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What makes pricing insurance different than most products?

the cost of the raw materials is not known at the time of determining the life insurance price.


What is the actual profitability of a life insurance product determined?

policy lapse or policy holder(s) has died


Who determines the setting of the motality expectations, expenses, interrest rates etc...

the product development actuary


What are the two key items an organization needs to consider when determining the cost of the product?

1. approprietly analyse the risk being considred,
2. be realistic about the underlying cost of different offerings.


consumption of life insurance products tends to be driven by what pull?

the price in the marketplace.
the competition pressure is driving by the accepted belief insurance products are bought as a commodity


define surplus

the capital that is held above and beyong the expected needs of the products in order to ensure that all policholder claims will be met.
can be assigned based on a products design


on a theoretical level, expected returns should correlate directly with the amount of underlying risk present?
True or false?



True or False
if the risk is greater in the investment then the return w



Name the 4 types of risks defined by the Society of Actuaries that should be covered by the assgined (or allocated) surplus.

1. C1- asset Risk-
2. C2- Insurance Risk
3. C3- Interest Rate Risk
4. C4- business risk


DEfine C1- asset risk

risk that the assets supporting the product line lose some or all of their value


Define C2- Insurance risk

risk that the price for the isnurance product provided is inadequate- could occur from the mis-estimation of the underlining expected mortality or the introduction of a risk not contemplated when the product was priced


Define C3 - interest Rate Risk

the risk that assets must be sold at a loss in order to meet the cash needs of a policyholder-


What do you call the management of Interest Rate risk? Define it

This risk management process is known as asset liability management of ALM. the management of this risk has precipitated sig amount of industry work aimed at matching the liability cash flow of a product with the cash flow of the invested assets.


define C4 - business Risk

this is a "catch-all" category of risk management to cover anything not specifically included in the C1, C2, or C3 category.


What is the predominant risk to manage a term product offering?

C2 risk. There are very few accumulated assets.


What is the biggest cost in a life insurance product?



Define the difficulties of preferred risk class product pricicng.

when there is more stringent underwriting. The expected mortality decreases on the block of policies that qualify at this tighter level criteria = more competitive prices. However fewer individuals will qualify under the more stringent underwriting requirements.


Proposed insureds that just miss qualifying for a company's preferred rates will likely do 1 of 3 things. name them

1. find a company with a slightly less restrictive preferred criteria and obtain an preferred classification from that company.
2. They will be unhappy thast they did not qualify as preferred and drop out of the buying pool altogether
3. they will purchase the residual standard policy from your company


What is the largest decrement affecting the number of policies in force?

The lapses that occur in a product.


When will a lapse hurt profitability?

when it occurs when the premium collected is greater than tthe mortality cost for the duration,


What is a lapse profitability imrprove?

if a lapse occurs when the premium collected is less than the mortality cost


how long does a policy needs to typically be in place in order to recover the expenses that incurred upon issue?

5 years.


Name some factors in included in the expense levels build into the product.

agents compensation, corporate overhead, support of an agency system, advertising, underwriting expenses.


When ordering additional requirements in order to assess as risk, there is a balance act to consider in view of the expenses levels and profitability. What are the 4 factors considered?

1 the cost of a requirement
2. the corresponding mortality saving that occurs due to the obtained requirement
3. the proposed insureds adverse reaction to being subjected to a battery of requirements for the desired level of coverage.
4. time taken to issue a policy


In addition to basic pricing components of a product there are other components established by regulation. What are these items?

1. reserve bias
2. non-forfeiture laws
3. surplus needs
4. tax laws


Define reserve bias

- purpose is to make sure enough of the premium earned in the early duration of a contract is held until the time when the group of policyholder ages and the probability of death is greater than the premium received.


Define non-forfeiture laws

allows for the return of excess premiums in the form of a cash value (net of allowing the company to recover its expenses) if the policy holder chooses to lapse the policy.


define the surplus needs-

A safety net needs to be provided, beyond the level of reserves being held, in case experience turns


Federal taxes paid by an insurance company are income based and are affected by what 3 main components?

1. corporate tax rate
2. tax reserves
3. DAC (deferred acquisition cost) tax


what is the purpose of DAC tax?

a way to disallow full deductibility of acquisition expenses in the year they were incurred, but rather to force them to be recognized over a 10-year period.