Lecture 6 Flashcards
Recall, what is the formula for GAAP profits?
profit = premiums + investment income - benefits - expenses & taxes - increase in reserves
GAAP profit can be rearranged into 4 categories:
investment gain
expense gain
mortality gain
lapse gain
write the formulas for the 4 categories of GAAP profit
ok
what is a non-forfeiture benefit?
saves people that stop paying premiums for a small period of time
what is the US Standard Non-Forfeiture law?
prescribes a minimum NF benefit (cash surrender value) that must be paid to a p/h upon surrender
what products are non-forfeiture benefits usually available on?
whole life products - where there is a significant build up of reserve (unlike term contracts - which have very low reserves)
what are the 4 types of non-forfeiture benefits?
- cash - not popular bc taxes
- Extended Term (ETI) - not used anymore, but takes cash & buys single premium term insurance for the longest term as it can
- Reduced Paid up (RPU) - Keeps in the policy
- Automatic premium load (APL) - this is standard, automatically lends money to pay premium, need to pay back this sum + interest
do the example in 6A on minimum SNL
ok
a company’s total assets is comprised of two things. what are they?
reserves (also called liabilities)
capital (also called equity or surplus)
why is capital held?
for unexpected cash outflows
reserves are held for expected cash outflows
what are the two things that you can do with capital?
- invest in new business
2. pay dividends to stockholders and p/h
draw the diagram of asset breakdown
ok
what is the mechanism used for measuring if a company has enough capital?
capital ratio
what are the 5 main risk elements of LICAT?
- asset default risk
- insurance risk
- interest rate risk
- interest spread risk
- other risk
what is asset default?
when an asset permanently loses value
what happens when an asset defaults?
the company must reflect the decrease in value of the asset on its books > decreases capital
how do you calculate the required capital component for asset default risk?
= asset_default_factor * (solvency reserve - net loans)
what is insurance risk, in terms of required capital?
the risk that either actual mortality/morbidity experience is worse than assumed in pricing
how do you calculate the required capital component for insurance risk (both mortality and morbidity)?
mortality:
= factor * NAR
where: NAR = (DV - solvency reserve)
morbidity:
= factor * total premium
what are the three types of interest rate risk?
- disintermediation risk
- guarantee risk
- liquidity risk
what is disintermediation risk?
the risk that assets will be sold at a loss to cover a substantial cash outflow
ex. when new money rate increases, people lapse par products, and go to UL
interest rate risk: what is guarantee risk?
the risk that interest rates guaranteed > actual interest rates earned
interest rate risk: what is liquidity risk?
the risk that assets cannot be sold fast enough to meet cash demands of liabilities
how do you calculate the required capital component for interest rate risk?
= factor * (solvency reserve)
how can a company mitigate disintermediation risk? 2
- invest in assets that match the liability cash flows as closely as possible
- limit exposure on products that allow surrender/withdrawal on short notice without penalty
how do you calculate the total required capital?
sum of the components / (1 - asset_def_factor)
t/f: the mortality table used when calculating ETI is loaded.
true - to mitigate anti-selection
