Chapter 2 - Cost Benefit Analysis of Underwriting Requirements Flashcards
What is a cost-benefit study?
It compares the costs associated with gathering and analyzing an underwriting requirement with the benefit derived from the identification of extra mortality found by the requirement
What is the point of a cost-benefit study?
To assess whether the dollars invested in obtaining evidence to assess a risk are producing an adequate ROI
Why do existing cost-benefit studies need updating?
1) Changes in pricing
2) Underlying mortality tables
3) Actual experience
4) the competitive landscape
How does a break-even calculation work?
The cost of testing will be balanced by the benefit the mortality dollars saved, which depends on face amount
Quick way to estimate mortality change if a requirement is not required
frequency * severity or hit rate * avg # of debits
For direct carriers, how much of premium is assigned to cover mortality?
50%
How are profit and mortality related?
a 2% increase in mortality = 1% reduction in profits
What is the sentinel value of testing?
When someone does not apply for insurance or walks away from the app process b/c a certain test is required
What is the 1% rule?
It is a simple model calculation that states PV of death benefits is 1% of the face amt
Where does the 1% rule not work well?
It makes PV too high for younger ages and too low for older ages
Formula for protective value dollars
Debits (as a %) * PV
What is a net single premiums (NSP)?
The premium collected today that would cover all future benefit payments for a given face amt
Why are future death benefit payments converted to today’s dollars in cost benefit studies?
Because the expenses are recognized today
Example of the 1% rule being interpreted
A company needs to collect $5,000 to cover all future claims that will occur for each $500,000 policy placed on the books.
What is a double decrement table?
Tables that take lapses and deaths into account (each is considered a decrement, together, they are a double decrement)
