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AFE1 > Part 2 - Life Insurance Company Operations > Flashcards

Part 2 - Life Insurance Company Operations Flashcards

1
Q

Surplus strain

A

Condition that occurs when a life insurance policy is surrendered and its asset share is less than its cash surrender value

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2
Q

Asset valuation reserve (AVR)

A

Accounting mechanism required by regulators designed to minimize volatility in an insurer’s statutory surplus by earmarking portions of it to absorb realized and unrealized capital gains and losses not attributable to interest rates

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3
Q

Interest maintenance reserve (IMR)

A

Similar to AVR except earmark is to absorb realized capital gains and losses attributable to changing market interest rates

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4
Q

NAIC’s 7 core financial solvency principles

A

1) Regulatory reporting, disclosure, and transparency
2) Offsite monitoring and analysis
3) On-site risk focused exams
4) Capital adequacy and solvency
5) Regulatory control of significant, broad-based risk related transactions/activities
6) Preventative and corrective measures, including enforcement
7) Exiting the market and receivership

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5
Q

Total adjusted capital (TAC)

A

Value equal to statutory capital, paid in surplus, AVR, and (for mutuals) 50% of any declared and unpaid dividend

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6
Q

(Life)

Authorized control level (ACL)

A

The minimum amount of TAC that must be held to avoid possible regulatory intervention, its value derived by a formula intended to reflect the insurer’s particular contingency risks

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7
Q

RBC triggerpoints and required regulatory responses

A

Trigger point RBC level/required 
percentage action:
TAC/ACL:

200+ No action
150-200 CAL/RBC plan required
100-150 RAL/RBC plan and
corrective orders req.
70-100 ACL/possible regulatory
control
Below 70 MCL/mandatory
regulatory control

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8
Q

Basket or leeway clauses

(Life insurer investments)

A

Provision in state insurance law that permits insurers to invest in a limited percentage (e.g. 10%) of its assets in any lawful investment

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9
Q

Market consistent embedded value (MCEV)

A

Present value of future profits attributable to in-force business and the value of surplus, based on the market derived asset and liability values (as opposed to statutory values)

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10
Q

Deterministic reserve

A

Based on a gross premium valuation method: the present value of future benefits less the value of future gross premiums

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11
Q

Stochastic reserve

A

Is based on a probability distribution of cash flow results using multiple economic scenarios:
it is the average of the worst losses above a prescribed level, called conditional tail expectation 70

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12
Q

Tail risk

A

Outlier risk associated with low frequency/high severity losses

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13
Q

Value at risk (VaR)

A

Maximum acceptable loss associated with an asset or liability, or portfolio of assets and liabilities, over a specified time period with a specified probability or confidence level

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14
Q

Conditional tail expectation (CTE)

A

(aka tail VaR)

Is a refinement of the VaR and is the measure of risk adopted in principles-based approach (PBA) reserves and capital

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15
Q

Hedge capital

A

Risk management asset cash flow that substitutes for and compliments surplus capital

(The two most important risk management assets for insurers are reinsurance and derivatives)

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16
Q

Economic capital (EC)

A

Amount of capital required to absorb the maximum expected loss occurring with a specified probability over specified time horizon

Does not distinguish reserves and surplus; incorporates both reserve capital to cover expected losses and risk capital to cover unexpected losses in one measurement

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17
Q

Dynamic financial analysis (DFA)

A

Stochastic or probability-based projection of an insurance company’s cash flows and financial condition over time, taking into account a full range of economic scenarios, asset and liability cash flows, the mutual dependencies or interrelationships of the cash flows, and the factors that affect cash flows individually and collectively

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18
Q

Monte Carlo method

A

Applies randomly selected values to variables in a deterministic cash flow model that is repeated thousands of times to produce a range of possible results and their probabilities

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19
Q

Asset liability risk management (ALRM)

A

Process of preserving or enhancing a life insurer’s surplus capital position as assets and liability values change in response to changing economic conditions and customer behavior

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20
Q

Immunization

A

Practice of structuring assets and liabilities such that a change in interest rates affects assets and liability values equally

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21
Q

Cash matching

A

Technique wherein a portfolio is constructed whose interest and principal payments exactly match a set of liability cash flows

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22
Q

Duration matched

A

Property of a portfolio such that changes in asset values will be exactly offset by changes in liability values when market interest rates change

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23
Q

Basis risk

A

Possibility that offsetting investments in a hedging strategy will not experience precisely identical inverse pricing changes because the notional amount or timing of cash flows of risk management assets are not precisely matched to the assets or liabilities hedged

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24
Q

Interest rate cap

A

Specified interest rate (of an interest option) above which an interest rate index results in payment to its holder

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25
Q

Interest rate floor

A

Specified interest rate (of an interest option) below which an interest rate index results in payment to its holder

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26
Q

Counterparty risk

A

Possibility that the party or their guarantor (such as a bank or clearing company) on the other side of the transaction (i.e. counterparty) will default

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27
Q

Transfer pricing

A

Pricing of goods and services between related parties

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28
Q

Risk-adjusted return on capital (RAROC)

A

Project’s net economic income divided by its economic investment

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29
Q

Securitization

A

Selling of asset-backed bonds that will be repaid regularly from the cash flows of specified assets backing the securities

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30
Q

Convexity (or positive convexity)

A

Property of a non-callable bond (or other cash flow stream) in a normal, positive yield curve environment such that, for a given interest rate shift, its potential increase in value due to a drop in rates exceeds its potential decrease in value for the same magnitude rate increase.

(As rates fall, price increases at an increasing rate; as rates rise, price decreases at a decreasing rate)

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31
Q

Negative convexity

A

(Observed when the yield curve is inverted or when a bond is callable)

Exists when, for a given interest rate change, a bond’s or portfolio’s potential decrease in value exceeds its potential increase at any point on the yield curve.

As rates fall, price increases at a decreasing rate; as rates rise, price declines at an increasing rate.

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32
Q

Vested (commissions)

A

Agent has the right to continue to be paid commissions so long as the insurance policy remains in effect

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33
Q

Asset-based trail fee

A

Annual compensation paid to the producer expressed as a percentage of the accumulated account value

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34
Q

Career agency (affiliated distribution channel)

A

Recruit, train, house and supervise individual intermediaries and are operated on either a general agency or a branch office basis.

The general agency performs the functions as an independent business whereas the branch office (a.k.a. managerial system) is owned and operated by the insurer

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35
Q

Multiple-line exclusive agents (MLEA)
(Affiliated distribution channel)

A

Commissioned exclusive agents who sell the life and health and P&C insurance products of a single group of affiliated insurers

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36
Q

Home service
(affiliated distribution channel)

A

(A.k.a. combination or debit distribution service)

Relies on commissioned agents who are assigned a geographic territory.

Targeted lower income consumers.

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37
Q

Four types of affiliated distribution channels

A

1). Career agency
2) Multiple-line exclusive
3) Home service
4) Salaried

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38
Q

Duration

A

Weighed average time to maturity of the cash flows of a fixed income asset or liability, or portfolio of fixed income assets or liabilities

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39
Q

Intermediation

A

Is the process of policyowners making payments to an insurer for investment

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40
Q

Disintermediation

A

Occurs when policyowners exercise options to withdraw funds (surrenders, withdrawals, and loans) or reduce or suspend premium payments to invest these funds elsewhere

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41
Q

ERM framework

A

Range of processes and techniques designed to protect and create value by assisting companies to uncover hidden risks, improve the stability of earnings, identify opportunities in assuming risk and risk arbitrage, and discovering natural synergies across business lines

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42
Q

Derivatives

A

Traded securities or contractual agreements whose cash flows depend on the value of other specified securities or indices

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43
Q

Hedging

A

Strategy of acquiring securities whose gains and losses offset gains and losses in other securities, or portfolio of securities, often achieved through the purchase of derivatives

44
Q

Diversifiable
(ie unsystematic or specific risk)

A

That particular to a given company, usually measured by its beta.

Beta: The volatility or variance of its stock performance relative to the performance of the stock market as a whole

45
Q

Five ethical duties owed to customers

A

(Proposed by the life office management association)

1) Insurers should apply underwriting decisions equitably to all applicants
2) Claims should be handled promptly and fairly
3) Customer service should be honest, objective, and fair
4) Privacy and confidentiality of customer information should be preserved in the absence of written authorization from the owner/applicant
5) Insurer should maintain adequate resources to pay claims and honor its obligations under the policies it issues

46
Q

Reserves (reserve capital)

A

Actuarially determined investment funds dedicated to the payment of future policy benefits

47
Q

Risk capital

A

Unencumbered amounts set aside and expected to remain idle but available to pay unexpected claims and benefits, is necessary to provide confidence to policyowners and their advocates (regulators and rating agencies) that an insurer will remain solvent under reasonably extreme circumstances

48
Q

Corporate governance

A

Set of factors that affect the direction, administration, and control of a corporation

An important theme is the nature and extent of accountability of management

49
Q

Coinsurance with funds withheld
(type of proportional reinsurance)

A

Coinsurance under which the ceding company retains premiums normally paid to the assuming company, while the assuming company keeps the allowances normally paid to the ceding company

50
Q

Modified coinsurance (type of proportional reinsurance)

A

Ceding company pays the assuming company a proportionate part of the gross premium, as under conventional coinsurance plan, but at year’s end, the reinsurer pays to the ceding company a reserve adjustment equal to the net increase in the reserve during the year, less one year’s interest on the total reserve held at the beginning of the year

51
Q

Nonproportional reinsurance

A

Reinsurance that does not specify in advance the amounts or percentages of risk for which the assuming company is liable, but specifies the loss limits, time limits, or conditions beyond which an assuming company will assume some or all of the benefit payments

52
Q

Proportional reinsurance

A

Reinsurance that specifies in advance the amounts or percentages of risk for which the assuming company is liable

53
Q

Substandard risks

A

Insureds who are expected, or do exhibit, higher than average mortality or morbidity experience

54
Q

Numerical rating system

A

Process under which an insurance company relies on a system of debits and credits representing adverse and positive expected marginal mortality rates to derive an expected mortality classification for a proposed insured

55
Q

Retaliatory tax laws

A

Require out of state insurers to pay the higher of the tax due using their homes state’s laws or the host state’s law

56
Q

Regulatory arbitrage

A

The shifting of activities within the group to take advantage of different regulatory approaches in different industries, can also change reporting in capital appearances with no real change in the group’s economic risk

57
Q

Double gearing

A

The double counting of subsidiary capital to prop up conglomerate capital

58
Q

Twisting

A

Practice by an agent of inducing a policyowner through misrepresentation to replace an existing life insurance policy with another one

59
Q

Rebating

A

Practice by an agent (or insurer) of giving something of value (e.g. a portion of the agent’s commission) not specified in the insurance contract to an applicant in return for the purchase of a policy

60
Q

NAIC’s mission

A

To protect the interests of the policyholder and those who rely on the insurance coverage provided to the policyholder first and foremost, while also facilitating an effective and efficient marketplace for insurance products

61
Q

Closed blocks

A

In a demutualization, a specified group of policies with participation rights protected by the allocation of specific investment, expense, and mortality results to such policies

62
Q

Dodd Frank Wall Street reform and consumer protection act

A

Enacted in 2010

Established federal insurance office (FIO)

Provided for the possibility of a federal role in the resolution or liquidation of insurers but only when there is a systemic importance potentially damaging to the national economy and when states do not act effectively

Consumer protection elements do not apply to life insurance and annuities

63
Q

Financial services modernization act

A

A.k.a. Gramm Leach Bliley act

Passed in 1999

Eliminated restrictions on financial services integration in the US

Allowed creation of financial holding companies and authorized them to engage in a range of financial activities

64
Q

McCarran Ferguson act

A

Passed in 1945

Maintains the central role of the states in insurance regulation

Congress reserves the right to regulate insurance only where it expressly addresses insurance (specifically related to the business of insurance)

65
Q

Capture theory of regulation

A

Holds that special interest groups, being well organized and well financed, influence legislation and regulation for their own benefit

66
Q

Public interest theory of regulation

A

Holds that government regulation exists to protect the public interest by correcting market imperfections and promoting allocative efficiency and social welfare

67
Q

Facultative reinsurance

A

Reinsurance on a policy by policy basis under which applications received by primary insurer are submitted to an assuming company that chooses whether to accept (or reject) the risk based on its own underwriting standards

68
Q

Automatic (i.e. treaty) reinsurance

A

Reinsurance under which the direct writing company must transfer an amount in excess of its retention of each applicable insurance policy to the assuming company immediately upon payment of a direct premium and the issuance of the policy, and the reinsurer must accept transfers that fall within the scope of the agreement

69
Q

Assumption reinsurance

A

Total transfer of assets, liabilities, and risk from one insurer to another in which the assuming company legally replaces the ceding company in transactions on sections or books of business, and issues assuming certificates to affected policyholders

70
Q

Indemnity reinsurance

A

Reinsurance that indemnifies the ceding company for some or all of its reinsured underwriting losses

71
Q

Multiple extra table method

(Rating substandard life insurance)

A

Most common method used to classify substandard life insurance risks, it divides them into groups according to their numerical ratings for which additional charges or premiums are levied

72
Q

Flat extra premium method

(Rating substandard life insurance)

A

Method used in writing substandard risks in life insurance under which a constant extra premium is charged to provide for expected additional mortality

73
Q

Mutually exclusive

(Probability concepts)

A

Condition wherein the occurrence of one event precludes (ie makes impossible) the possibility of the occurrence of another

In other words, they can’t both exist, be true, or happen at the same time

74
Q

Exhaustive
(probability concepts)

A

Condition wherein events under consideration cover all possibilities (e.g. a person will either live or die during a given year)

75
Q

Compound probability
(Probability concepts)

A

Likelihood of the occurrence of two independent events calculated by taking the product of the simple probability of the occurrence of each event

76
Q

Four elements of gross premium rate structures

(Life insurance actuarial applications)

A

1) The expected amount and incidence of claims
2) An appropriate rate of investment return
3) Amounts to cover expected expenses, taxes, profits (or surplus), and contingencies
4) Withdrawal rates and amounts withdrawn

77
Q

Mortality tables:

Basic
vs
valuation

(Mortality concepts)

A

Basic – tabulation that displays yearly probabilities of death drawn from records of the actual experience of the population from which the data were drawn

Valuation – Tabulation that displays yearly probabilities of death used in the calculation of minimum reserves and cash surrender values; usually contains margins

78
Q

Mortality tables:

Select
vs
ultimate
vs
aggregate

A

Select – shows probabilities of death by age, duration of insurance for newly insured lives only, and other possible criteria such as sex of insureds

Ultimate – shows probabilities of death by age and other possible criteria such a sex of insureds after the select mortality period

Aggregate – shows probabilities of death by age and other possible criteria such as sex of insureds within both the select and ultimate mortality groups

79
Q

accumulated book profits model

A

Simulation of an anticipated operating experience for a block of policies with profits and losses carried forward each policy year at a selected hurdle rate and maintained separately in a profit account

80
Q

Asset share model

A

Simulation of anticipated operating experience for a block of policies using best estimates for what the individual factors will be for each future policy year

81
Q

Hurdle rate

A

Minimum acceptable investment return an insurer expects from a product line

82
Q

Expense margin

A

(in pricing)

– Also called safety margin –

Amounts added to anticipated expenses and taxes to provide for contingencies, profits, surplus accumulation, and to cover losses associated with early policy lapses

83
Q

Investment generation method

A

Technique to determine the interest crediting rate applicable to a block of policies by allocating segmented investment portfolios to the blocks of policies based on the timing of investment acquisitions

84
Q

Portfolio average method

A

Technique to determine the interest crediting rate applicable to policies based on the investment return of its entire general account investment portfolio

85
Q

Fractional or modal premiums

A

Premiums paid other than annually

86
Q

Nonforfeiture factor

A

Adjusted premium when it is amortized over a period shorter or at an uneven rate than that permitted

87
Q

Standard nonforfeiture value method

A

Descriptor indicating that nonforfeiture values are higher than required minimums because of the use of nonforfeiture factors

88
Q

Adjusted premium
And
Adjusted premium method

A

Adjusted premium – under the standard nonforfeiture law (SNL), the level premium necessary to pay guaranteed policy benefits (the net level premium) plus the level equivalent of a defined special first year expense allowance

Adjusted premium method – descriptor indicating derivation of minimum nonforfeiture values

89
Q

Commissioner’s reserve valuation method

A

Modified reserve method permitted under SAP that allows deferred reserve funding by dividing policies into two groups:

1) Those where net level premium for the second and subsequent policy years do not exceed the corresponding modified net premium for a 20-payment WL policy in which case the full preliminary term method is applied; and
2) Those with higher premiums in which case the additional amount for expenses is limited to that amount permitted under the full preliminary term method for a 20-payment WL policy

90
Q

Full preliminary term method

A

Modified policy reserve method permitted as part of the commissioner’s reserve valuation under US SAP that allows an insurer to assume that the first year’s premium under some policies pays only for term insurance for the first policy year and that the actual policy for reserve purposes comes into operation one year later than the age of issue and will have a one year shorter premium payment and coverage year

91
Q

Initial reserve

A

Reserve at the beginning of the policy year and equals the terminal reserve for the preceding year increased by the net level annual premium (if any) for the policy year

92
Q

Mean reserve

A

Arhythmic average of the initial reserve and the terminal reserve for any year of valuation

93
Q

Terminal reserve

A

Value of a policy reserve at the end of a policy year, equal to the present value of future expected benefits less the present value of future expected premiums

94
Q

Net level premium reserve

A

Policy reserve established in recognition that early net level premiums are intended to pre-fund future insurance charges, derived for any policy year as the present expected value of future benefits less the present expected value of future premiums

95
Q

Policy reserves

A

Liabilities that represent the present amount that, with future premiums and interest earned, is expected to cover future benefit payments under existing policies

96
Q

Net single premium (NSP)

A

(Termed “aggregate approach”)

Present value of future benefits promised under a life insurance policy

97
Q

Net level premium (NLP)

A

Periodic premium equivalent to the net single premium, annualized over a specified premium payment period derived by dividing the net single premium by the present value of a life annuity due for the premium payment period

98
Q

Net rates

A

Insurance rates calculated to recognize the probability of the insured event, the time value of money, and the benefits promised, with no allowance for loading

99
Q

Gross premium

A

1) Net premium and loading
2) Premium paid to an insurer for an insurance policy

100
Q

Annuity due

A

Annuity whose payments are made at the beginning of each period

101
Q

Temporary life annuity

A

Life annuity payable for the lesser of a set number of years or until the annuitant dies

102
Q

Composite mortality table

A

Mortality table whose death rates include experience from both smokers and non-smokers

103
Q

Select and ultimate mortality table

A

Mortality table that shows probabilities of death by both age and duration of insurance

104
Q

Radix

A

With a mortality table, arbitrary number of persons assumed to be alive at the youngest age for which death rates are shown

105
Q

Law of mortality

A

Concept that the death rate increases exponentially with age, as the body at first slowly then more rapidly deteriorates or fails

(From 1825, Benjamin Gompertz)

106
Q

Simple probability

A

Likelihood of the occurrence of an event calculated by dividing the number of events satisfying a stipulated condition (e.g. death) by the total number of events or exposures (e.g. lives)

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