Chapter 6

Question 1

What are the 6 product development process steps?

Answer 1

1) product planning
2) comprehensive business analysis
3) technical product design
4) product introduction
5) monitoring, evaluation, and feedback

Question 2

whats another name for technical product design for life insurance?

Answer 2

pricing

Question 3

What are some important objectives for product design?

Answer 3

1) ensuring adequate future investment income to support the fin obligations.
2) providing an adequate return to the company’s owners
3) guaranteeing a level of future benefits that the company can be certain to deliver underknown future conditions.
4) covering company’s expenses of supporting the product
5) identifying pricing and commission structures that will suceed in the market place
6) understnading specific prodcut riks in terms of the company’s sick standards.

Question 4

Why deos product design pose a risk to a company?

Answer 4

the profitability of a new product depends on suing correct prodcut design assumptions.
- risk increases as new product levels of innovation and complexity rise.

Question 5

When does a life insurance product increase the risk of product underpricing?

Answer 5

when a company designs and issues new complex prodcuts, uses new distribution channels, significantly relaxes uw STDs or assumes admin expense levels are below hx costs.

Question 6

Insurance company’s offer what variations in premium rate structures for individual life insurance products

Answer 6

1) premium rate structure divided into STD, substandard, and preferred. Sexes, smokres, ages.
2) premium rate structured by graded face amounts
3) contingency pricing structure
4) indeterminate premium structure.

Question 7

what is a contingency pricing structure

Answer 7

gives the company mechanism for adjusting the company’s charges for an in-force product to reflect the company’s financial results from the product.

Question 8

What indeterminate premium structure?

Answer 8

allows the comapny to peridocially reset premium rates on in-force whole life products while guaranteering customers that premiums will not exceed a max specific level.
- contract language has scale of guaranteed max premiums

Question 9

Actuaries use product development software to model new product designs. They can support deterministic and stochastic approaches. how?

Answer 9

1) deterministic modeling for simple products like term life, whole life and fixed immediate annuitieis
2) stochastic modeling for more complex products like variables- because it provides detailed decision information about the volatile risks associated with second guarantees

Question 10

Each assumed value in a life insurance or annuity product design is an actuarial assumption. define this.

Answer 10

in a typical product design, actuarial assumptions are needed for the insurer’s operating expenses, cost of providing benefits, and investment earnings.

Question 11

What do you call records of the company’s past expenses?

Answer 11

expense experience

- the credibility of the data refers to the predictive value of the data set for a given predictive purpose.

Question 12

define cost of benefits in product design

Answer 12

the cost of benefits, sometimes knownas the cost of insurance, is the value of all guaranteed benefits.

Question 13

How can you express the projected cost of a single insurance benefit?

Answer 13

projected cost of a single benefit for a given policy year = (potential benefit amount payable) x (profitability that the benefit will be payable)

Question 14

Define mortality rate

Answer 14

the rate at which people in a group of insureds die-

Question 15

What is policyholder behavior?

Answer 15

refers to the benefit utilization choices of customers who own life insurance anuities.

Question 16

what is policy holder behavior risk?

Answer 16

refers to the company’s increased exposure to volatility in cash flow and costs of benefits as a result of customer’s choices.
- can be difficult to incorporate into deterministic moedls.

Question 17

Policyholder behavior risk is inherent in what product design features?

Answer 17

1) felxible premiums that allow customers to select timing and amount of premium payements
2) provisions that allow owners to change investment allocations between guaranteed and nonguraranteed investment subaccounts
3) provisions for surrenders, withdrawals and lapes, which cxs can terminate or reduce the value of the contact
4) options for reinsutatement and conversions of life insurance
5) options for convertign deferred annuities to a payout basis
6) provisions for assignment of ownership rights to a third party
7) secodnary guatantees attached to such products as variable annuities.

Question 18

What is a derivative security?

Answer 18

a fianncial security, (stock) that derives its value from another security.

Question 19

A hedging program involves hedge costs- what are there?

Answer 19

expenses for trading and holding the derivative securities. They can magnify the portential profits or losses from a prodcut.

Question 20

What are examples of risks that can product negative financial outcomes for products?

Answer 20

1) unfavourable swings in market interest rates
2) unfavourable regulatory desicions, unfavourable court decisions, and unfavourable changes in the law, including tax law.
3) unfavourable deviations from values assumed in a deterministically modeled product design
4) Negative tail scenaries,

Question 21

to manage investment risk, actuaries and investment experts must set investment policies. What are investment policy ?

Answer 21

limits the asset types- by security, issuer, credit rating and other features- and the proportions of the assets the company will use to support products.

Question 22

what are Negative tail scenarios?

Answer 22

highly unfavourable scenarios identified in a stochastically modled product design.

Question 23

How do you test a product design?

Answer 23

modeling the financial results for one or multiple sets of estimated values and comparing the results to establish objectives for the product.
- tests examine the product’s profitability, assets, reserves, and cash flows.

Question 24

what are some examples of changes that would orginarily improve a product model’s profitability with all other factors remaining the same?

Answer 24

1) increase charges to customers
2) decrease product expenses
3) decrease benefit costs
4) increase investment earnings.

Question 25

what parts make up the budgeting and scheduling process for new products?

Answer 25

1) preparing a budget for the human, financial and computer resources needed to omplement the product 2) developoing a project schedule

Question 26

What is a product developement budget?

Answer 26

project planning document that shows the costs associated with each planned work activity and the anticipated revenue from the new product.

Question 27

What is a project schedule?

Answer 27

project planing timetable that shows the times required for the completion of planned tasks and the relationsh`ip among these tasks.

Question 28

what happens during product introduction?

Answer 28

the company implements the plans and product design and then offers the product for sales.

Question 29

There are two main phases of product introduction. What are they?1

Answer 29

1) product implementation | 2) product launch

Question 30

what is product implementation/.

Answer 30

conssit of establishing the administrative strucutres and processes necessary to offer the product for sale.

Question 31

what steps are involved in product implementation?

Answer 31

- obtaining regularoty approval per jurisdiction - designing promotion and traning material 3) developing and structuring systems needed to market and admin the product 4) bringing information online 5) target advertising 6) press releases and other promotions 7) training sales staff, admin staff, 8) conducting distribution meetings and seminars to introduct the new product.

Question 32

When does product launch occur?

Answer 32

when the company finally offers the product for sale.

Question 33

To speed up the implementation process, comapnies generally divide product implementation activites into what 2 categories?

Answer 33

1) day 1 function: product admin and IT elements that must be in place and functioning when product is first made available. 2) Day 2 functionality:: product admin and IT elements that a company may delay in making functional until after day 1,

Question 34

What happens after the product is introduced?

Answer 34

Monitoring and evaluation phase. The ongoing monitoring, evaluation and feedback may result in monir refinement or major innovations.

Question 35

What can companies monitor to evaluate a product's success?

Answer 35

1) value and number of contracts sold 2) actual compared to expected product profitability 3) numebr of new customers 4) demographic characteristics of purchase 5) surrender or withdrawal rates 6) mortality rates 7) sales through various distribution channels 8) impact fo the prdouct on other products.

Question 36

What are some factors that can contribute to poor sales of a new product?

Answer 36

1) inadequate compensation structures for sales 2) incorrect interpretation fo the needs of the taget markrt 3) indadeuqate traning of sales producers about the product 4) competition from another product offered by the same company or by a competitor.

Question 37

what can a company do if the sales of a new product are poor?

Answer 37

1) redesign the prodcut 2) change the product underwriting guidelines 3) using a different distribution system 4) implementing a sales incentive program 5) pulling the product

Question 38

In product operations, what is an adverse deviation?

Answer 38

produces a decrease in actual product profitability relateive to assumed product profitability.

Question 39

what is a provision for adverse deviation (PAD)?

Answer 39

any amount inlcuded in the assumption valuye to provide an allowance for unexpected negative outcomes.

Question 40

What is a favourable deviation?

Answer 40

difference between actual and assumed product values that produces an increase in actual product profitability relative to assumed product profitability.

Question 41

When does a favourable deviation occur?

Answer 41

product revenue > that assumed benefit payments < than assume product expenses are < than assumed.