Ch 7 Multi-life Underwriting

Question 1

guaranteed issue

Answer 1

does not include traditional underwriting
-conditional guarantee
-eligible participant must be actively at work
-provision not absent from work during last 3 mos due to illness or injury
-least expensive, most efficient
-corporate-owned plans
-abbreviated app, consent form
-company owns policy
-drawbacks: ease of enrollment/greater assurance of approval = higher cost, pricing for extra mortality
-addl cost modest due to: population is actively-at-work, risk is mostly standard or better, spread of risk is acceptable, plan is nonselective, group does not present untoward risks

Question 2

simplified issue

Answer 2

abbreviated underwriting w/ fewer requirements
-pricing more expensive to allow for increased mortality
-accept or reject on abbreviated app alone
-minimal costs, quick decisions
-common to accept risks believed to be 200% or better
-alternate: abbreviated app, records. depending on evidence can include ratings as needed. greater expense

Question 3

principles of multi-life underwriting

Answer 3

-primary focus to use as few tools as possible to keep costs down
-avoid anti-selection, minimized through use of traditional underwriting techniques

Question 4

corporate-owned life insurance - COLI

Answer 4

plans intended to provide benefits to meet needs of executives

Question 5

bank-owned life insurance - BOLI

Answer 5

life insurance purchased and owned by a bank to be used to offset a variety of pre-retirement and post-retirement employee benefit obligations
cost efficient and effective means offset rising employee benefit costs
-can be funded w/ life insurance, executive retirement plans, deferred compensation plans, retiree medical obligations

Question 6

charity-owned life insurance - CHOLI
foundation-owned life insurance - FOLI

Answer 6

plans designed to insure multiple or large numbers of lives on behalf of charity or foundation
-provides steady stream of ongoing revenue to charity from life insurance proceeds
-voluntary plans, increases potential for adverse selection
-skews to older ages, less favorable mortality
-no assurance individuals are actively at work

Question 7

non-voluntary plan

Answer 7

participation is compulsory, amount of insurance on each life is fixed, predetermined by method not of participant’s choosing
-anti-selection eliminated

Question 8

voluntary plan

Answer 8

PI has choice of whether or not to participate, amount of coverage is open to choice
-often requires some measure of evidence

Question 9

eligibility definitions for plans

Answer 9

1. company’s management provided w/ guidelines to ensure all current and future eligible employees are properly enrolled
2. plan administrator provided w/ guidelines as to who to enroll in program
3. insurance company confident employer remains consistent w/ agreed upon eligibility requirements
   -eligibility requirements establish expected overall mortality
   -based on salary, title, equity ownership, or other definable measure
   -execs can meet key person definition

Question 10

Plan design impacts UW

Answer 10

GI plan based on simple multiple of salary provides insurer w/ reasonable assurance program will not be subject to anti-selection & mortality costs will not be higher than expected - cannot entirely eliminate possibility of adverse mortality
1. greater amt of coverage tends to be on older lives
2. # highly compensated executives typically small group - does not allow for spread of risk

Question 11

spread of risk

Answer 11

relates to how much insurance is permitted on any one life relative to size of group, and how much is permitted on any one life relative to average death benefit for group

-there is upper limit over which amt of insurance permitted by GI becomes too risky
-amt depends on risk tolerance, room for error actuarial pricing tolerates, characteristics of plan design, other factors
-flat amt upper limit or multiples/increments of insurance multiplied by # of participants to determine max death benefit
-salary based plans: amt of insurance on individual that becomes too risky when compared to avg DB for group
-alternative: GI max acceptable risk, SI excess w/ evidence

Question 12

aggregate-funded plan design

Answer 12

allows for most liberal pricing and/or higher multiples
-better design from perspective of risk selection
-ex. deferred compensation
-employee allots any amt of salary w/in constraints of plan
-all monies are pooled and spread equally over lives insured
-removes selectivity, reduces spread of risk
-employee has no ownership rights
-designated premium by equal coverage or equal premium

Question 13

Tiered plan design

Answer 13

-amounts of insurance vary by title/salary
-can produce highly variable spread of risk
-differing levels of employee classes
-flat amts of coverage that increase in steps, based on set criteria
-can be large percentage jumps in db
-salary bands vs salary based
-more challenging to evaluate and price

Question 14

most favorable plan from risk selection perspective

Answer 14

deferred compensation plans that are aggregate funded
-primary benefit is value of policy provides addl resources for retirement
-employer paid, individual owned
-162 executive bonus plan least favorable

Question 15

bundle UW

Answer 15

full UW w/ 1 or more modestly substandard risk can be accepted at standard
-costly
-may not meet actuary’s priced mortality expectations

Question 16

Nonqualified Executive compensation plan

Answer 16

most prevalent form of multilife sales
1. deferred compensation plans
2. supplemental executive retirement plans SERPs
3. section 162 bonus plan
4, equity repurchase plan

Question 17

Qualified Pension Plans

Answer 17

1. defined benefit plans
2. defined contribution plans
3. Employee stock ownership plans ESOP

Question 18

deferred compensation plans

Answer 18

-easiest to UW
-goal to minimize taxation and maximize return on money deferred
-permits largest amounts of GI coverage on fewer lives
-no direct correlation between amt of insurance placed on participant & amt individual chooses to defer, all deferrals aggregated & spread equally
-economical not to insure oldest eligible lives
-no anti-selection, but can be unexpected adverse risk

Question 19

Supplemental Executive Retirement Plans - SERPs

Answer 19

-participation motivated by desire to maximize income in retirement while minimizing taxation
-employer is owner and payor, diminishes anti-selection
-direct relationship between amt of money set aside and resulting death benefit
-funded on non-aggregate basis

Question 20

Section 162 Bonus Plan

Answer 20

-paid by employer for key employees
-favorable features:
1. corporate-paid benefit for employees of certain class/title/pay grade w/ no selectivity on part of employee
2. amt of coverage established in nonselective basis, set on multiple of salary
3. DB determined by multiples, ensures coverage on 1 life doesn’t become too disproportionate
-owned individually, element of anti-selection, factor after termination of employment

Question 21

select period of GI

Answer 21

yrs following UW of policy that enjoys most favorable mortality experience as consequence of UW. After select period cost increases by more than merely a factor of age since benefits of UW wore off. If choice to retain coverage is beyond select period, risk of anti-selection no greater than those fully underwritten

Question 22

Equity Repurchase Plan

Answer 22

-company will have future obligation to repurchase executive’s ownership stakes in company
-insurance purchased on employee lives to have funds available to redeem shares
-challenges:
1. selectivity to how one acquires shares
2. employees who acquired relatively large equity portions due to long employment, but salary/title not kept pace w/ equity position

Question 23

private placement products

Answer 23

nonregistered life insurance products only available to a qualified purchaser
- designed to be attractive investment vehicles that enjoy tax advantages of more traditional forms of life insurance

Question 24

External Forces

Answer 24

1. Insurer Financial Ratings: sound rating is critical, meet minimum level of acceptability
2. Interest rates: constantly evaluate interest rate environment, variable life not rate sensitive, ULs rate sensitive
3. Regulatory environment: unpredictable, greatest challenge w/ substantial impact.

Question 25

key employee / highly compensated employee

Answer 25

1. 5% or more shareholder position at any time during preceding year
2. earned compensation of $95K
3. 1 of 5 highest paid officers
4. among highest paid 35% of all employees

Question 26

concentration of risk

Answer 26

concentration of exposure in 1 location, can have serious impact on life carrier

Question 27

geo-measure

Answer 27

area encompassed by circle of given size,
best prospect of limiting carrier’s exposure in given area for purposes of covering catastrophic events, man-made or nautral

Question 28

reasons for auto reinsurance

Answer 28

1. spreads risk on per life basis for business underwritten w/o normal UW requirements
2. spreads risk on group basis, reducing impact of catastrophic event
3. provides addl capacity on per location basis for business that might otherwise exceed carrier’s concentration of risk limit

Question 29

reinsurance treaty differences from individual business

Answer 29

1. lower per life automatic binding limits
2. agreed upon multiples per life, depending on size of group
3. agreed upon parameters of group case characteristics that permit auto vs fac
4. per location concentration of risk limits
5. definition of location
6. stacking limits

Question 30

definition of location

Answer 30

per address/per building/ zip code

Question 31

aggregate funding method

Answer 31

method whereby the necessary contributions for a plan are calculated for the entire group of plan participants

Question 32

Defined Benefit Pension Plan

Answer 32

plan that provides for a specified monthly benefit at retirement
-can be monthly amount or calculated through plan formula that considers salary and service

Question 33

Defined Contribution Pension Plan

Answer 33

plan in which employee or employer, or both, contribute to employee’s individual account under the plan, sometimes at a set rate, such as 5% of earnings annually.
-invested on employees behalf
ex. 401K, employee stock ownership plans

Question 34

Employee Stock Ownership Plan -ESOP

Answer 34

form of defined contribution plan in which the investments are primarily in employer stock

Question 35

Executive Bonus Plan

Answer 35

plan whereby an employee owns a life insurance policy that was purchased, all or in part, by the employer
-employee treats employer’s payments as reportable income for tax purposes
-employer deducts payments as compensation
-ex Employee Bonus Plan/Section 162 Bonus Plan

Question 36

internal rate of return

Answer 36

average rate earned by each and every dollar invested during the period.
-rate influenced by market, decisions by portfolio managers, timing and size of cash inflows and outflows, beginning and ending book or market values

Question 37

multiples

Answer 37

set amounts of death benefit expressed in thousands of dollars that are multiplied by the number of plan participants to determine the max amount of death benefit available on any one life

Question 38

qualified purchaser

Answer 38

individual w/ at least $5M in investments or a corporation or trust w/ at least $25M in investments, excluding employee benefit plans

Question 39

sinking fund

Answer 39

separate accumulation of cash or investments (including earnings on investments) in a fund in accordance w/ the terms of a trust agreement or indenture, funded by periodic deposits by the insurer (or entity responsible for debt service) for the purpose of assuring timely availabity of monies for payment of debt service or obligations

Question 40

stacking

Answer 40

using the limits of multiple policies to 1 claim or event
-can be done if more than 1 policy covers a loss
-reinsurance treaties typically permit stacking up to 3x on a given group