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ILA Track > ILA-LPM A > Flashcards

ILA-LPM A Flashcards

1
Q

What are the face amount patterns for term insurance?

A
  1. Level
  2. Decreasing
  3. Increasing
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2
Q

What are the premium patterns for term?

A
  1. level
  2. modified
  3. increasing
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3
Q

What are the premium schedules for term?

A
  1. attained age
  2. select
  3. select and ultimate
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4
Q

Describe term product development challenges and possible solutions

  • Attained age scale vs. S&U scales
A
  • attained age: simpler, not competitive at all ages (possible solution: limit coverage period, e.g. 7 yrs)
  • S&U: more competitive, mortality may worsen in the future
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5
Q

Describe term product development challenges and possible solutions

  • decreasing term
A
  • problem: may mean increasing relative premium
  • solution:
    • offer limited-pay
    • decrease premium scales
    • floor DB
    • OYT premium
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6
Q

6 types of special types of term insurance

A
  1. Par Term
  2. Indeterminate (non-guarnateed) prem term
  3. joint life
  4. second-to-die
  5. hybrid
  6. deposit
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7
Q

Describe indeterminate - give pros and cons

A

insurer can adjust premiums prospectively

  • pros: allows for more aggressive pricing
  • cons: anti-selection
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8
Q

Describe par term - give pros and cons

A

charges higher premium to fund dividends

  • pros: higher persistency, more cushion against adverse experience
  • cons: high cost to PH (not popular)
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9
Q

5 factors affecting term variations in premium

A
  1. size per 1000
  2. risk class
  3. gender
  4. lapse-supported design
  5. cross-subsidization
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10
Q

Describe factors that cause variations in premiums

  • Cross-subsidization
A
  • price some cells more aggressively than others
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11
Q

Describe factors that cause variations in premiums

  • Lapse-supported design
A
  • higher actual lapse rates = higher profits
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12
Q

Describe factors that cause variations in premiums

  • Risk class
A
  • higher premiums for smokers
  • lower premiums for select risk
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13
Q

Describe factors that cause variations in premiums

  • Size
A
  • premiums per 1000 decrease as issue face increases
    • ​b/c of decreasing average costs
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14
Q

4 term riders on term

A
  1. base
  2. spouse
  3. child
  4. OYT
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15
Q

7 non-term riders on term

A
  1. WOP
  2. ROP
  3. ADB
  4. guaranteed insurability
  5. other ADB riders (CI)
  6. Disability
  7. LTC
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16
Q

Describe non-term riders on term

  • Guaranteed Insurability
A

purchase more coverage without underwriting

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17
Q

Describe non-term riders on term

  • LTC
A

pays LTC benefits independent of original DB

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18
Q

Describe non-term riders on term

  • Disability
A

pays monthly income as a % of the original face

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19
Q

Describe non-term riders on term

  • Other ADB riders
A

triggered by the following:

  • chronic illness (6 ADLs)
  • critical illness - heart attack, stroke, cancer, and coronary bypass
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20
Q

Describe non-term riders on term

  • Waiver of Premium (WOP)
A

waives premium on qualified disability

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21
Q

6 pricing considerations for term

A
  1. mortality
  2. persistency
  3. underwriting
  4. compensation
  5. expense and inflation
  6. legal and regulatory issues
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22
Q

Describe pricing considerations for term

  • legal and regulatory issues
A
  • stat reserves
  • coverage length
  • marketing
  • certifications
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23
Q

Describe pricing considerations for term

  • expense and inflation
A
  • overhead allocation
  • high profit sensitivity
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24
Q

Describe pricing considerations for term

  • Compensation
A
  • varies a lot
  • can affect persistency
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25
Q

Describe pricing considerations for term

  • UW
A

shifting to AUW (accelerated UW) and predictive analytics

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26
Q

Describe pricing considerations for term

  • persistency
A

(anti-selection, premium slope)

  • high early lapses - no acquisition cost recovery
  • low ultimate lapses - hurt lapse supported design
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27
Q

Describe pricing considerations for term

  • mortality
A

***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
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28
Q

5 profit objectives for term insurance

A
  1. profit margin
  2. ROE
  3. IRR
  4. Surplus strain
  5. Break-even year (BEY)
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29
Q

Profit Margin

A

PV(Profits)/PV(Premiums)

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30
Q

ROE

A

Net Income/Equity

(discounted or undiscounted)

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31
Q

IRR

A

discount rate such that PV(Profits)=0

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32
Q

Surplus strain

A

first year income/first year premium

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33
Q

BEY

A

year accumulated assets >= reserves

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34
Q

3 ways company could charge for conversion options

A
  1. charge only PH who exercise option
  2. charge only PH who want option available
  3. charge everyone
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35
Q

4 pricing assumptions for conversions

A
  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)
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36
Q

Formula determining extra mortality cost of conversion (words)

A

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

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37
Q

5 characteristics of WL

A
  1. permanent life insurance
  2. guarantees coverage for life
  3. offers tabular CSV
  4. can be participating
  5. multiple premium patterns
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38
Q

WL dividend options

A
  • cash
  • apply to premiums
  • PUAs (purchase paid-up)
  • OYT
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39
Q

WL premium patterns

A
  1. ordinary level for life
  2. indeterminate
  3. limited
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40
Q

Pricing considerations for WL:

  • Underwriting
A
  • trending toward AUW like term
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41
Q

Pricing considerations for WL:

  • Persistency
A
  • May affect other assumptions like mortality and expense
  • (takeaways from 2012 SOA WL persistency study)
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42
Q

Pricing considerations for WL:

  • Mortality
A
  • significant risk
  • lack of premium flexibility + very long coverage periods
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43
Q

5 takeaways from 2012 SOA WL persistency study

A
  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
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44
Q

Cash value formula for UL

A

CVt = (CVt-1 + Premt - Chargest)(1+r)

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45
Q

3 credited rates for UL

A
  1. guaranteed minimum
  2. portfolio
  3. new money
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46
Q

Investment rate

A

investment earned rate - credited rate

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47
Q

List characteristics of UL (9 total)

A
  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
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48
Q

Mortality charges for UL

A
  • guaranteed max
  • attained age vs. S&U
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49
Q

Key credited rate risk for UL

A

spread compression if interest rates fall

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50
Q

2 main designs of ULSG

A
  1. MNLP (minimum no-lapse premium)
  2. Shadow account design
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51
Q

MNLP for ULSG - 3 characteristics

A
  1. most basic ULSG design
  2. SG based on if cumulative min premiums have been paid
  3. premiums generate little of no CSV
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52
Q

Shadow account design for ULSG - 2 characteristics

A
  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!)
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53
Q

3 reserve implications ULSG

A
  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
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54
Q

UL - index crediting rate formula

A

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

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55
Q

UL 2 methods for calculating index change

A
  1. Point-to-point: based on index change between two points
  2. Averaging: annual index change is based on average monthly index level
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56
Q

fixed premium UL product design (4 characteristics)

A
  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
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57
Q

List advantages and disadvantages of fixed premium UL

A

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
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58
Q

4 pricing considerations for UL

A
  1. flexibility creates challenges
  2. scenario testing is important
  3. UL sources of profit
  4. asset/liability analysis (interest rate risk)
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59
Q

3 UL sources of profit

A
  1. interest earned - interest credited
  2. cost of insurance charges - DBs Paid
  3. (expense charges + surrender charges) - (expenses + commissions)
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60
Q

6 similarities between VUL and UL

A

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
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61
Q

4 differences between VUL and UL

A

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
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62
Q

3 fixed premium variable life differences from WL

A
  1. CSVs uncertain - vary w/ separate account
  2. no guaranteed minimum
  3. DBs vary by intervals (monthly or yearly)
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63
Q

Equitable design - 4 characteristics

A
  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
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64
Q

4 characteristics of survivorship insurance

A
  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
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65
Q

5 ways PHs compare survivorship products across companies

A
  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
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66
Q

4 types of survivorship riders

A
  1. PUAs and term
  2. policy split
  3. estate preservation
  4. first-to-die term
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67
Q

policy split rider on survivorship

A
  • allows policy to be split in future
  • few sold
  • very valuable to those that have it
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68
Q

estate preservation rider on survivorship

A

increases DB to cover estate taxes

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69
Q

first-to-die term rider

A
  • 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
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70
Q

single status survivorship

A
  • status = blend of “one-alive and two-alive”
  • smoother CSVs and reserves
    • values don’t change a lot after 1st death
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71
Q

dual status survivorship

A
  • status change depending on who is alive
    • X & Y both alive
    • X alive only
    • Y alive only
  • CSVs and reserves jump after 1st death
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72
Q

decision factors (5) when choosing between single or dual status

A
  1. perceived marketability
  2. administrative feasibility
  3. regulators’ attitudes
  4. perceived risk profile
  5. implications of increased dual-status term rider costs
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73
Q

3 methods for calculating dual-life statuses

A
  1. exact age
  2. joint equal age
  3. equivalent single age
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74
Q

Exact Age - dual life status

A
  • 1st principles using mort of exact ages
  • cumbersome: calculation, storing, validating
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75
Q

Joint Equal Age - dual life status

A

Example: (55,52) ≈ (53, 53)

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76
Q

Equivalent Single Age - dual life status

A
  • equates 2 ages to a single age
  • overcharges in early years, undercharges later
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77
Q

Describe 3 substandard rating methods

A
  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
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78
Q

5 requirements for uninsurable lives

A
  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)
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79
Q

4 pricing considerations for survivorship

A
  1. mortality
  2. persistency
  3. expenses
  4. reinsurance
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80
Q

mortality considerations for survivorship (5)

A
  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
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81
Q

persistency consideration for survivorship

A

very low lapse rates are common

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82
Q

expense consideration for survivorship

A

usually higher than single life business

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83
Q

reinsurance considerations for survivorship (2)

A
  1. very important in pricing
  2. retention rates may be higher than other places
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84
Q

2 approaches for increasing premium on substandard lives

A
  1. flat extra: extra amount per 1000
  2. table rating: multiple of standard mort
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85
Q

5 methods for determining extra mortality for substandard lives

A
  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
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86
Q

2 methods for determining extra mortality for UL substandard lives

A
  1. Charge higher premium
  2. Reduce coverage
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87
Q

3 ways companies can subdivide substandard business

A
  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
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88
Q

List and describe 4 considerations for substandard business expenses

A
  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
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89
Q

Describe not-taken and lapse rates w.r.t substandard pricing

A

higher than standard business

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90
Q

Describe premium paying period w.r.t substandard pricing

A

good practice to limit premium paying period

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91
Q

Describe rating expiration w.r.t substandard pricing

A

ratings may be removed later

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92
Q

Describe CV level w.r.t substandard pricing

A

CSVs are slighly higher than standard

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93
Q

Describe how to assess profitability w.r.t substandard pricing

A

asset share tests - use to fit premiums to profit objectives

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94
Q

How do you calculate the extra substandard gross premium?

A
  1. Calculate standard gross premium GP
  2. Calculate substandard GP (GPR) using same formula
    • use substandard (rated) mortality and expense assumptions
  3. Extra substandard gross premium:

GPR - GP

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95
Q

Describe basic deferred annuity product design in terms of:

  • premium structure
A

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

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96
Q

Describe basic deferred annuity product design in terms of:

  • tax treatment
A
  • 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
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97
Q

Describe basic deferred annuity product design in terms of:

  • interest guarantees
A
  • SPDAs: guarantee rate for 1-7 years
  • FPDAs: lower minimum guaranteed rates
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98
Q

Describe basic deferred annuity product design in terms of:

  • charges
A
  • 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)
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99
Q

4 specific types of deferred annuities

A
  1. CD
  2. Market Value Adjusted (MVA)
  3. Two-tiered
  4. Non-Surrenderable
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100
Q

List and describe 4 specific types of deferred annuities:

  • CD Annuities
A
  • work like CDs (want to compete with)
  • penalty-free WD 30-60 days after interest rate guarantee period (high lapses)
  • pay low commissions
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101
Q

List and describe 4 specific types of deferred annuities:

  • Market Value Adjusted (MVA) Annuities
A
  • 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
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102
Q

List and describe 4 specific types of deferred annuities:

  • Two-Tiered Annuities
A
  • 2 account values - annuitization and surrender
  • annuitization account rate > surrender account rate
    • ^encourages persistency
  • COMPLEX! for PH and company
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103
Q

List and describe 4 specific types of deferred annuities:

  • Non-surrenderable annuities
A
  • “personal GICs (guaranteed investment certificates)”
  • surrenders not allowed between guarantee period end dates
  • illiquid
  • difficult to market
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104
Q

final cash surrender value w/ MVA (formula)

A

Final CSVt = AVt x MVAt x (1 - SC%t)

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105
Q

7 primary features of deferred annuities

A
  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
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106
Q

penalty-free withdrawal provisions on deferred annuities (3 characteristics)

A
  • waivers SC on portion of AV
  • may be a constant % or % of premiums paid
  • may be tied to persistency
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107
Q

Account value enhancement bonuses and 4 different types

A

bonuses intended to increase persistency:

  1. annuitization
  2. persistency
  3. large account value
  4. higher credited rate first year
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108
Q

5 bailout provisisions for a deferred annuity

A
  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
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109
Q

4 interest rate considerations for deferred annuities

A
  1. interest rate risk
  2. interest spread
  3. target spread components
  4. crediting strategies
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110
Q

Describe interest rate considerations for deferred annuities?

  • interest rate risk (deferred annuities)
A
  • 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
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111
Q

Describe interest rate considerations for deferred annuities?

  • interest spread
A

investment earned rate - credited rate

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112
Q

Describe interest rate considerations for deferred annuities?

  • target spread components (4) for deferred annuities
A
  1. expenses (e.g. maintenance, commissions)
  2. product features (e.g. bailouts)
  3. risk charges (e.g. disindermediation)
  4. expected profit
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113
Q

Describe interest rate considerations for deferred annuities?

  • 3 crediting strategies
A
  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
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114
Q

5 deferred annuity pricing assumptions

A
  1. withdrawal (really important)
  2. partial withdrawal provisions
  3. mortality (less important)
  4. commissions and marketing expenses
  5. expenses (lower than life insurance)
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115
Q

Commissions and marketing expense considerations for deferred annuities

A
  • Percent of premium
  • Affected by competitive pressures
  • Examples: SPDA 3–10%, FPDA 7% FY then 3%
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116
Q

Withdrawal considerations for deferred annuities

A
  • affected by SCs
  • credited rates
  • distribution system
  • guarantees
  • policyholder characteristics
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117
Q

4 deferred annuity profit and pricing considerations

A
  1. 1st year strain sources
  2. should consider mult interest rate scenarios
  3. profit objectives
  4. pricing horizon usually 10-20 yrs
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118
Q

1st year strain sources for deferred annuities

A
  • commissions
  • reserves
  • required capital
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119
Q

Profit objectives for deferred annuities

A
  • profit margin, IRR, BEY, GAAP ROE
  • make decisions w/ all 4 together
  • low IRR and high profit margin = surplus strain
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120
Q

What is surplus strain

A

ratio of the first year loss to premium

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121
Q

5 basic characteristics of Variable Annuities

A
  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
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122
Q

product charges for VAs

A
  • Front-end loads (FELs)
  • SCs
  • periodic fees
  • % of asset charges
    • mortality
    • expense
    • profit
    • guarantee riders
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123
Q

2 common VA guarantees

A
  1. GMDBs = max(AV, GMDB) on death
  2. GLBs - contractholder must be alive to exercise benefit
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124
Q

2 types of GMDBs (formulas)

A
  • Step up =

highest AV on any past anniversary - sum(WDs since anniversary w/ highest AV)

  • Roll-up =

GMDBt-1 x (1 + r) + Premiumst - WDst

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125
Q

4 types of GLBs

A
  1. GMIB - income
  2. GMAB - accumulation
  3. GMWB - withdrawal
  4. GLWB - life (MOST POPULAR)
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126
Q

3 approaches used to make variable payouts less variable (VAs)

A
  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
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127
Q

How to floor variable annuity payment at 100% and track actual payment separately

A
  • if actual payment < floor, insurer “loans” shortfall
  • “loans” are repaid when actual payments > floor
  • outstanding loan amount forgiven on death
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128
Q

6 general pricing considerations for VAs w/ out guarantees (describe each)

A
  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
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129
Q

3 pricing considerations specifically for VA guarantees

A
  1. GMDBs and GLBs require stochastic pricing
  2. company must hold reserve for GMDBs and GLBs
  3. pricing considerations to fund cost of guarantees
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130
Q

pricing considerations to fund cost of guarantees for VAs (4)

A
  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)
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131
Q

Define a FIA

A

fixed deferred annuity w/ a GMAV and index credit potential

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132
Q

3 characteristics of fixed indexed annuities

A
  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)
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133
Q

2 common methods for determining index growth

A
  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
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134
Q

8 innovative or exotic return methods for fixed indexed annuities

A
  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)
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135
Q

high water fixed indexed annuity index growth formula

A

IndexGrowth = Max Index Level/Initial Index Level

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136
Q

spread for a fixed indexed annuity

A

= Net Earned Rate - Pricing Spread - Hedging Budget

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137
Q

Describe how fixed annuity can be priced from a spread perspective

A
  • 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
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138
Q

Risks for pricing fixed indexed annuities from a spread perspective

A
  • 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
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139
Q

Static hedging for fixed index annuities

A

uses OTC call spread options

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140
Q

Call spread price and payoff for fixed index annuities

A
  • Price = call struck at current index - call struck at cap
  • Payofft = max(0, Indext - lower strike) - max(0, Indext - upper strike)
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141
Q

Funding ratio definition and outcomes

A

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
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142
Q

what is delta for FIAs?

A

expected change in option value per unit change in index

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143
Q

Describe dynamic delta hedging

A
  • 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
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144
Q

disadvantages of dynamic hedging

A
  1. involves “buying high and selling low”
  2. no downside protection like static hedging provides
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145
Q

Describe how the guaranteed minimum account value is funded for a fixed indexed annuity as well as key risks.

A

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
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146
Q

Fixed indexed annuities reserving is based on what?

A
  • AG 33
  • AG 35
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147
Q

AG 33

A
  • prescribes CARVM for all fixed deferred annuities
  • reserve = largest projected future CSV on a PV basis

CARVM - commissioner’s annuity reserve valuation method

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148
Q

AG 35

A

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
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149
Q

What is HaR?

A

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

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150
Q

5 types of income annuities

A
  1. payment certain
  2. specialty markets
  3. life contingent
  4. joint and survivor
  5. variable payment
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151
Q

specialty markets income annuities

A
  • structured settlements
  • lottery winnings
  • gift annuities
  • reverse mortages
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152
Q

Life contingent income annuities

A
  • life only
  • life with n years certain
  • unit refund (refund = cash value - total payments recieved)
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153
Q

joint and survivor income annuities

A
  • pays until death of last insured
  • payment may change after first death
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154
Q

variable payment income annuity

A

adjust payment for investment performance

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155
Q

6 pricing considerations for income annuities

A
  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
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156
Q

Mortality considerations for pricing income annuities

A
  • lower mortality = higher PVFB
  • assume mortality improvement (e.g. 1% per year: qx+t x (1-0.01)t)
  • substandard methods
    • rated age
    • constant multiple
    • constant extra deaths
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157
Q

CMO perspecitive for GMWB pricing

A
  • 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
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158
Q

CFO perspective regarding GMWB pricing

A
  • wants higher price -> less risk
  • annuity price wars are ruinous
  • hedging could be expensive, even impossible
  • rating downgrade risk
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159
Q

2 ways fixed annuities are regulated

A
  1. solvency is regulated by states (like life insurance)
  2. sales licensing (very tedious)
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160
Q

how is solvency regulated by the states for variable annuities?

A
  • assets are held in a general account
  • liquidation and rehabilitation state laws govern insolvencies
  • guaranty associations collect assessments from solvent insureres
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161
Q

how does sales licensing work for variable annuities?

A
  • 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.)
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162
Q

5 ways guaranteed rates affect fixed annuity competition

A
  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

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163
Q

3 GLBs that VA sellers use to boost sales

A
  1. GMABs
  2. GMIBs
  3. GMWBs
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164
Q

Describe guarantees that VA sellers use to increase VA sales:

  • GMAB
A

typical guarantee = premiums paid

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165
Q

Describe guarantees that VA sellers use to increase VA sales:

  • GMIB
A
  • guaranteed annuity payments as a % of a benefit base (artificial number)
  • assumptions tend to be very conservative
166
Q

Describe guarantees that VA sellers use to increase VA sales:

  • GMWB
A
  • 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)
167
Q

Legal structure of VAs vs. Fixed DAs

A
  • 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
168
Q

Regulation of VAs

A
  • 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
169
Q

typical charge structure of a variable annuity

A
  • Main fee: M&E charge
  • other fees intended as cushion in case M&E charge is insufficient
170
Q

describe the M&E charge for variable annuities

A
  • % of AV per year
  • covers longevity risk
  • covers expense risk
  • varies by producer (higher for salespeople than direct channels)
171
Q

Variable annuity fees that serve as a cushion in case M&E charge is insufficient

A
  • administrative charge
  • fees for guaranteed benefit riders
  • fund manager fee paid to insurer
172
Q

Other fees intended as cushion in case M&E charge is insufficient:

  • administrative charge for variable annuity
A
  • flat dollar amount like $20/yr
  • covers risk of low AVs
173
Q

Other fees intended as cushion in case M&E charge is insufficient:

  • fund manager fee paid to insurer
A

defrays incremental cost of adding additional fund options

174
Q

Compare taxation for VAs vs. Qualified Retirement Plans

A
  • 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
175
Q

Compare taxation of VAs vs. Mutual Funds

A
  • 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
176
Q

Compare taxation of VAs and fixed deferred annuities

A
  • 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
177
Q

exclusion ratio

A

1 - exclusion ratio = taxable portion of each payment

178
Q

Describe key GMWB hedging issues and risk

A

market risks created by the embedded put option

179
Q

What are the 3 market risks created by the embedded put option for a GMWB?

A
  1. stock movements
  2. increased volatity
  3. increased rate risk
180
Q

GMWB hedging issues and risks: market risks created by the embedded put option:

  • Stock movements
A
  • Up or down movements force rebalancing
  • cost = additional investments in hedge
181
Q

GMWB hedging issues and risks: market risks created by the embedded put option:

  • Increased volatility
A
  • hedge costs increase faster as volatility increases
  • could hedge with VIX futures, but most insurers don’t
182
Q

GMWB hedging issues and risks: market risks created by the embedded put option:

  • Interest rate risk
A
  • can hedge w/ interest rate swaps
  • changes in interest rate lead to incorrect hedge positions
183
Q

Cost of hedging GMWB

A

=sum of costs use to update hedge portfolio:

  • stock movements
  • increased volatility
  • interest rate risk
184
Q

What is the key difference between GMWB PH behavior risk and market risks?

A

PH behavior risk can NOT be hedged

185
Q

3 key policyholder behavior risks for GMWBs

A
  1. persistency
  2. utilization
  3. disruptive or catastrophic events
186
Q

Describe key GMWB policyholder behavior and other risks:

  • persistency
A
  • risk of low ultimate lapse rates ⇒ under-priced benefits
  • risk of high early lapses ⇒ don’t recover costs
187
Q

Describe key GMWB policyholder behavior and other risks:

  • utilization
A

higher than expected utlization ⇒ under-priced benefits

188
Q

Describe key GMWB policyholder behavior and other risks:

  • disruptive or catastrophic events
A
  • counterparty risk in hedges
  • risk of high cash collateral requirements
  • derivatives markets may close during high volatility
189
Q

what is a very long-term risk for GMWBs

A

regulation prohibits transferring GMWB liability after issue

190
Q

5 reasons LTCI is such a risky product

A
  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
191
Q

what are the data issues with LTCI?

A
  • products are new - data truncated
  • little public data available
  • significant market changes
192
Q

Why is having no CSV a risk for LTCI?

A
  • insurance risk does not decline
  • policyholders have a “use it or lose it” mentality
193
Q

Risk vs uncertainty

A
  • 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
194
Q

3 types of risk (LTCI)

A
  1. process risk
  2. parameter risk
  3. economic scenario risk
195
Q

drivers of process risk

A
  • prob distributions for mortality, morbidity, and lapse
  • benefits
  • # of policies
  • demographics
  • length of reporting period

**drive “width” of 90% prediction interval**

196
Q

Confidence interval components for lapse rate process risk

A
  • lapse rate (p) is Binomial
  • mean lapses = np
  • σ = sqrt (np (1 - p))
197
Q

90% convidence interval for lapse process risk and interpretation

A
  • 90% CI = expected lapses +/- 1.64σ
  • interpretation: if actual lapses are within +/- 1.64σ of expected, it is due to process variance
198
Q

process for assessing paid LTCI claims process risk

A
  1. simulate results
  2. calculate mean and standard error (estimate of σ)
  3. calculate relative standard error (RSE)
  4. calculate 95th percentile claims margin
199
Q

RSE

A

=standard error/expected value of claims

200
Q

95th percentile claims margin for LTCI w/ interpretation

A
  • 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
201
Q

Hypothesis testing for PCM95 for a single period (e.g. month)

A
  • H0: Best estimate is correct
  • Reject H0 if actual claims > PCM95
202
Q

ILR for LTCI

A

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

203
Q

Differences between paid claims analysis and ILR for LTCI

A
  • 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
204
Q

Profit formula for LTCI

A

=Premium + InvInc - IncPolRes - IncClaimRes - Claims

***Profit can also be analyzed statistically (confidence intervals, etc.)

205
Q

Process and formula used to measure process risk of LTCI profit

A
  • Simulate results ⇒ calculate mean, variance, etc.

Var(Profit) = Var(Premium) + Var(InvInc) + Var(IncPolRes) + Var(IncClaimRes) + Var(Claims) + Covariance

206
Q

Drivers of profit process risk

A
  • Biggest driver (by far) claims reserve (83% in study)
  • premium and investment income (low)
207
Q

How does length of reporting period affect process risk?

A

process risk declines as time period lengthens

208
Q

What happens to process risk as the time period lengthens?

A
  • 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
209
Q

Describe parameter risk

A
  • 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
210
Q

Describe 2 types of parameter risk

A
  • 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
211
Q

How is lapse parameter risk measured?

A
  • 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

212
Q

how can parameter risk affect results in an LTCI pricing model?

A

Key Point: Adding parameter risk increases overall variance in results

213
Q

How to capture parameter risk in LTCI pricing model

A
  • 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
214
Q

Decribe investment risk for LTCI results

A
  • major source of risk
  • almost 1/2 benefits funded by investment returns
  • can’t be diversified across policies
215
Q

LTCI pricing and product design implications for interest rate risks

A
  • products need large margins to absorb interest rate risk
  • products can be designed to transfer more investment risk to policyholders
    • example: inflation-indexed premiums
216
Q

how do you quantify process, parameter, and investment risk in LTCI products?

A
  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
217
Q

LRM

A
  • loss ratio margin
  • LR = incurred claims/earned premium
  • LRM95 = 1.64 x sLR
218
Q

PRM

A
  • profit ratio margin
  • PR = profit/earned premium
  • same 95% CI as LR
219
Q

SDLR

A
  • 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
220
Q

SDLRsr

A
  • calculated exactly the same as SDLR except w/ a short rate specific to each scenario
  • reflects interest rate risk
221
Q

risk measures that capture process and parameter risk

A
  • LRM
  • PRM
  • SDLR
  • SDLRsr

ALL

222
Q

risk measures that capture interest rate risk

A
  • PRM
  • SDLRsr
223
Q

risk measures that are annual measures

A
  • LRM
  • PRM
224
Q

risk measures that are PVs of future values

A
  • SDLR
  • SDLRsr
225
Q

3 characteristics of ALL risk measures

A
  1. higher expected values and s.d.s = more risk
  2. can calculate 95th % of distribution
  3. can do hypothesis testing
226
Q

Compare LTCI product design to 5-yr BP w/ 5% compound inflation

  • 2-yr BP w/ 3% simple inflation
A
  • shorter BP = less risk
  • less volatility in claims reserve
227
Q

Compare LTCI product design to 5-yr BP w/ 5% compound inflation

  • ROP Rider: returns premiums on death
A
  • increases interest rate risk: higher SDLRsr & PRM
  • lowers LRM and SDLR: more scenarios where benefits occur (lowers variance)
228
Q

Compare LTCI product design to 5-yr BP w/ 5% compound inflation

  • Life/LTC Combo Product
A
  • more interest rate risk: higher SDLRsr
  • substantially less benefit variance: creates a natural hedge
  • lower LRM and SDLR
  • similar PM most years
229
Q

Compare LTCI product design to 5-yr BP w/ 5% compound inflation

  • Inflation-Indexed Benefits and Premiums
A
  • significantly less interest rate risk: lower PM and SDLRsr
  • more benefit variance ignoring interest rate risk (higher SDLR)
230
Q

2 ways inflation indexing affects LTCI product risk

A
  • 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
231
Q

5 steps for pricing LTCI recommended by authors of “Understanding the Volatility of Experience and Pricing Assumptions in Long-Term Care Insurance”

A
  1. define industry risk tolerance up front
  2. set annual performance expectations
  3. monitor experience
  4. investigate assumptions
  5. re-price business
232
Q

5 steps for pricing LTCI recommended by authors of “Understanding the Volatility of Experience and Pricing Assumptions in Long-Term Care Insurance”

  • Re-price business
A
  • Update premiums if necessary based on results of investigation of assumptions
    • Example: results fall outside prediction interval 2 years in a row
233
Q

5 steps for pricing LTCI recommended by authors of “Understanding the Volatility of Experience and Pricing Assumptions in Long-Term Care Insurance”

  • Investigate assumptions
A
  • (i.e. results of monitor experience)
  • review ALL model assumptions
234
Q

5 steps for pricing LTCI recommended by authors of “Understanding the Volatility of Experience and Pricing Assumptions in Long-Term Care Insurance”

  • Monitor experience
A
  • Compare actual experience to criteria to performance expectations
235
Q

5 steps for pricing LTCI recommended by authors of “Understanding the Volatility of Experience and Pricing Assumptions in Long-Term Care Insurance”

  • Set annual performance expectations
A
  • Using key risk measures, develop prediction intervals, hypothesis tests
236
Q

5 steps for pricing LTCI recommended by authors of “Understanding the Volatility of Experience and Pricing Assumptions in Long-Term Care Insurance”

  • define industry risk tolerance up front
A
  • Should be objective and consistent across companies
    • Example: companies will accept all process risk plus moderate parameter risk
237
Q

Describe the consumer perspective of long-term care insurance

A
  • 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
238
Q

financial situation of average LTC buyers

A
  • median income = $87.5K
  • most have liquid assets of $100K+
239
Q

What did insurers do to drive agents from LTCI market?

A
  • dropped benefits PHs wanted most
  • products to innovative for agents to learn
  • strict UW
  • sex-distinct pricing (“hits target marget the hardest”)
240
Q

Key findings from SOA’s LTC pricing project study

A
  • 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%
241
Q

How will 5 of insurers’ LTCI associated risks decrease over time? (name and describe each)

A
  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
242
Q

Describe how key pricing assumptions for LTCI have changed compared to original pricing in LTCI market?

  • Morbidity
A
  • 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
243
Q

Describe how key pricing assumptions for LTCI have changed compared to original pricing in LTCI market?

  • Lapse rates
A
  • early LTCI products overestimated lapse rates
  • voluntary ultimate lapse rates are nearing zero (0.7%)
244
Q

Describe how key pricing assumptions for LTCI have changed compared to original pricing in LTCI market?

  • mortality rates
A
  • early LTCI products overestimated mortality rates
  • mortality continues to improve
  • morbidity improvement should offset cost of mortality improvement
245
Q

Describe how key pricing assumptions for LTCI have changed compared to original pricing in LTCI market?

  • Investment income
A
  • rates are lower today (raises premium)
  • premiums must accumulate to fund reserves for future claims
246
Q

Describe how key pricing assumptions for LTCI have changed compared to original pricing in LTCI market?

  • expenses
A
  • 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
247
Q

Describe how acceleration riders work

A
  • insurer pays some portion of face before death
  • “living benefits”
  • PH must meet specific criteria (trigger)
248
Q

events that trigger accelerated benefits

A
  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
249
Q

Goal of chronic illness rider on life policy

A

designed to keep benefits tax-free to PHs

250
Q

List and describe 3 common chronic illness benefit designs

A
  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
251
Q

10 ways to control risk for chronic illness acceleration riders (name 4)

A
  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
252
Q

Reinsurance participation for terminal illness rider

A

proportional to base policy participation

253
Q

Chronic illness rider reinsurance participation:

  • permanent products
A
  • high prob of ultimate claim
  • if chronically ill, lapse rate ~0%
  • reinsurer partipation may be:
    • full
    • limited to one-time payment
    • none
254
Q

Chronic illness rider reinsurance participation:

  • term products
A
  • 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
255
Q

4 key activities in web-based distribution

A
  1. preliminary info search
  2. other pre-sales activity
  3. completion of purchase/sale online
  4. post-sales activity online
256
Q

Describe key activities in web-based distribution:

  • preliminary information search
A
  • online insurance research growing in US
  • aggregators: price comparison websites (PCWs) - popular in UK
257
Q

Describe key activities in web-based distribution:

  • other pre-sales activity
A
  • consumers gaining comfort w/ internet advice
  • evolving from simple calcs to personalized risk assessment
  • social media - gaining popularity
258
Q

Describe key activities in web-based distribution:

  • completion of purchase/sale online
A
  • all age groups gaining comfort, but relatively low penetration so far
  • younger consumers 2x more likely to buy online
259
Q

Describe key activities in web-based distribution:

  • post-sales activity online
A
  • customers can access printable policy forms, etc.
  • modify coverage terms and other account info
260
Q

Discuss trends in mobile device usage as it relates to insurance distribution

A

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
261
Q

Describe telematics and uses for insurance distribution

A
  • 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
262
Q

Mobile design considerations for success

A
  • fast, simpler functionality
  • pre-filling of data fields
  • interface optimized for small screen
  • focused on-the-go issues
  • gamification
263
Q

What is basic mobile?

A
  • No internet access on the device (only text messaging, etc)
264
Q

Challenges for basic mobile in developing countries (Africa, Asia, and Latin America)

A
  • 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
265
Q

Opportunities and success factors for basic mobile

A
  • may lower cost to reach new markets
  • may facilitate UW
  • remote payment collection is critical (biometric ID systems)
  • mobile microinsurance: embedded insurance freemium model
266
Q

What is big data?

A
  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
267
Q

6 ways that Big Data increases consumer centricity (list 4)

A
  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
268
Q

Describe ways that Big Data increases consumer centricity?

  • Micro market segmentation
A
  • activity-based data: web history, behavior tracking
  • social network profiles: work history, group memberships
  • social influence data: likes, follows, etc.
269
Q

Describe ways that Big Data increases consumer centricity?

  • Facilitates insurance market research and lowers costs
A
  • Identify missing insurance markets using internet search data
  • loyalty card programs
  • telematics for UW and engagement
270
Q

Describe ways that Big Data increases consumer centricity?

  • Predictive analytics
A
  • increase customer retention
  • monitor brand awareness and reputation
271
Q

3 reasons returns on big data are uncertain

A
  1. difficult to quantify customer experience and risk management
  2. expensive to capture/analyze data
  3. doesn’t replace human intuition
272
Q

Discuss the strategic implications of the following as they relate to digital distribution.

  • Role of intermediaries will evolve but remain essential
A
  • provide guidance, expert advice, and reach uninformed customers
  • increased channel interaction = increased customer loyalty
273
Q

Discuss the strategic implications of the following as they relate to digital distribution.

  • Risks from Aggregators
A
  • high price sensitivity
  • higher lapses, churn caused by direct solicitation
  • adverse selection from overly aggressive pricing
274
Q

Discuss the strategic implications of the following as they relate to digital distribution.

  • New Market Entrants
A
  • disruption will happen faster than before
  • mutual insurance pools may have natural limits
275
Q

Discuss the strategic implications of the following as they relate to digital distribution.

  • Impact of increased non-price differentiation
A
  • higher churn and lapses
  • increased commoditization
276
Q

Discuss the strategic implications of the following as they relate to digital distribution.

  • Integrating multiple distribution platforms
A
  • must increase customer comfort w/ low-cost channels
  • IT systems must be upgraded
277
Q

Discuss the strategic implications of the following as they relate to digital distribution.

  • Importance of innovation
A
  • 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
278
Q

Describe recent trends in life insurance sales

A
  • 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
279
Q

List the two types of traditional forms of UW

A
  1. Full UW
  2. Non-medical UW
280
Q

Describe full UW

A
  • medical/para-medical exam
  • collection of fluids (blood/urine)
  • Rx, MVR, and MIB
  • lowest mortality cost
281
Q

Describe the end-to-end UW approach and compare it to traditional methods

A
  • 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
282
Q

Describe non-medical UW

A
  • no medical/para-medical exam
  • no fluid collection
  • Rx, MVR, and MIB
  • higher mortality cost
283
Q

6 ways to increase mid-market and millenial customer satisfaction (list 4)

A
  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)
284
Q

2 industries w/ better customer satisfaction than insurance

A
  1. personal banking
  2. retail
285
Q

End-to-end UW process (9 steps)

A
  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
286
Q

5 general reasons people buy life insurance

A
  • 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)
287
Q

2 personality traits that make you more likely to buy life insurance

A
  1. risk averse (don’t drink, smoke, etc)
  2. higher sense of accountability (kids or dependents)
288
Q

list socioeconomic indicators that increase purchase probability for life insurance

A
  • higher income/socioeconomic class (highly significant)
  • trust in financial institutions
  • male
  • older age (until 59)
  • married
  • have kids
  • have mortgage
289
Q

List 3 possible explanations why consumers don’t buy life insurance

A
  1. rational demand limitations
  2. psychological and behavioral biases
  3. market failures
290
Q

3 rational demand limitations that discourage people from buying life insurance

A
  1. governement programs
  2. low disposable income
  3. complicated, lengthy application processes
291
Q

Describe general consumer attitudes toward life insurance

A
  • 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
292
Q

Describe the 4 stages of the life insurance purchase process and customer barriers for each.

A
  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
293
Q

4 postulates of prospect theory

A
  1. reference dependence
  2. loss aversion
  3. diminishing sensitivity to gains and losses
  4. probability weighting
294
Q

Market failures that prevent consumers from buying life insurance

A
  • asymmetric information
  • adverse selection problems
295
Q

Describe the postulates of prospect theory:

  • reference dependence
A
  • relative decision making
  • “narrow-framed” - focus more on short-term utility/wealth
296
Q

Describe the postulates of prospect theory:

  • diminishing sensitivity to gains and losses
A
  • risk averse in gain domain
  • risk seeking in loss domain
  • insurance purchase tend to be loss domain decisions
297
Q

Describe the postulates of prospect theory:

  • probability weighting
A

overweight high probability events and underweight low probability events

298
Q

cognitive biases that apply to life insurance (name 4)

A
  • 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
299
Q

Problems with traditional face-to-face meetings w/ agents/brokers

A

principal-agent problem and asymmetric information

300
Q

Decribe the trend in how consumers seek information

A
  • 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
301
Q

Describe trends in where consumers buy life insurance

A
  • most still sold face-to-face w/ agents/brokers
  • online channels gaining - especially for simpler/transparent products
  • emerging markets use internet-enabled mobile phones
302
Q

Based on surveys, what do consumers actually want from life insurance?

A
  1. simpler, more transparent products and purchasing processes
  2. trust want long-term relationships w/ insurers
  3. loyalty rewards
303
Q

Describe PHs desire for simpler, more transparent products and purchasing processes

A
  • more important than lower premiums to some
  • reduce confusing language in contracts
304
Q

How to build trust with PHs

A
  • should make more effort to retain lapsing PHs
  • don’t find loopholes out of paying claims
  • improve communication
305
Q

List factors that increase WTP for life insurance

A
  1. higher income
  2. older age (WTP increases up until retirement age)
  3. higher trust in financial industry
306
Q

How is understanding WTP a competitive advantage?

A
  • marketing strategies must be country-specific
  • high WTP could be an opportunity to create more segmented products
307
Q

How can insurers respond to customer dissatisfaction w/ life insurance? (name 4)

A
  • 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)
308
Q
  • Why does nonforfeiture law exist
A
  • regulators want equitable treatment for both persisting and lapsing policyholders
  • regulators want policyholders to receive their fair share of equity on lapse
309
Q

Key pricing concepts and risks related to nonforfeiture law

A
  • policies must provide a minimum nonforfeiture value by law in U.S.
  • lapse risks
  • nonforfeiture option utilization rates
  • anti-selection
  • expense assumptions
  • substandard risks
310
Q

Describe key pricing concepts and risks related to nonforfeiture law:

  • lapse risks
A
  • 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
311
Q

Describe key pricing concepts and risks related to nonforfeiture law:

  • anti-selection
A

mortality generally higher for options that maximize benefits for the cost

312
Q

Describe nonforfeiture options:

  • Reduced Paid-Up (RPU)
A
  • lower face amount than original
  • maximizes coverage period
  • low anti-selection
313
Q

Describe key pricing concepts and risks related to nonforfeiture law:

  • substandard risks
A
  • may have same CSV as standard
  • impact of later qualifying for standard
314
Q

Describe key pricing concepts and risks related to nonforfeiture law:

  • expense assumptions
A
  • different from regular polcies and varies by option
315
Q

Describe nonforfeiture options:

  • Extended Term Insurance (ETI)
A
  • maximizes policyholder’s face
  • ETI expenses lower than RPU
  • policy terminates when CSV=0
  • higher anti-selection than RPU unless ETI is default option
316
Q

4 types of nonforfeiture options other than RPU and ETI

A
  1. Automatic Premium Loan (APL)
  2. Annuitization
  3. Cash Surrender
  4. Flexible UL Premium Payments
317
Q

Describe types of nonforfeiture options other than RPU and ETI:

  • Automatic Premium Loan (APL)
A
  • 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
318
Q

Describe types of nonforfeiture options other than RPU and ETI:

  • Annuitization
A

convert CSV into stream of payments (DAs mostly)

319
Q

Describe types of nonforfeiture options other than RPU and ETI:

  • Cash surrender
A

the equivalent cash value of nonforfeiture options

320
Q

4 methods for calculating nonforfeiture options

A
  1. retrospective method
  2. prospective method
  3. net premium method
  4. single premium method
321
Q

Assumptions for future experience for prospective method of calculating nonforfeiture value

A
  • persister approach - mortality is only decrement
  • whole contract approach - reflects any policyholder option to terminate/convert
322
Q

Prospective method for calculating nonforfeiture values (description)

A
  • forward-looking
  • PV based on expected future experience
  • maintains parity between persisting and lapsing PHs
323
Q

Net premium approach for calculating nonforfeiture values (description)

A
  • 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
324
Q

Single premium method for calculating nonforfeiture values

A
  • assumes PH “borrows” signle premium to purchase policy
  • PH makes payments, loan is reduced, PH gains equity
  • very different from other approaches
325
Q

Retrospective nonforfeiture approaches to calculating nonforfeiture values (description)

A
  • backward-looking accumulation value
  • no-lapse guarantee: policy stays in force even if NF Value < 0
326
Q

Which nonforfeiture value calc method is easier to explain to PHs?

A
  • Retrospective: based on what actually happened, not future assumptions
327
Q

Which nonforfeiture value calc method maintains more parity between persisters and lapsers?

A
  • Prospective
328
Q

What are 2 characteristics of the prospective method for calculating nonforfeiture values that make it more complicated than the retrospective method?

A
  • value will change if assumptions change (hard to explain)
  • depends on policy class definitions
329
Q

Compare retrospective and prospective nonforfeiture calc methods based on product type

A
  • prospective - works well for fixed premium products (WL, etc)
  • retrospective - works well for flexible premium products (UL, annuities, etc)
330
Q

US nonforfeiture practices

A
  • 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
331
Q

Outside US nonforfeiture practices

A
  • 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
332
Q

Define the following terms as they related to policyholder dividends.

  • Participating policy
A

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

333
Q

Define the following terms as they related to policyholder dividends.

  • Mutual life insurance company
A

owned by its participating policyholders

334
Q

Define the following terms as they related to policyholder dividends.

  • Stock company
A

owned by shareholders (but may have participating blocks)

335
Q

Define the following terms as they related to policyholder dividends.

  • Dividend scale
A

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

336
Q

Define the following terms as they related to policyholder dividends.

  • Divisible surplus
A

aggregate surplus to be distributed as policyholder dividends

337
Q

Define the following terms as they related to policyholder dividends.

  • Dividend actuary
A

senior actuary responsible for dividend scale and advising
board

338
Q

Describe the duties of the Dividend Actuary

A

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

339
Q

Describe the duties of the Board with respect to policyholder dividends

A

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)
340
Q

Describe the “contribution principle” for dividends

A

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

341
Q

Describe the 3-factor dividend formula

A

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
342
Q

Duration of the significance of each factor in the 3-factor dividend formula

A
  1. Expense - ALL years
  2. Mortality - Early years
  3. Interest - Later years
343
Q

List 5 dividend options commonly offered to participating policyholders

A
  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
344
Q

Describe the minimum nonforfeiture interest rate for fixed deferred annuities

A

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

345
Q

List 5 common settlement options available for deferred annuities

A
  1. Annuity certain
  2. Straight-life annuity
  3. Life annuity w/ a period certain
  4. Refund annuity
  5. Joint and survivorship annuity
346
Q

Describe common settlement options available for deferred annuities:

  • Annuity certain
A

pays for a specified period (not life contingent)

347
Q

Describe common settlement options available for deferred annuities:

  • Straight-life annuity
A

makes periodic payments while annuitant is alive (life contingent)

348
Q

Describe common settlement options available for deferred annuities:

  • Life annuity with a period certain
A

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

349
Q

Describe common settlement options available for deferred annuities:

  • Refund annuity
A

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
350
Q

Describe common settlement options available for deferred annuities:

  • Joint and survivorship annuity
A

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

351
Q

What is the difference between a mutual and a stock company?

  • Mutual company
A
  • 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
352
Q

What is the difference between a mutual and a stock company?

  • Stock company
A
  • Owned by stockholders
  • Sells non-par and possibly some par business
  • Limited transfers from par to stock business
353
Q

Define the following terms with respect to policyholder dividends.

  • Policy factor
A

policy-specific values

  • CSVs, reserves, premiums, etc.
354
Q

Define the following terms with respect to policyholder dividends.

  • Experience factor
A

policy-specific values

  • values and assumptions that affect excess earnings (dividends)
355
Q

Define the following terms with respect to policyholder dividends.

  • Dividend scale
A

policy-specific values

  • a current or guaranteed schedule of dividends
356
Q

Define the following terms with respect to policyholder dividends.

  • Experience factor class
A

group of policies whose dividends are based on same experience factors

  • Varies by issue age, duration, sex, etc.
357
Q

Describe the required background of the Dividend Actuary

A
  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
358
Q

What are the Dividend Actuary’s responsibilities?

A
  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
359
Q

List sources of earnings that drive a dividend scale

A
  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
360
Q

How does the use of the portfolio rate vs. investment year method impact the investment earnings component of a dividend scale?

A
  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

361
Q

How can policy loans be recognized in a dividend scale? Describe advantages and disadvantages of each method.

  • Fixed Loan Rate
  • With Direct Recognition
A
  • Can’t adjust loan rates
  • Can adjust dividends at policy level
  • Satisfies contributory principle
362
Q

How can policy loans be recognized in a dividend scale? Describe advantages and disadvantages of each method.

  • Variable Loan Rate
  • With Direct Recognition
A
  • Can adjust dividends and loan rates at policy level
  • Satisfies contributory principle
363
Q

How can policy loans be recognized in a dividend scale? Describe advantages and disadvantages of each method.

  • Fixed Loan Rate
  • Without Direct Recognition
A
  • Can’t adjust loan rates or dividends at policy level
  • Does NOT satisfy contributory principle
364
Q

How can policy loans be recognized in a dividend scale? Describe advantages and disadvantages of each method.

  • Variable Loan Rate
  • Without Direct Recognition
A
  • Can adjust loan rates
  • May satisfy contributory principle (but only sometimes)
  • Time bomb problem!
365
Q

Give considerations for handling mortality experience in a dividend scale

A
  • 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
366
Q

How should expenses be recognized in policyholder dividends?

A
  • 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
367
Q

How should persistency be recognized in a dividend scale?

A
  • Can recognize directly or indirectly
  • Affects expenses through amortization of acquisition expenses
  • Affects mortality: anti-selection
368
Q

How do the following impact policyholder dividends?

  • Taxes
A
  • Reflect any taxes not netted out of other sources
369
Q

How do the following impact policyholder dividends?

  • Mergers
A
  • Merge past experience gradually into future experience
  • Post-merger policyholder equity should resemble pre-merger level
370
Q

How do the following impact policyholder dividends?

  • Reinsurance
A
  • Do reflect risk reinsurance in dividends
  • Do not reflect financial reinsurance
371
Q

List 3 methods for changing a dividend scale

A
  1. pegging
  2. substitution
  3. experience premium method
372
Q

Describe the 3 methods for changing a dividend scale:

  • Pegging
A
  • Basic goal: Avoid dividend decreases (Dividendt >= Dividendt-1)
  • can improve persistency
373
Q

Describe the 3 methods for changing a dividend scale:

  • Substitution
A
  • Maintain old scale, even if revised scale is lower
  • Expensive if revised scale is falling
  • can improve persistency
374
Q

Describe the 3 methods for changing a dividend scale:

  • Experience Premium Method
A
  • Like pegging, but carries but carries the cost into future years
375
Q

How should a dividend scale be adjusted for experience?

A
  • 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
376
Q

List considerations for illustrated dividend scales.

A

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
377
Q

How should retained surplus be managed for policyholder dividend purposes?

A
  • Maintain enough surplus for current and future needs
378
Q

How should retained surplus be managed for policyholder dividend purposes?

  • Terminal dividends
A
  • use to release excess surplus
379
Q

How should retained surplus be managed for policyholder dividend purposes?

  • Annual contributions to surplus should allow the company to…
A
  • 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
380
Q

How should retained surplus be managed for policyholder dividend purposes?

  • Observe Week’s Axiom
A
  • Changes in sales volume should NOT affect in-force dividends
381
Q

How should retained surplus be managed for policyholder dividend purposes?

  • Strategies for increasing surplus growth rate
A
  • Lower dividends to existing policyholders
  • Reinsurance
  • Issue capital notes (debt)
382
Q

Describe the purpose of ASOP 2

A

Provide guidance on determination of NGEs

383
Q

Describe the scope of ASOP 2

A

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
384
Q

ASOP 2 does not apply to…

A
  • NGE illustration (ASOP 24)
  • Policyholder dividends (ASOP 15)
  • NGEs in reinsurance contracts
385
Q

Review the ASOP 2 definitions on the back of this card

A
  • 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
386
Q

List actuarial responsibilities in an NGE framework

A
  • Understand insurer’s NGE framework
  • Consider how the NGE framework has been applied in the past
387
Q

List items commonly found in an NGE framework

A
  • 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
388
Q

Describe ASOP 2’s general considerations on NGE scales

A
  • Only revise if AEFs change
  • Based on future expectations; don’t recoup past losses or distribute past gains
389
Q

Describe ASOP 2’s considerations when developing or modifying an NGE determination policy

A
  • 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)
390
Q

Describe ASOP 2’s considerations when providing actuarial advice on applying an NGE determination policy

A
  • 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)
391
Q

Describe ASOP 2 guidance on establishing or changing policy classes:

  • For Future Sales of a New or Existing Product
A
  • 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
392
Q

Describe ASOP 2 guidance on establishing or changing policy classes:

  • For In-Force Policies
A
  • Don’t reassign unless new, material information supports reassignment
  • OK to combine policy classes based on actuarial judgment
    • Can increase credibility, etc.
393
Q

Describe ASOP 2’s general considerations on the NGE determination process

A
  • 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
394
Q

Describe ASOP 2’s guidance on the NGE determination process for future product sales

A
  • Consider how AEFs were developed and whether they reflect:
    • Product’s features, intended markets, distribution methods, underwriting procedures, and policy classes
  • NGE scale considerations
395
Q

Describe ASOP 2’s guidance on the NGE determination process for future product sales

  • NGE scale considerations
A
  • 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
396
Q

Describe ASOP 2’s guidance on the NGE determination process for inforce products

(broad categories)

A
  • 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
397
Q

Describe ASOP 2’s guidance on the NGE determination process for inforce products

(details)

Don’t stress about remembering all of these!

A
  • 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
398
Q

Describe ASOP 2 guidance on NGEs used in illustrations not subject to ASOP 24

A
  • 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
399
Q

Describe ASOP 2 guidance on providing regulatory opinions and disclosures

A
  • 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
400
Q

Describe ASOP 2 guidance related to reliance on other parties

  • Reliance on Data or Other Information Supplied by Others
A

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

401
Q

Describe ASOP 2 guidance related to reliance on other parties

  • Reliance on Assumptions or Methods Selected by Another Party
A
  • Refer to ASOP 41
  • Disclose the extent of reliance in the actuarial report
402
Q

Describe ASOP 2 guidance related to reliance on other parties

  • Reliance on Another Actuary
A
  • 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
403
Q

List various required disclosures in an actuarial report per ASOP 2

Don’t stress about remembering all of these!

A
  • 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
404
Q

List additional ASOP 41 disclosures in an actuarial report related to NGEs

A
  • 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
405
Q

Describe requirements in NY Reg 210 for determining policy classes for the purpose of setting non-guaranteed elements

A
  • 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.
406
Q

Describe the NY Reg 210 requirements for readjustments to non-guaranteed elements on existing policies

A
  • 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
407
Q

Describe board-approved criteria required by NY Reg 210

A
  • 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
408
Q

Describe disclosures to the policy owner required by NY Regulation 210

A
  • 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
409
Q

Describe the Actuarial Memorandum filing requirements under NY Reg 210

  • QA must sign and date an actuarial memorandum prior to…
A

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
410
Q

Describe the Actuarial Memorandum filing requirements under NY Reg 210

  • Actuarial memorandum required contents (as applicable)
A

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
411
Q

Review the additional NY Reg 210 filing and record requirements on the back of this card

A
  • 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

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