BY CONSUMERS: GUARANTEED RATE

Answer 139

1. GMABs 2. GMIBs 3. GMWBs

Answer 140

typical guarantee = premiums paid

Answer 141

* guaranteed annuity payments as a % of a benefit base (artificial number) * assumptions tend to be very conservative

Answer 142

* allowed annual withdrawals starting at a specified age (e.g.65) * withdrawal = specified % of AV (e.g.5%) * some versions guaranteed withdrawals for life (GLWB)

Answer 143

* VA **does not guarantee return** on AV * VAs have **monthly AV charges** * VAs offer **many fund choices** (money market bond equity) * VA **assets are held in SA** (separate account) * assets backing VA guarantees **held in GA** * **SA assets protected** from general creditors * **GA to SA transfers** not allowed

Answer 144

* state-specific **insurer license** required like DAs * federal regulation of VAs * SEC requires **registration** of each VA contract * FINRA regulates **ads and requires seller license**

Answer 145

* Main fee: **M&E charge** * other fees intended as **cushion in case M&E charge is insufficient**

Answer 146

* % of AV per year * covers **longevity risk** * covers **expense risk** * varies by producer (higher for salespeople than direct channels)

Answer 147

* **administrative** charge * fees for **guaranteed benefit riders** * **fund manager** fee paid to insurer

Answer 148

* flat dollar amount like $20/yr * covers risk of low AVs

Answer 149

defrays incremental cost of adding additional fund options

Answer 150

* both **defer tax on earnings**, then **tax at ordinary income rates on withdrawal** * VA **pro**: contributions are **not limited by law** * VA **con**: contributions are **not pre-tax**

Answer 151

* both funded w/ after-tax dollars * VA **pros**: * **defer taxes until withdrawal** (no capital gains each year) * fund inside contract transfers are not taxable events * VA **con**: ordinary income tax rates \> capital gains tax rates

Answer 152

* both **defer tax until withdrawal** * both must provide at least 1 **annuitization option** * both use an **exclusion ratio** * VA: if annuitant outlives life expectancy, payments are 100% taxable

Answer 153

1 - exclusion ratio = taxable portion of each payment

Answer 154

market risks created by the **embedded put option**

Answer 155

1. stock movements 2. increased volatity 3. increased rate risk

Answer 156

* Up or down movements force rebalancing * cost = additional investments in hedge

Answer 157

* hedge costs increase faster as volatility increases * could hedge with VIX futures, but most insurers don't

Answer 158

* can hedge w/ interest rate swaps * changes in interest rate lead to incorrect hedge positions

Answer 159

=sum of costs use to update hedge portfolio: * stock movements * increased volatility * interest rate risk

Answer 160

PH behavior risk can NOT be hedged

Answer 161

1. persistency 2. utilization 3. disruptive or catastrophic events

Answer 162

* risk of low ultimate lapse rates ⇒ under-priced benefits * risk of high early lapses ⇒ don't recover costs

Answer 163

higher than expected utlization ⇒ under-priced benefits

Answer 164

* **counterparty risk** in hedges * risk of **high cash collateral requirements** * **derivatives markets may close during high volatility**

Answer 165

regulation prohibits transferring GMWB liability after issue

Answer 166

1. more assumptions than other products 2. long-duration, level premium w/ steeply increasing benefits 3. data problems 4. heavily reliant on investment returns 5. no CSV

Answer 167

* products are new - data truncated * little public data available * significant market changes

Answer 168

* insurance risk does not decline * policyholders have a "use it or lose it" mentality

Answer 169

* **uncertainty** - events w/ prob distributions that can't be measured * **risk** - events w/ KNOWN prob distributions * 3 types: process, parameter, economic scenario * requires stochastic analysis

Answer 170

1. process risk 2. parameter risk 3. economic scenario risk

Answer 171

* prob distributions for mortality, morbidity, and lapse * benefits * # of policies * demographics * length of reporting period \*\*drive "width" of 90% prediction interval\*\*

Answer 172

* lapse rate (p) is Binomial * mean lapses = *np* * *σ* = *sqrt (np (1 - p))*

Answer 173

* 90% CI = expected lapses +/- 1.64σ * interpretation: if actual lapses are within +/- 1.64σ of expected, it is **due to process variance**

Answer 174

1. **simulate** results 2. calculate **mean and standard error** (estimate of σ) 3. calculate **relative standard error (RSE)** 4. calculate **95th percentile claims margin**

Answer 175

=standard error/expected value of claims

Answer 176

* PCM₉₅ = 1.64 x RSE * interpretation: * if actual claims \> PCM₉₅, they are **beyond moderate** * assumption is good if \>PCM₉₅ **no more than 1 out of every 20 months**

Answer 177

* H₀: Best estimate is correct * Reject H₀ if actual claims \> PCM₉₅

Answer 178

=(Paid Claims + Change in Claims Reserve)/Earned Premium

Answer 179

* ILR more volatile (b/c includes change in claims reserve which is volatile) * A/E ratio for ILR may look high compared to A/E ratio for paid claims

Answer 180

=Premium + InvInc - IncPolRes - IncClaimRes - Claims \*\*\*Profit can also be analyzed statistically (confidence intervals, etc.)

Answer 181

* Simulate results ⇒ calculate mean, variance, etc. Var(Profit) = Var(Premium) + Var(InvInc) + Var(IncPolRes) + **Var(IncClaimRes)** + Var(Claims) + Covariance

Answer 182

* Biggest driver (by far) **claims reserve** (83% in study) * premium and investment income (low)

Answer 183

process risk **declines** as time period **lengthens**

Answer 184

* it declines * monthly earnings volatility \> quarterly \> annual * for a sample size increase of 4, RSE decreases by 50% * annual CI width = 1/2 quarterly * quarterly CI width = 1/2 monthly

Answer 185

* **more serious than process risk** * risk that assumption is wrong * =0 if assumption fully credible * model misspecification may hide it * 2 types: sampling risk, data bias

Answer 186

* **sampling risk** * little LTC data for older ages * UW changes, claims adjudication affect data quality and relevance * censoring ⇒ most policies haven't reached old ages * **data bias** - not trended properly

Answer 187

* w/ the Beta distribution * Mean = a/a+ß * Variance = aß/(a + ß)²(a + ß + 1) a = # of lapses ß = policyholders who did not lapse

Answer 188

Key Point: Adding parameter risk **increases overall variance** in results

Answer 189

* generate claims data w/ GLM * fit historical lapse data to Beta dist * Use random simulations: * choose incidence rate table * extrapolate incidence rates for old ages * get lapse rates from Beta distribution

Answer 190

* **major source of risk** * almost 1/2 benefits funded by investment returns * can't be diversified across policies

Answer 191

* products need **large margins** to absorb interest rate risk * products can be designed to **transfer more investment risk to policyholders** * example: inflation-indexed premiums

Answer 192

1. run many simulations of LTCI product 2. create a distribution of results (picture bell shaped curve) 3. risk measures based on the sd of various variables

Answer 193

* loss ratio margin * LR = incurred claims/earned premium * LRM₉₅ = 1.64 x s_LR

Answer 194

* profit ratio margin * PR = profit/earned premium * same 95% CI as LR

Answer 195

* standard deviation of lifetime loss ratio * LLR = PV(claims)/PV(premiums) * run simulations and calculate LLR for each scenario * SDLR = s.d. of distributions of LLRs

Answer 196

* calculated exactly the same as SDLR except w/ a short rate specific to each scenario * reflects interest rate risk

Answer 197

* LRM * PRM * SDLR * SDLRsr ALL

Answer 198

* PRM * SDLRsr

Answer 199

* LRM * PRM

Answer 200

* SDLR * SDLRsr

Answer 201

1. higher expected values and s.d.s = more risk 2. can calculate 95th % of distribution 3. can do hypothesis testing

Answer 202

* shorter BP = less risk * less volatility in claims reserve

Answer 203

* increases interest rate risk: higher SDLRsr & PRM * lowers LRM and SDLR: more scenarios where benefits occur (lowers variance)

Answer 204

* more interest rate risk: higher SDLRsr * substantially less benefit variance: creates a natural hedge * lower LRM and SDLR * similar PM most years

Answer 205

* significantly less interest rate risk: lower PM and SDLRsr * more benefit variance ignoring interest rate risk (higher SDLR)

Answer 206

* non-indexed products have much more interest rate risk * Highest for DB and ROP – higher premiums * inflation indexing **reduces** insurer and policyholder risk * PH - gets appropriate coverage * Insurer - gets constant premium ⇒ greatly reduces interest rate risk

Answer 207

1. define industry risk tolerance up front 2. set annual performance expectations 3. monitor experience 4. investigate assumptions 5. re-price business

Answer 208

* Update premiums if necessary based on results of investigation of assumptions * _Example:_ results fall outside prediction interval 2 years in a row

Answer 209

* (i.e. results of monitor experience) * review ALL model assumptions

Answer 210

* Compare actual experience to criteria to performance expectations

Answer 211

* Using key risk measures, develop prediction intervals, hypothesis tests

Answer 212

* Should be **objective and consistent** across companies * _Example_: companies will accept all process risk plus moderate parameter risk

Answer 213

* LTC costs can be high and uncertain **(especially NH)** * buyers want to protect assets * early LTC promised stability/level premiums - **didn't happen** * lack of premium stability drove away consumers and agents

Answer 214

* median income = $87.5K * most have liquid assets of $100K+

Answer 215

* dropped benefits PHs wanted most * products to innovative for agents to learn * strict UW * sex-distinct pricing ("hits target marget the hardest")

Answer 216

* Premiums now more than 2x 2000 levels (more accurate) * IRR is 25% now vs. 10% in 2000 * LTC model reg now requires min margin of 10% for adverse experience * margin decreased prob of future rate increases from 40% to 10% * margin decreased avg rate increase size from 34% to 10%

Answer 217

1. **pricing**: more claims experience 2. **operational**: less cost and risk w/ premium rate management 3. **regulatory**: better relationships w/ regulators 4. **legal**: less litigation from unhappy PHs 5. **reputational**: will undo expectation of future rate increases

Answer 218

* credibility much higher (especially at older ages...70X higher!) * expected ultimate claims are higher (as much as +45%) * select periods are longer w/ lower select factors due to stricter UW

Answer 219

* early LTCI products **overestimated** lapse rates * voluntary ultimate lapse rates are nearing zero (0.7%)

Answer 220

* early LTCI products **overestimated** mortality rates * mortality continues to improve * morbidity improvement should offset cost of mortality improvement

Answer 221

* rates are lower today (raises premium) * premiums must accumulate to fund reserves for future claims

Answer 222

* FY commissions have increased, renewal commissions have decreased * UW and claims processing more expensive than life ins * PV of policy admin costs as a % of premium has declined

Answer 223

* insurer pays some portion of face **before** death * "living benefits" * PH must meet specific criteria (trigger)

Answer 224

1. terminal illness ⇒ life expectancy \< 12 or 24 months 2. chronic illness ⇒ unable to perform 2+ ADLs w/ out assistance 3. critical illness ⇒ meet criteria for a CI

Answer 225

designed to keep benefits **tax-free to PHs**

Answer 226

1. actuarial discounting of FA: * acceleration benefit = actuarial PV of accelerated portion of face 2. lien method: * lien = acceleration benefit paid to PH * PH continues to pay premium for full FA * DB = face - lien 3. chronic illness rider: * PH pays explicit additional premium for the rider

Answer 227

1. supplemental UW 2. limit issue ages 3. lien or actuarial discounting approach 4. limit amount 5. require ADL loss certification 6. exclude temporary ADL loss 7. strict trigger criteria 8. limit to max table rating 9. same contestibility as base 10. limit max benefit to LESS than 100% of base DB

Answer 228

proportional to base policy participation

Answer 229

* high prob of ultimate claim * if chronically ill, lapse rate ~0% * reinsurer partipation may be: * full * limited to one-time payment * none

Answer 230

* MUCH more uncertainty and death than permanent product * lot less fewer ultimate death claims than permanent * life expectancy may be \> term * term conversions: additional risk

Answer 231

1. preliminary info search 2. other pre-sales activity 3. completion of purchase/sale online 4. post-sales activity online

Answer 232

* online insurance research growing in US * aggregators: price comparison websites (PCWs) - popular in UK

Answer 233

* consumers gaining comfort w/ internet advice * evolving from simple calcs to personalized risk assessment * social media - gaining popularity

Answer 234

* all age groups gaining comfort, but relatively low penetration so far * younger consumers 2x more likely to buy online

Answer 235

* customers can access printable policy forms, etc. * modify coverage terms and other account info

Answer 236

**Crucial advantage: deal with urgent issues away from a stationary computer** * Smartphones and tablets now outnumber PCs * **Usage** – varies by country, culture, and regulatory environment * Spreading fast in emerging markets * **Opportunities** – new social interactions and acquisition cost reduction * Best suited for auto and **simple life products**

Answer 237

* integration of telecommunication and info processing * P&C: usage-based insurance (UBO) and pay-as-you-drive (PAYD) * life and health: potential to use to track diet & health behaviors

Answer 238

* fast, simpler functionality * pre-filling of data fields * interface optimized for small screen * focused on-the-go issues * gamification

Answer 239

* No internet access on the device (only text messaging, etc)

Answer 240

* infrastructure weakness, geographic inaccessibility, financial literacy * very low profit per customer (requires high volume sales) * poor data (or none at all) * regulation may prohibit remote payment

Answer 241

* may lower cost to reach new markets * may facilitate UW * remote payment collection is critical (biometric ID systems) * mobile microinsurance: embedded insurance freemium model

Answer 242

1. **size of data** captured increasing (external and internal source) 2. **complexity** of structured vs. unstructured datasets 3. **technology**: analytics and devices that assess customer behavior

Answer 243

1. micro market segmentation 2. facilitates insurance market research and lower costs 3. predictive analytics 4. improved cross-selling 5. fully dynamic insurance pricing and real-time UW 6. improved agent/broker efficiency

Answer 244

* activity-based data: web history, behavior tracking * social network profiles: work history, group memberships * social influence data: likes, follows, etc.

Answer 245

* Identify missing insurance markets using internet search data * loyalty card programs * telematics for UW and engagement

Answer 246

* increase customer retention * monitor brand awareness and reputation

Answer 247

1. difficult to quantify customer experience and risk management 2. expensive to capture/analyze data 3. doesn't replace human intuition

Answer 248

* provide guidance, expert advice, and reach uninformed customers * increased channel interaction = increased customer loyalty

Answer 249

* high price sensitivity * higher lapses, churn caused by direct solicitation * adverse selection from overly aggressive pricing

Answer 250

* disruption will happen faster than before * mutual insurance pools may have natural limits

Answer 251

* higher churn and lapses * increased commoditization

Answer 252

* must increase customer comfort w/ low-cost channels * IT systems must be upgraded

Answer 253

* CRITICAL * must innovate faster and change culture (innovation labs) * must accept high failure rates * demand for insurance will increase in emerging countries * understand impact of regulations

Answer 254

* **sales have been declining - at 50-year low** * sharpest decline: middle-income and milennial market * avg US household under-insured by 400K * **average face amount has increased** * agents no focus on high net worth market * **distribution channels not designed to serve the mid-market**

Answer 255

1. Full UW 2. Non-medical UW

Answer 256

* medical/para-medical exam * collection of fluids (blood/urine) * Rx, MVR, and MIB * **lowest mortality cost**

Answer 257

* supplements non-medical UW w/ predictive analytics * can bring non-medical mortality cost down to fully UW levels * more customer friendly (less invasive) * faster, cheaper

Answer 258

* no medical/para-medical exam * no fluid collection * Rx, MVR, and MIB * **higher mortality cost**

Answer 259

1. quick **tutorial** w/ explanation of benefits 2. **individualize** needs and recommendations 3. **simpler** application process (fewer ?s and pre-filled info) 4. **real time quotes** (similar to car insurance) 5. relevant quote **alternatives for comparison** 6. **view of life insurance and related products** (e.g. purchased by peers)

Answer 260

1. personal banking 2. retail

Answer 261

1. improve UI 2. fluid-less risk score prediction (PA) 3. predict smoker status (PA) 4. triage (send to step 9) 5. risk classification using risk score thresholds 6. external rules engine 7. mortality-risk-based real-time quotes 8. real-time customer response 9. trad UW of select applicants from step 4

Answer 262

* **milestone events** (birth of child, new job, etc) * recs from financial advisors * advice from family and friends * work-related experiences (loss of group life coverage) * negative life events (death of family member, 9/11, etc)

Answer 263

1. risk averse (don't drink, smoke, etc) 2. higher sense of accountability (kids or dependents)

Answer 264

* **higher income/socioeconomic class** (highly significant) * trust in financial institutions * male * older age (until 59) * married * have kids * have mortgage

Answer 265

1. rational demand limitations 2. psychological and behavioral biases 3. market failures

Answer 266

1. governement programs 2. low disposable income 3. complicated, lengthy application processes

Answer 267

* Poor understand of life insurance * **limited info** to make decision * don't **understand** benefits * think it's too **expensive** * Put off by buying process * insurance **contract language** is outdated and confusing * **UW complexity** deters consumers

Answer 268

1. **problem recognition/needs assessment**: unpleasant thinking about death 2. **information search**: time consuming, difficult 3. **evaluation and selection**: difficult product language 4. **vendor choice and purchase**: complicated, lengthy UW

Answer 269

1. reference dependence 2. loss aversion 3. diminishing sensitivity to gains and losses 4. probability weighting

Answer 270

* asymmetric information * adverse selection problems

Answer 271

* relative decision making * "narrow-framed" - focus more on short-term utility/wealth

Answer 272

* risk averse in gain domain * risk seeking in loss domain * insurance purchase tend to be loss domain decisions

Answer 273

overweight high probability events and underweight low probability events

Answer 274

* Procrastination and status quo bias * Time-inconsistent preferences and hyperbolic discounting * Framing information affects decision making * Overconfidence and risk perception * Availability bias, salience, and risk perception * Information overload * Heuristics (mental short cuts) and herding * Mental accounting * Narrow framing

Answer 275

principal-agent problem and asymmetric information

Answer 276

* traditionally: face-to-face w/ agents/brokers * more internet and social media based * info **cheaper and more accessible** * can **review, share opinions** with peers * **online comparison** sites gaining popularity * more popular w/ **younger consumers** * Asia, Central/Eastern Europe: informal networks are common

Answer 277

* most still sold face-to-face w/ agents/brokers * online channels gaining - especially for simpler/transparent products * emerging markets use internet-enabled mobile phones

Answer 278

1. **simpler,** more **transparent** products and purchasing processes 2. **trust** want long-term relationships w/ insurers 3. **loyalty rewards**

Answer 279

* more important than lower premiums to some * reduce confusing language in contracts

Answer 280

* should make more effort to retain lapsing PHs * don't find loopholes out of paying claims * improve communication

Answer 281

1. higher income 2. older age (WTP increases up until retirement age) 3. higher trust in financial industry

Answer 282

* marketing strategies must be country-specific * high WTP could be an opportunity to create more segmented products

Answer 283

* needs to become "bought" not "sold" * become more customer-centric * simplify and innovate product design (offer ROP, etc.) * mitigate psychological barriers * streamline UW process * improve communication & consumer education * mutli-channel distribution system * improve long-term relationships and reward loyalty * embrace social media * increase consumer research to close knowledge gap (WTP analysis)

Answer 284

* regulators want equitable treatment for both persisting and lapsing policyholders * regulators want policyholders to receive their fair share of equity on lapse

Answer 285

* policies must provide a minimum nonforfeiture value by law in U.S. * lapse risks * nonforfeiture option utilization rates * anti-selection * expense assumptions * substandard risks

Answer 286

* high lapses on high CSV products * low lapses on products w/ little or no CSV (like T-100...lapse-supported) * disintermediation - high lapses when interest rates are high and asset MVs are low

Answer 287

mortality generally higher for options that maximize benefits for the cost

Answer 288

* lower face amount than original * maximizes coverage period * low anti-selection

Answer 289

* may have same CSV as standard * impact of later qualifying for standard

Answer 290

* different from regular polcies and varies by option

Answer 291

* maximizes policyholder's face * ETI expenses lower than RPU * policy terminates when CSV=0 * **higher anti-selection** than RPU unless ETI is default option

Answer 292

1. Automatic Premium Loan (APL) 2. Annuitization 3. Cash Surrender 4. Flexible UL Premium Payments

Answer 293

* preserves original contract, benefits, riders * policyholder can repay loan anytime * policy will terminate if loan balance \> CSV * may entice PH to stop paying premium * DB = Face - Loan Amount

Answer 294

convert CSV into stream of payments (DAs mostly)

Answer 295

the equivalent cash value of nonforfeiture options

Answer 296

1. retrospective method 2. prospective method 3. net premium method 4. single premium method

Answer 297

* **persister approach** - mortality is only decrement * **whole contract approach** - reflects any policyholder option to terminate/convert

Answer 298

* **forward-looking** * PV based on expected **future** experience * maintains parity between persisting and lapsing PHs

Answer 299

* required traditional US products * net premium is a constant percentage of gross premium * like prospective method, except use a level net premium calculated at issue

Answer 300

* assumes PH "borrows" signle premium to purchase policy * PH makes payments, loan is reduced, PH gains equity * very different from other approaches

Answer 301

* backward-looking accumulation value * no-lapse guarantee: policy stays in force even if NF Value \< 0

Answer 302

* Retrospective: based on what actually happened, not future assumptions

Answer 303

* Prospective

Answer 304

* value will change if assumptions change (hard to explain) * depends on policy class definitions

Answer 305

* prospective - works well for fixed premium products (WL, etc) * retrospective - works well for flexible premium products (UL, annuities, etc)

Answer 306

* permanent policies must have a nonforfeiture value * try to balance different views on equity * lapsing PHs - want to recieve max value * persisting PHs - want to pay as little as possible for lapsers * company - wants $ for risk and costs * agent - wants $ for sale * regulator - maximize PH return w/ out threatening insurer solvency

Answer 307

* most countries don't have specific nonforfeiture laws * Canada may have to file general NF plan w/ regulator * UK: * most life products variable * strong disclosure regulation

Answer 308

pays policyholder dividends (else, it’s non-par)

Answer 309

owned by its participating policyholders

Answer 310

owned by shareholders (but may have participating blocks)

Answer 311

set of rates that details how divisible surplus will be distributed participating policies

Answer 312

aggregate surplus to be distributed as policyholder dividends

Answer 313

senior actuary responsible for dividend scale and advising board

Answer 314

Duties of the dividend actuary when developing the dividend scale: 1. **Review _experience_ of the each dividend class** (expense, mortality, lapse, etc.) 2. **Determine _investment_ earnings** of supporting assets 3. **Determine _earnings_ from other LOBs** to be reflected in dividend scale 4. **Develop dividend _factors_** for allocating divisible surplus 5. **Perform _analyses_ to confirm compliance** (applicable law, ASOPs, and the insurer’s dividend policy) 6. **Issue a _report_** documenting the processes used for dividend scale The dividend actuary also advises the board

Answer 315

The board has the ultimate responsibility for approving the dividend scale Should be **‘‘fair and equitable”** to participating policyholders **Strike a balance** between: * **Withholding enough surplus to absorb**: * Unexpected future losses * Fund future growth of the company * Maintain strong financial ratings * **Distributing surplus to its owners** (the participating policyholders)

Answer 316

ASOP 15 to the dividend actuary: use the contribution principle! * _Exception_: actuary’s judgment says otherwise **Fundamental concept: allocate divisible surplus to policies proportionally based oncontribution**

Answer 317

3-factor dividend formula is common 1. **Expense factor** – difference between assumed & actual expenses 2. **Mortality factor** – difference between assumed & actual mortality 3. **Interest factor** – difference between actual & assumed investment earnings Factors are set by experience groups * Also varies by policy based on age, gender, and policy year

Answer 318

1. Expense - **ALL** years 2. Mortality - **Early** years 3. Interest - **Later** years

Answer 319

1. Receive in **cash** 2. Apply to pay **premiums** 3. **Deposit** with the insurer to earn interest 4. _**Purchase PUAs** without evidence of insurability ⇒ **Most common**_ 5. **Purchase OYT** without evidence of insurability

Answer 320

**Minimum SNL Interest Rate = 5-Year CMT – 1.25%** rounded to nearest 0.05% * Maximum rate allowed = 3% * Minimum rate allowed = 1% * **EIAs only**: Subtract an additional 1% * (5-Year CMT) – 2.25% * 1% floor still applies **On death, the contract DB must be \>= MinFV at that time**

Answer 321

1. Annuity certain 2. Straight-life annuity 3. Life annuity w/ a period certain 4. Refund annuity 5. Joint and survivorship annuity

Answer 322

pays for a specified period (not life contingent)

Answer 323

makes periodic payments while annuitant is alive (life contingent)

Answer 324

e.g. pays for 10 years guaranteed, then for life if annuitant is still alive

Answer 325

life annuity that makes additional payments on/after death * **Cash refund annuity** – pays any excess of purchase price over sum of actual payments to date * **Installment refund annuity** – continues paying to a beneficiary until sum of all payments = purchase price

Answer 326

continues paying to 2nd life after death of 1st life (payment usually reduced)

Answer 327

* Owned by policyholders * Only (or mostly) sells participating (par) business * Par business * Guaranteed values set so that block is self supporting * Excess profits returned through dividend payments * Requires more entity surplus

Answer 328

* Owned by stockholders * Sells non-par and possibly some par business * Limited transfers from par to stock business

Answer 329

policy-specific values * CSVs, reserves, premiums, etc.

Answer 330

policy-specific values * values and assumptions that affect excess earnings (dividends)

Answer 331

policy-specific values * a current or guaranteed schedule of dividends

Answer 332

group of policies whose dividends are based on same experience factors * Varies by issue age, duration, sex, etc.

Answer 333

1. An employee of the company (often Chief Actuary) 2. Recommends dividend scale to Board of Directors 3. Signs Schedule M in the Annual Statement 4. FSA, MAAA 5. Must have significant experience working with dividend scales 6. Must clearly understand company history and the past treatment of the par block

Answer 334

1. Balance responsibility to company with responsibility to policyholders 2. **Determine a formula that equitably distributes dividends in proportion to major sources of past and current earnings** * **Contributory Principle** – distribute surplus to policies in proportion to their contribution 3. Disclose if Board distributes dividends: * Differently from recommendation * AND inconsistently with standards of practice 4. Must be willing to resolve any conflicts with senior management or Board

Answer 335

1. **_Investment earnings (usually the biggest)_** * Interest, coupons, capital gains/losses * Policy loans 2. **Mortality** experience 3. **Expenses** 4. **Persistency** 5. **Other factors**: taxes, reinsurance, mergers

Answer 336

1. **Both** (and blends of the two) are **acceptable** 2. Apply either one **consistently** over time 3. IYM will result in **greater variance** between actual and illustrated scales 4. Don’t merge 2 blocks using IYM **if new money rates are less than existing earnings** Define a new IYM class after a **significant change** (e.g. 50 bps) in new money rates

Answer 337

* **Can’t** adjust loan rates * **Can** adjust dividends at policy level * **Satisfies** contributory principle

Answer 338

* **Can** adjust dividends _and_ loan rates at policy level * **Satisfies** contributory principle

Answer 339

* **Can’t** adjust loan rates _or_ dividends at policy level * **Does NOT** satisfy contributory principle

Answer 340

* **Can** adjust loan rates * **May satisfy** contributory principle (but only sometimes) * Time bomb problem!

Answer 341

* Use **actual experience** for the block if credible * Use **ultimate mortality** in the dividend scale * Early select gains are used to offset underwriting expenses * Create **new experience classes** if underwriting changes

Answer 342

* Allocation * Direct expenses – allocate to blocks * Overhead – be reasonable and consistent * Include any expenses not included elsewhere * Balance new and old business * Don’t favor new business at the expense of in-force policies

Answer 343

* Can recognize **directly or indirectly** * Affects expenses through **amortization of acquisition expenses** * Affects mortality: **anti-selection**

Answer 344

* Reflect any taxes not netted out of other sources

Answer 345

* Merge past experience gradually into future experience * Post-merger policyholder equity should resemble pre-merger level

Answer 346

* _Do_ reflect risk reinsurance in dividends * _Do not_ reflect financial reinsurance

Answer 347

1. pegging 2. substitution 3. experience premium method

Answer 348

* Basic goal: Avoid dividend decreases (Dividend_t \>= Dividend_t-1) * can improve persistency

Answer 349

* Maintain old scale, even if revised scale is lower * Expensive if revised scale is falling * can improve persistency

Answer 350

* Like pegging, but carries but carries the cost into future years

Answer 351

* Use **block-specific experience** for large, credible blocks * Use **company averages** for smaller blocks * Use **3–5 year averages** for morbidity and mortality * **Expenses** – attribute to block where they occurred * Use care with **overhead allocation**

Answer 352

Illustrated Scale Should **_NOT_**. . . * Exceed currently **payable scale** * Reflect **pegging or substitution** * Project **future improvements** over current scale * Show **exceptional one-time dividends** continuing into the future * Use **loan rates** less than dividend interest rate

Answer 353

* Maintain enough surplus for **current and future** needs

Answer 354

* use to release excess surplus

Answer 355

* **Annual contributions to surplus should allow the company to:** * Grow at target rate * Avoid increasing unit expenses * Maintain a surplus level consistent with future risks

Answer 356

* Changes in sales volume should NOT affect in-force dividends

Answer 357

* Lower dividends to existing policyholders * Reinsurance * Issue capital notes (debt)

Answer 358

Provide guidance on determination of NGEs

Answer 359

**Scope**: Actuarial services related to NGE determination and illustration for: * Fixed/indexed/variable individual life and annuity products + riders * Individual certificates in group contracts if determined similarly to individually written contracts

Answer 360

* NGE illustration (ASOP 24) * Policyholder dividends (ASOP 15) * NGEs in reinsurance contracts

Answer 361

* **Anticipated experience factor (AEF)** – assumption based on anticipated future experience (mortality, lapses, expenses, etc.) * **Determination policy** – insurer’s principles/objectives for determining NGEs * **Guaranteed element** – anything that limits an NGE * **NGE** – any nonguaranteed amount that can be changed at insurer’s discretion to affect policy costs or values * **NGE framework** – determination policy, how policy classes are established, and practices used to determine NGE scales * **NGE scale** – one or more NGEs that can be changed over time * **Policy class** – policies that are grouped to set NGEs * **Profitability metric** – used to assess a product’s expected financial results

Answer 362

* Understand insurer’s NGE framework * Consider how the NGE framework has been applied in the past

Answer 363

* **Description** of determination policy * **Methodology** for: * Establishing **policy classes** * Evaluating **experience / AEFs** * Allocating **income and costs** * Determining **reserves and capital objectives** * Frequency of **experience reviews** * **Models** or methods used * **Marketing** objectives (e.g. distribution strategy) * **Profitability** metric objectives * Insurer’s **governance** process

Answer 364

* Only revise if AEFs change * Based on _future_ expectations; don’t recoup past losses or distribute past gains

Answer 365

* Policy provisions and **applicable law** * How AEFs reflect expectations of **future experience** * **Variability and credibility** of each AEF * **Marketing** objectives * **Profitability**, **reserves, capital objectives, reinsurance, and taxes** * **Periodic review** of inforce NGEs (e.g. max time period between reviews)

Answer 366

* **Additional assumptions** on how determination policy applies to assignment * **Guaranteed elements, options, and other relevant provisions of the policy** * Impacts on/from **reserve/capital objectives** * Impact on/from **reinsurance and taxation** * **Applicable law** * **Resources available** * **Insurer’s goals** (e.g. marketing and financial)

Answer 367

* Recommend **establishing/changing policy classes** that * Are **not defined** (or incomplete) in the NGE framework * **Do not reflect changing circumstances** (e.g. new underwriting) * Ensure **consistency** with: * ASOP 12, Risk Classification * Reflect differences within AEFs (e.g. smoker vs. nonsmoker) * Mitigate antiselection * Not expected to be redefined after issue

Answer 368

* **Don’t reassign unless new**, material information supports reassignment * OK to **combine policy classes** based on actuarial judgment * Can increase credibility, etc.

Answer 369

* **Actuary should take into account the determination policy and the following:** * **Appropriateness** of models, methods, and profitability metrics * **Relationship** of NGE scales to * AEFs * Reserves, capital, and surplus * **Consistency** of NGE scales with policy provisions * **Limits on NGE scales** due to regulatory constraints or guaranteed elements

Answer 370

* Consider how AEFs were developed and whether they reflect: * Product’s features, intended markets, distribution methods, underwriting procedures, and policy classes * NGE scale considerations

Answer 371

* How NGE scales are **structured** to cover costs * **Should not be revised** unless AEFs change * **Consistency** with policy language * **Profitability and sensitivity** to policyholder behavior and other assumptions * **Constraints** on the ability to revise NGE scales

Answer 372

* Review prior determinations: AEFs, profit metrics/patterns, NGE scales, etc. * Analyzing emerging experience relative to anticipated experience * Considering whether to revise NGE scales * Determine revised NGE scales

Answer 373

* **Review prior determinations: AEFs, profit metrics/patterns, NGE scales, etc.** * Reconstruct if necessary/practicable; else, document a reasonable approach * **Analyzing emerging experience relative to anticipated experience** * Time elapsed since last experience analysis * Credibility of experience * Size of policy groups/classes (policy count, face, AV, etc.) * Materiality of any change in the experience * Whether existing AEFs are supported by actual experience * Sensitivity of profitability to changes in AEFs * **Considering whether to revise NGE scales** * Time elapsed since NGE scales were last reviewed * AEFs used for revising NGE scales * Deviations in emerging experience from what prior assumptions * Impact on reserves, capital, reinsurance, and taxation * Appropriateness of the profitability metrics * Change in the prospective profitability due to the change in AEFs * Complexity needed, practical issues, need for other analyses * **Determine revised NGE scales**: identify AEFs based on policy terms and applicable law * New NGE scales should not be expected change * Do not recoup past losses or distribute past gains

Answer 374

* **Follow** applicable regulations, guidelines, and standards for illustrations: * Annuity Disclosure Model Regulation (Model 245) * Variable Life Insurance Model Regulation (Model 270) and AG 15 * Consider **testing illustrated NGEs** to see if they could be supported by AEFs and other reasonable assumptions

Answer 375

* Actuary should be knowledgeable about the **requirements and necessary information** * Information may include: * Insurer’s NGE framework * Requirements of applicable law * Determination process * Previous regulatory filings

Answer 376

Refer to **ASOP 23 (Data Quality)** and **ASOP 41 (Actuarial Communications)**

Answer 377

* Refer to ASOP 41 * Disclose the extent of reliance in the actuarial report

Answer 378

* OK to rely on **another’s actuarial services** related to NGE determination * Relying actuary should be **reasonably satisfied** that: * Other actuary is **qualified** to perform the actuarial service * Actuarial service was performed **in accordance with applicable ASOPs** * Actuarial service was **appropriate for the objective** of the assignment * **Disclose** the extent of any reliance

Answer 379

* **Recommendations** that were made with respect to: * The NGE framework * Establishing or changing policy classes for future sales * Reassignment of in-force policies to different policy classes * Updated AEFs and how they were taken into account * **Advice** provided on: * Developing/modifying the determination policy * Applying determination policy, including any deviations from advice * Any **conflicts** with the ASOP 2 guidance * **Description** of AEFs used and any changes since prior determination * **Description** of any material constraints on ability to revise NGEs * **Observations/recommendations** related to * NGE scales for future sales * Sensitivity in certain AEFs * Revisions to in-force NGE scales and determination process used * Any **use of prior analysis**, including reconstructed * Rationale for using any additional AEFs not previously used * Results from any tests of illustrated NGE scales not subject to ASOP 24

Answer 380

* **Material assumptions/methods** prescribed by applicable law * **Disclaimer of responsibility** for any material assumption/method selected by a party other than the actuary * Whether actuary has **deviated materially** from the guidance of this ASOP

Answer 381

* **Don’t unfairly discriminate** among policies with similar expectations * **Use sound actuarial principles** * Put policies with materially different expected costs in **different classes** * **Reasonable limits on anti-selection** * **Don’t combine policies with different guarantees** * Example: high and low guaranteed credited rates * **OK to differentiate by issue period** * Be **consistent** with * Underwriting risk classes * Policy language, solicitation, advertising, etc.

Answer 382

* **Should be reasonably based on differences in anticipated experience factors** since the last NGE scale revision * **Cannot increase profit margins** above the profit margin projected at issue * Must be based on **future expectations** (can’t recoup past losses) * **Assumed/acquired business**: can’t be more adverse than original insurer * Can’t be based on changes in **reinsurance cost** * Rules include **readjustments** resulting from changes in **board-approved criteria**

Answer 383

* **_Must_ require/state:** * Anticipated experience factors must be consistent with credible, relevant experience * How/when to determine reasonableness of anticipated experience factors * _May also_ require/state: * Minimum in-force needed for statistical credibility * Minimum change in anticipated experience factors required * Averaging, smoothing, etc. can’t have an adverse bias * **Must limit policyholder exposure to higher unit expenses resulting from low/zero sales volume**

Answer 384

* **At policy issue, provide current NGE scale** * Include in policy, application, illustration, or as a special disclosure document * **At least 60 days before an adverse change, disclose:** * NGEs that have changed * New current NGE scale * Prior NGE scale since the last disclosure * The guaranteed scale * A prominent description of the nature of the adverse change

Answer 385

**QA must sign and date an actuarial memorandum prior to:** * Issuing a policy on a new policy form * Issuing a policy on a policy form where NGEs are changing only for new issues * Changing NGEs of an existing policy

Answer 386

**Actuarial memorandum required contents (as applicable)** * Premium, gross investment returns, benefits paid * Investment expenses and defaults * Credited rates and index account parameters * Assumptions for policyholder behavior, mortality, morbidity, and expenses * Profit margins

Answer 387

* **Experience data or other info used for anticipated experience factors** * **Processes/methods used in the determination of NGEs for a pricing cell** * **Index account parameter formula(s) and description** * **Investment methods** – investment income allocation, defaults, inv. expenses * **Signed statement by QA** – certify reasonableness of experience factors, etc. * **QA must notify the insurer if in any violation of qualification requirements** * **File changes with superintendent at least 120 days prior** * **File changes with superintendent by May 1 of each year:** * List of any adverse NGE changes during the prior calendar year * Actuarial certification of compliance with Reg 210 * **Provide all records required by Reg 210 to the Superintendent upon request** * **Maintain records and written documentation for 6 years**