Flashcards in Chapter 4 Deck (36):
What is the purpose of a financial design for life insurance products?
it implies set premiums and other charges, to create an overall set of values for the numerous elements of the product. the following is included in its calculations.
-company operating expenses
it is designed with the intent of a life expectance of the policy plan.
Which employee is most involved in the financial design of products?
What is an actuary
an expect in financial risk management and the mathematics and modeling of insurance, annuities and financial instruments .
what is the equation for financial stability
revenue > expense.
what is a financial model?
a computer bawswed mathematical model that approx. the operation of real world financial processes. These models produce projections of potential future financial values.
what do you call assumptions that are estimates of future values, created by financial models?
what is the legal reserve system?
the system insurers use to set financial values for life insurance products. Insurers are required to establish policy reserves. these reserves are liabilities that represent the amount the insurere estimates it needs to pay future benefits.
what 3 premises is the legal reserve system based on?
1. the amount of benefits payable should be specific or calculable in advance of the insured event
2. companies should collect in advance the money needed to fund a policy reserve so that the insurer5 will have sufficient funds available to pau claims and expenses
3. the amount a customer pays for life insurance policy should be related to the amount of risk the insurance company assumes for that policy
what 3 elements should be included in a products financial design?
1. the costs of benefits
2. investment earnings
3. operating expenses.
what is the equation to calculate cost of life insurance policy benefits?
total potential benefit obligations X probability that potential benefits will be payable
define cost of benefits, sometimes known as the cost of insurance, and its primary obligation
the value of all benefits under a product.
its first obligation is the death benefit payout.
what is a block of policies?
a group of policies issues to insured who are all the same age, sex, and in the same risk class.
what defines the cost of death benefit for a block of policies? ie. what is its dependable factor?
depends in part on the mortality rate. the higher the risk, the higher the chance of payout ie. the higher the premium.
what is the term used for the mortality rates shown in a mortality table, and what is their purpose?
tabular mortality rates
these are the starting point numbers to calculate the mortality rates that insurance companies use to project the cost of benefits for a block of policies.
where would a company derive a mortality experience table?
is compiled from a companys own records, reflecting its insureds' actual mortality.
what are the 4 categories in which mortality tables are typically separated?
men non smoker
women non smoker
The financial design of a life insurance product must include a provision for investment earnings- define this.
this is the money the insurer earns from investing the funds it receives from customers.
how do most investments earn money?
in the form of interest- which is payment received for the use of money. It is expreses in percentage.
define principal in terms of investment earnings.
it is the sum of money originally invested, loaned, or borrowed.
define simple interrest
the interest on the original principal only.
what term is used to define the calculation between an interest amount on both the principal and the accured interest
compounding. The interest on both the principal and the accrued interest is called compound interest.
In what situation can an invester earn interrest on both the principal and the accrued interrest?
until the loan is paid, the interest on a compound-interest loan continues to accrue (accumulate)
how frequency can interrest be compounded?
Annually, daily, monthly, etc...
what is rate of return, in terms of interrest earnings?
the investment earnings expressed as a percentage relative to the principal.
what 2 methods are used by insureres to pay benefits?
1) use premiums and charges they collect from customers
2) use investment earnings.
>the ^ the investment earnings, the less money the insurer needs to charge customers.
define operating expenses
the expenses that arrive in the normal course of the insurers' operations.
in general foes insueres spend more on life insurance benefit payments or on their operating expenses?
what is the significant risk associated with an insueres operating expenses?
customers will terminate or reduce the value of a life insurance policy before the policy becomes profitable.
Define lapse rate, in terms of operating costs.
the percentage of a specified group of policies in force at the beginning of a specified period, that are terminated by the end of that period for reasons other than the death of the insured.
A FINANCIAL DESIGN CONSIST of projected values for 5 component factors. What are they?
payments from policy owners
company operating expenses
Conservative values for specific life insurance product elements generally take the form of (3 examples)
1. mortality rates that are ^^ than expected
2. investments earnings that are lower than expected
3. operating expenses that are higher than expected
what is the advance to using conservative values in financial design?
provides a risk margin against adverse development.
define a premium rate
is a charge per unit of insurance coverage. it is typically expressed as the rate per thousand per year. the annual premium amount for a policy is calculated by multiplying the premium rate by the number of coverage unit.
define 3 characteristic sought after by actuaries during the construction/development of premium rates and other policy charges.
1. adequate amount
3. not excessive.
what is the purpose of a level premium system?
it allows a policy owner to pay the same premium amount each year a policy is in place. this can be done because premiums are higher than needed in the first years to pay claims and expenses.