Chapter 1

Question 1

What makes pricing insurance different than most products?

Answer 1

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

Question 2

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

Answer 2

policy lapse or policy holder(s) has died

Question 3

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

Answer 3

the product development actuary

Question 4

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

Answer 4

1. approprietly analyse the risk being considred,

2. be realistic about the underlying cost of different offerings.

Question 5

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

Answer 5

the price in the marketplace.

the competition pressure is driving by the accepted belief insurance products are bought as a commodity

Question 6

define surplus

Answer 6

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

Question 7

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

Answer 7

true.

Question 8

True or False

if the risk is greater in the investment then the return w

Answer 8

True

Question 9

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

Answer 9

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

Question 10

DEfine C1- asset risk

Answer 10

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

Question 11

Define C2- Insurance risk

Answer 11

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

Question 12

Define C3 - interest Rate Risk

Answer 12

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

Question 13

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

Answer 13

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.

Question 14

define C4 - business Risk

Answer 14

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

Question 15

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

Answer 15

C2 risk. There are very few accumulated assets.

Question 16

What is the biggest cost in a life insurance product?

Answer 16

Mortality.

Question 17

Define the difficulties of preferred risk class product pricicng.

Answer 17

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.

Question 18

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

Answer 18

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

Question 19

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

Answer 19

The lapses that occur in a product.

Question 20

When will a lapse hurt profitability?

Answer 20

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

Question 21

What is a lapse profitability imrprove?

Answer 21

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

Question 22

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

Answer 22

5 years.

Question 23

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

Answer 23

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

Question 24

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?

Answer 24

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

Question 25

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

Answer 25

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

Question 26

Define reserve bias

Answer 26

• 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.

Question 27

Define non-forfeiture laws

Answer 27

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.

Question 28

define the surplus needs-

Answer 28

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

Question 29

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

Answer 29

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

Question 30

what is the purpose of DAC tax?

Answer 30

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.

Question 31

define tax laws for insurance companies in canada.

Answer 31

insurance companies are subject to corporate taxes at a federal and provincial level in much the same way that united states companies are taxes. The fed tax related to company’s income and the provincial level they relate to premiums.

Question 32

In simple terms how do you price a product?

Answer 32

schedule out a series of expected expenses and couple that with a stream of premium payments to product a profit that meets the corporate requirements for the product. It must also be filed and approved with each state before it is made available for sale in that state.

Question 33

The interaction between the actuary and the underwriter in product development takes form through two main decision. What are they

Answer 33

the setting of the underwriting requirements and the reasonableness of the pricing expectations

Question 34

What are the two components in the underwriting requirement process?

Answer 34

verifying information obtained from the proposed insured

discovering information that is either new to or is being concealed by the proposed insured.

Question 35

what is “protective value” in relation to pricing?

Answer 35

refers to the relationship of mortality savings from a requirement to the cost of administering the particular requirement.