Chapter 11

Question 1

How does an insurance company successfully manage and control mortality risk for individual products ?

Answer 1

• price products
• properly select the cases to issues at the proper rated
• properly diversify its morality risks
• Decides whether it needs to obtain reinsurance

Question 2

how does underpricing affect expenses for mortality?

Answer 2

• properly price its products
• properly select the cases to issue at the proper rates
• properly diversity its mortality risks
• decide whether it needs to obtain reinsurance.

Question 3

how does an insurance company counteract for misclassification of mortality risk?

Answer 3

company may fail to diversify the potentially diversifiable risk characteristics within a portfolio of mortality risk.
- diversity risk by location, type, financial/health UW, occupation and economic status

Question 4

How does a company compensate for failure to obtain reinsurance according to risk management policies?

Answer 4

reinsurance administration programs must make sure that any cases failing within the guidelines for obtaining reinsurance actually obtain the reinsurance and that reinsured claims are settled appropriately.

Question 5

What are some tools for managing mortality risk

?

Answer 5

control cycles
product design controls
underwriting activities and controls, 
pre-screening of applicants 
reinsurance programs

Question 6

what is a control cycle?

Answer 6

a repetative process designed to ensure that all areas of the company adhere to the company’s perfromance stadards. - consist of

Question 7

Control cycle consists of 3 basic types of controls.

• steering controls
• concurrent controls
• feedback controls

Define each

Answer 7

• steering controls: established in advance and describe the company’s expectations of performance, because steering controls focus on future performance, they often referred as feedforward controls.
• concurrent: address current activities and systems by continuously monitoring activites as they performe
• feedback controls: used to company actual performance or output with established standards.

Question 8

The actuarial control cycle requires companies to track what:?

Answer 8

developing mortality experience using forms of acutal-to-expected (A/E) ratio for motalities.
The percentage gives actuaries a basis for adjusting expeience mortality rates to develop expected mortality rates.
A/E analysis can track cause of death in early policy yrs and thus see if u/w well implicated
- used to evaluate the effects that recent changes in u/w crioteria have on mortality results of NB.

Question 9

define antiselection:

Answer 9

the tendency of individuals who beleive they are more likely than average to experience loss to seek insurance protection to a greated extent that do other individuals.

Question 10

What is the underwriting philosophy?

Answer 10

by applying underwriting controls, Mannuals, rating ceriteria, underwriting audit procedures and reinsurane aut productes and by influencing a product’s distirbution system.

Question 11

Underwriting standards for life insurance specify criteria for what?

Answer 11

• required data about the risk in each new case
• formal system for classify8ing risks in NB caases
• requireing reinsurance on cases that meet predetermined guidelines.

Question 12

Define risk class:

Answer 12

set of risks group together under a risk classification system.
 each class is associated with a set of premium rates, known as rate ables.

Question 13

What is a risk class classification system?

Answer 13

system used to assign NB casses to risk classes and an associated rate table ina manner that reflects the expect cost of benefits for the insurance product.

Question 14

What are standard risks?

Answer 14

Mortality risk characteristics overall are nominally standard for the coverage they seek.

Question 15

What is a substandard risk?

Answer 15

cases who risk characteriestics overall are higher than standard, but who are still insuereable.

Question 16

what is a preferred risks?

Answer 16

generally cases whos risk characteristics represent a lower risk than standard.
- lower premium rates than standard.

Question 17

What guidelines should be followed for an effectively designed risk classifgicationssytem?

Answer 17

• system should be appropriate for UW indiviudal life insurance policies
• risk classes in a lfie isnurancr risk clasfficiation system should be large enough to support credible statistical inferences regarding expected mortalitiy
• risk classes in a life insuran ce risk classification system should conform to all existing laws, regulations, industry practices, and company business practices.
• mortality risk classes should represent a narrow range of expected mortality expenses, since all risks assigned to a single class pay the same rates.

Question 18

Define risk characteristics in underwriting.

Answer 18

measureable or observable factors that u/w use for assigning each new business case to one of the risk classes of a risk classficiationssytem.

Question 19

Risk characteristics for use in underwriting individual life insurance should meet what guidelines?

Answer 19

• should have predictive value for mortality costs so variation in actual or expected mortality correlates to the risk characteristic.
• risk must be objectively measurable.
• material differences in expedcted mortality expenses for a specified risk should be at the basis for difference in premium rates
• the design of u/w standards must avoid double counting of mortality cots due to any interdependence
• if more than one risk has prediuctive value for mortality risk, the acturary should design the u/w process to use the characteriestic most practical to obtain
• should confirm to industry risk classficiation practices
• cost and effort, legal and regulatory and social aspects needs to be considered in evaluating tris.

Question 20

insurance risk characteristics are usually subdivided into what 4 chategories?

Answer 20

1) medical risk characteristics.
2) personal risk characteristics
3) financial risk characteristic
4) moral hazard characteristic.

Question 21

What is this characteristic associated with in terms of specified tendency of mortality:
Age

Answer 21

older show higher mortality than young ages

Question 22

What is this characteristic associated with in terms of specified tendency of mortality:
gender

Answer 22

males > mortality than females

Question 23

What is this characteristic associated with in terms of specified tendency of mortality: health characteristics

Answer 23

mortality increases with number of heath characteristics.

most associated: build, HTN, Fx.

Question 24

What is this characteristic associated with in terms of specified tendency of mortality:
smoker

Answer 24

smokers>2x mortality than non-smokers

Question 25

What is this characteristic associated with in terms of specified tendency of mortality: avocations

Answer 25

certain activities have ^ risk of accidental death.

Question 26

What is this characteristic associated with in terms of specified tendency of mortality: income and education

Answer 26

lower income and education are associated with ^ mortality. | hourly paid >risk than slararyt.

Question 27

What is this characteristic associated with in terms of specified tendency of mortality: marital status

Answer 27

married individuals have lower mortality than unmarried.

Question 28

What are some important compienents of a mortality risk monitoring system?

Answer 28

They allow a company to - review and approve forms and before product launch - review claim experience perdiodically to assess u/w req' adequacy - verify that the auth limit imposed on u/w are not being exceeded. - review rating experice - review cases and verify a sample of u/w worksheets to evaluate the u/w quality.

Question 29

Define rating experience

Answer 29

proportional assignment of NS cases to the company's available rate classes and then compare the findings to the appropriate benchmarks.

Question 30

Companies that attempt to control mortality risk by influencing sales producers rely on field u/w standards. What is this?

Answer 30

standards for sales producers to use for pre-screnning likfe insurnace applications. - they're pretrained to pre-qualify client's product choices

Question 31

Why do companies use life reinsurance?

Answer 31

to limit max losses by sharing large risks with other companies - minimize the risk from larger claims - allows for coverage that company would not accept entirely on its own. - better life u/w expectancies.

Question 32

What is a retention limit?

Answer 32

specified max amount of insurance on one life that a direct writer is willing to carry at its own risk.

Question 33

What is a retention schedule?

Answer 33

presents insurere's retention limits, organized by applicable catefories such as products, product lin, issue age, and underwriting rating. - affects a company's attitude toward the risk-return trade0off

Question 34

What is a product retention limit?

Answer 34

specified max amount of insurance under a given product that an insurer is willing to issue without transferring some of the risk to the reinsure.

Question 35

What is a corporate retention limit?

Answer 35

the maximum amount of acceptable total retention under all lines of business that a group of affiliated companies will retain on any one person.

Question 36

what are some drawbacks for direct writers when deeling with reinsurance?

Answer 36

- reduced potential for earning unexpected profits. | - when reinsurers audit reinsured death claims.

Question 37

What happens in post-death underwriting audit

Answer 37

the reinsurer determines whether the life insurance case really should have been issued at all and if the risk classification was accurate based on the UW information obtained at the time of issue.

Question 38

How do direct writers manage and control the risk of a reinsurance program?

Answer 38

- use reinsurance aufits and cost-benefit analysis. - actuaries also periodically analyze the pains and losses from reinsurance to evaluate whther a RI program is meeting objectives.

Question 39

What are the 5 administrative controls for reinsured death claims

Answer 39

policy: prompt submit a claim for reinsurance proceeds on reinsured business. procedure. procedure: mark a reinsurnace indicator, X, in policy admin master record for all reinsured policies procedure: claim analaysis, examine master record for sinrauce indicator. - if indicated, send for reinsurance claim monitoring controls: policy admin system automatically generates a report and del,iverys it to reinsurance unit, in return they monitor to see that they recieved the death claim Audit control: form a quality control sample fo death claims, and review that proper produce was handled.