Chapter 1 - The Relationship B/w Product Pricing And Underwriting

Question 1

What all has a significant impact on the ultimate cost of a product?

Answer 1

Target market, product features, sales approach, and underwriting process

Question 2

What is surplus?

Answer 2

Capital that is held above the expected needs of the product to ensure that all policyholder claims will be met

Question 3

Who determines what amount of surplus should be held?

Answer 3

Regulatory bodies and rating agencies

Question 4

Asset risk

Answer 4

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

Question 5

Underwriting/insurance risk

Answer 5

The risk that the price for the insurance product is inadequate and/or underwriting standards were not maintained

Question 6

Other risk

Answer 6

This includes things suck as business risk, interest rate risks, political risks

Question 7

Pricing components

Answer 7

1) Mortality
2) Lapse rates
3) Expense levels
4) Interest rates

Question 8

What is the single biggest cost in a life insurance product?

Answer 8

Mortality

Question 9

Common preferred factors

Answer 9

Blood pressure, cholesterol, chol/HDL, family history

Question 10

Two results of more stringent underwriting

Answer 10

1) Expected mortality decreases for SP/PFD business, leading to lower prices
2) Fewer people will qualify for these classes

Question 11

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

Answer 11

Lapses

Question 12

How do lapse rates impact profitability?

Answer 12

They can move it either direction - early duration lapses hurt profitability, while late duration lapses help

Question 13

How long must a policy be in-force to recoup first year costs?

Answer 13

Five years

Question 14

Should an underwriter make decisions based on expected duration of the policy?

Answer 14

No

Question 15

What is included in expense levels built into the product?

Answer 15

Agent’s compensation, corporate overhead, supporting an agency system, advertising, underwriting expenses, etc.

Question 16

Do term products have significant interest rate risk?

Answer 16

No

Question 17

Who bears interest rate risk with traditional products? Variable products?

Answer 17

Traditional - insurer
Variable - customer

Question 18

Regulation components

Answer 18

1) Reserve basis
2) Non-forfeiture laws
3) Surplus needs
4) tax law

Question 19

What is the purpose of the reserve basis?

Answer 19

To ensure that enough of the premium earned in early durations of the policy is held until the probability of a claim is higher than the premium received

Question 20

Who sets the reserve basis?

Answer 20

In US - states (generally consistent across the nation)
In Canada - federal regulation

Question 21

What is the purpose of non-forfeiture laws?

Answer 21

These allow for the return of excess premium if policyholder chooses to lapse the policy (net of covering expenses). These exist because with level premiums, one overpays for covg early in policy duration and underpays later.

Question 22

In the US, what tax do states charge?

Answer 22

One on the premium received by an insurer.

Question 23

Three main components of federal tax considerations for US insurance companies

Answer 23

1) Corporate tax rate
2) Tax reserves
3) deferred acquisition cost (DAC) tax

Question 24

What is the purpose of tax reserves and the DAC tax?

Answer 24

Accelerate income so that taxes are paid more quickly. Overall, income does not change but the timing of the income does

Question 25

How do taxes work in Canada?

Answer 25

Federal level - income
Provincial level - premiums

Question 26

What is protective value?

Answer 26

the relationship of mortality savings from a requirement to the cost of administering the requirement

Question 27

Considerations in a protective value study?

Answer 27

1) Which requirement identified the underlying impairment?
2) What is the impact on customer behavior with more requirements?

Question 28

Should competitors be considered when constructing the underwriting grid?

Answer 28

Yes, but they are not the only focus

Question 29

How hard is it to cover the cost of an “exception?”

Answer 29

Depending on magnitude, it can take up to 12 appropriately placed cases to overcome the loss of placing the exception.

Question 30

What is risk based capital?

Answer 30

A safety net that needs to be provided beyond the level of reserves being held in case a company’s mortality experience is worse than expected