Chapter 9

Question 1

Investment frow depends on what 4 types of critical factors?

Answer 1

1) type of asset
2) amount of the investment
3) investments’ rate of return
4) length of the investment period.

Question 2

Insurance company assets are maintained in what two primary types of invstment portfolio?

Answer 2

1) general account portfolio

2) separate account portfolios

Question 3

What is a general account portfolio?

Answer 3

assets that support the company’s contractual obligations to woners of the company’s guaranteed prodcuts, fixed-rate annuities, and other nonvariable prodcuts.

Question 4

what are separate account portolios?

Answer 4

used by companies that offer variable, or unit linked products.
used for assets that support such products as veriable life inusrance and variable annuities,.

Question 5

Hwo are separate account portfolios categoriezed?

Answer 5

AKA separate account portfolios as segregated account portgolios.
- divided into small subaccounts, each of which consist of a pool of investments with distinct risk-return profile, usually known as a fund style?

Question 6

Investments consist of what two components?

Answer 6

1) principal

2) earnings

Question 7

investors gain when an asset’s selling price is higher than the assets purchase price. Gains result from what?

Answer 7

price appreciation

which is an increase in the market value of an invested assets.

Question 8

When would an insuere experience a loss?

Answer 8

when the asset selling price is lower than the assets purchasing price.
loss results from price depreciation, which is a decrease in the market value of an invested asset

Question 9

What do you call the investment earnings that are expressed as a percentage of the principal?

Answer 9

rate of return on the investment.

Question 10

United states followed a rules-based approach to reserve valuation. Define this

Answer 10

a valuation actuary applies deterministic analaysis and a required set of rules to dertmine the reserves.

Question 11

insurers around the world use a principles-based approach (PBA) to reserve valuation. Define this.

Answer 11

the valuation actuary may apply stochastic analysis to develop probabilities for various outcomes and also applies professional judgement to set approrpiate values.

Question 12

Contract owners can recieve policy value of equity through what means?

Answer 12

1) policy loan benefits
2) withdrawal and surrender benefits
3) nonforfeiture benefits

Question 13

Cash values are based on what principals?

Answer 13

1) amount of premiums paid on the policy
2) faceamount of the policy
3) length of time the policy has been in force.

Question 14

What is the general formula for determining the cash value of a fixed life insurance product?

Answer 14

cash value= (present value of future benefits) - (present value of future premiums).

Question 15

How can an insurer calculate cash values for fixed life insurance products?

Answer 15

1) prospective valuation method.

2) retrospective valuation methods.

Question 16

What is a prospective valuation method?

Answer 16

looks at products future cash flows- future benefits + future premiums.

Question 17

What is retrospective valuation method?

Answer 17

looks at a product’s past cash flows. (uses accumulated value techniques father than present value.

Question 18

What is the equation for cash valye of new product forms?

Answer 18

Cash value = (account value)- (remaining unamortized first year expenses)

Question 19

Define the term policy surrender

Answer 19

withdrawal of the policy’s entire available cash value.

- terminates the policy.

Question 20

What factors increase the cash value of a contract?

Answer 20

paid up additions,
dividend accumulations,
advance premium payments

Question 21

What factors decrease the cash value?

Answer 21

policy loans, 
withdrawals 
surrender charges
administration charges
M&E risk cahrges

Question 22

What is the cash surrender value?

Answer 22

the amount that is actually available to the contract owner, adter adjustments have been made for additionals and substractions.

Question 23

What are some nonforfeiture benefit options in while life insurance policies?

Answer 23

1) cash payment option
2) reduced paid-up insurance option
3) extended term insurance option
4) automatic premium loan option.

Question 24

define cash payment opiontion

Answer 24

contract owner receives the policy’s cash surrender value in a single lump-sum payment.

Question 25

define reduced paid-up insurance option

Answer 25

the policy's cash surrender value is used as a single premium to purcahse paid-up life insurnace of the same plan as the original policy.

Question 26

Define extended term insurance

Answer 26

the surrender cash value is used as a single premium to purchase term life insurance for a coverage amount specified in the policy contact.

Question 27

define auto premium loan option

Answer 27

a policy loan against the policy's cash surrender value will automatically be used to pay an overdue premium for the policy owner, as long as the cash surrender value equals or exceeds the amount of the premium due.

Question 28

how are nonforfeiture benefits (other than cash payment benefit) calculated?

Answer 28

calculated to the actual value is equal to the cash value of the policy at the time the option is exercised.

Question 29

What is the accumulation value?

Answer 29

the total amount of premiums and earnings under the contract, less the amount of any withdrawals and charges assessed by the insurer.

Question 30

what do you call the interest rate the insurer applies to annuity contract values to determine the accumulation valye?

Answer 30

interest-crediting rate.

Question 31

Fixed deferred annuity contracts provide what tw interest-crediting rates?

Answer 31

1) mini guaranteed interest-credititing rate: min rate the insuere must pay on the contract's accumulation value 2) current interest-crediting rate: the rate the insrure declares and pays.

Question 32

True or False: the new current rate may be higheor lower than the previous current rate, but it can NEVER be lower than the guaranteed interest rate?

Answer 32

true

Question 33

What is excess interest crediting rate?

Answer 33

the amount by which the current interest-crediting rate exceeds the guaranteed interest-crediting rate.

Question 34

A fixed anbuity product design includes an interest spread (interest margin)- define this

Answer 34

represents the shares of investment earnings that the insurer retains to either pay expenses or provide a profit to owners. - its the different between teh rate of investement return the insurer is actually earning and the current crediting rate.

Question 35

Interest spread is typically expressed in terms of a number of basis points. Define this,

Answer 35

(1/100th of a percent) | - 1

Question 36

Insurers typically use which two methods, known as interest crediting formulas, to credit interest to fixed annuity contracts?

Answer 36

1) portfolio method: method under which the insuere applies one specified current interest rate to all money in an annuity account on the interest-crediting date, regardless of when the money was paid 2) new money method: method where insuere applies different interest rates to payments, depending on market conditions when each payment was mae.

Question 37

Investment earnings from variable deferred annuities are credited to fixed fund options and variable subaccounts. Define these two.

Answer 37

1) fixed fund options: directs payments to the insuere's generally account. insueres are responsible for the investment risk for money in fixed fund. 2) Variable subaacounts: premiums allocated here are used to purcahse accumulation units (ownership shares in selected subaccounts). Return credited to the contracts is equal to market return, less management fees. - favourabl market= ^ increase, if unfavourable accumulation unit's value decreases.

Question 38

How is the accumulation value of a variable annuity contract determined?

Answer 38

by the current values and number of accumulation units the contract holder has in each subaccount investment.

Question 39

annuity contracts purchased with periodic premium payments typically provide a nonforgeiture benefit if the contract owner fails to make all scheduled payments. what is a nonforfeiture benefit.

Answer 39

lump-sum cash payment or annuity period payment. Both options are based on the accumulation value of the contract a the time of the option is exercised less any surrender or expense charges. - adjusted value is the surrender value.