Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Life Pricing Exam > Section A > Flashcards

Section A Flashcards

1
Q

Slow Product Development Cycles

A
  1. Average launch time is 7-9 months
  2. Bottlenecks
    a) Administration - need to update systems
    b) Distribution training
    c) Marketing materials
    d) Illustration System
  3. Some countries use incentives to motivate the product development team
  4. Steering committees - help direct the product development process
  5. Increase IT headcount to improve speed to market

Life Insurance…Innovation and Optimization (LFV-140-16)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Global Insurance Market Trends

A
  1. Low interest rates
  2. Lower profitability due to lower investment income
  3. Alternative asset classes to boost yields
  4. Robust premium growth (3.3%)
  5. Stable underwriting margins
  6. Changing regulatory landscape (Solvency II, PBR, IFRS)
  7. Low number of catastrophic events recently - good experience for catastrophic coverage
  8. M&A activity has increased (Mergers and Acquisitions)

International Association…Insurance Market Report (LP-138-16)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Motivations for M&A Activity

A
  1. Enter a new market (cross border, new products)
  2. Increase size (economies of scale / diversification of risk)
  3. Response to new regulation
  4. Capital management
  5. Horizontal integration
  6. Vertical integration
  7. Less opportunity for organic growth

International Association…Insurance Market Report (LP-138-16)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Regulation of Insurance M&A in China

A
  1. China regulators are considered with the following:
    a. Insurance company solvency position
    b. Overall impact on the insurance industry
    c. Impact on the customer
  2. Regulators need to approve an acquisition before it can proceed.

International Association…Insurance Market Report (LP-138-16)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Regulation of Insurance M&A in Bermuda

A
  1. Pre-announcement - Bermuda Monetary Authority (BMA) should be notified and engaged
  2. Upon announcement
    a. May engage another jurisdiction’s supervisor (if appropriate)
    b. Engages with management of the impacted companies
  3. Post shareholder approval - BMA will get progress updates periodically.
  4. Post-closing of the deal -BMA will monitor integration of companies

International Association…Insurance Market Report (LP-138-16)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

M&A in Bermuda Types of Information Regulator Will Review

A
  1. Company strategy
  2. Risk management
  3. Transaction details
  4. Business plans
  5. Plans for integration

International Association…Insurance Market Report (LP-138-16)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Characteristics of Term Insurance

A
  1. Term insurance provides protection for a specified period of time
  2. Coverage Periods and Face Amount Patterns
  3. Premium Patterns and Premium Guarantees
  4. Premium differences by policy size
  5. Premium differences by underwriting class
  6. Riders
  7. Options

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Term Insurance Coverage Period, Face Amount Pattern, and Premiums

A
  1. Coverage Period – stated number of years or until a given age
  2. Face amount patterns
    a. Increasing – commonly indexed to inflation
    b. Level – most common
    c. Decreasing – used for mortgage protection
  3. Premiums can increase, decrease or remain level
  4. Premium scale
    a. Attained age scale
    b. Select scale
    c. Select and ultimate scale
  5. Term premiums are often guaranteed for an initial period and then subject to change

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Solutions for Decreasing Term

A

Level premium becomes very high in relation to DB
This may cause high lapses in later years

Possible solutions

  1. Limited payment decreasing term
  2. Decreasing premium scales
  3. Make DB level after period of time
  4. Premium = DB * one-year term rate

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Par Term

A

High guaranteed premium offset by dividends
Results in a decreasing premium pattern

Advantages of par term

  1. High gross premiums minimize the need for deficiency reserves
  2. Premiums provide a cushion against adverse future experience
  3. Insured’s net outlay may actually decrease in later policy years
  4. Decreasing or modestly increasing net outlays encourage persistency
  5. Slope of GP scale can sometimes lower costs by minimizing CV

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Term Insurance
Premium Differences by Policy
Size or Underwriting Class

A
  1. Options to vary premium by policy size:
    a. Banding
    b. Policy fee
    c. Could use both banding and policy fee
    d. Continuous rate structure – similar to banding but no cliff
  2. Premium discounts for insureds that meet preferred criteria
  3. Premium discounts for females

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Term Insurance

Riders and Options

A
  1. Term insurance is often attached to a permanent policy as a rider
  2. No policy fee for a term rider
  3. Term riders on child or spouse provide for small benefits
  4. Common options in term products
    a. Conversion – can convert term policy to a permanent policy
    b. Guaranteed insurability option – can increase face amount without evidence of insurability

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Pricing Considerations for Term Insurance

A
  1. Mortality
  2. Lapse Rates
  3. Underwriting
  4. Commission
  5. Expense and inflation
  6. Pricing options
  7. Profit objectives
  8. Legal and regulatory issues

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Pricing Considerations for Term Insurance

Mortality

A
  1. Significant factor for term pricing
  2. High face amounts will lead to good mortality in early years
  3. The slope of mortality by duration is influenced by:
    a. Unhealthy lives extending coverage
    b. Healthy insureds finding lower rates
    c. Extremely competitive market
  4. Renewal mortality is difficult for increasing term because most exposure is weighted toward later policy durations

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Pricing Considerations for Term Insurance

Commission

A
  1. Competition has driven commission rates and 1st year premiums down
  2. First year commission rates lower than 30% are rare
  3. Renewal commissions of 5% are typical
  4. Agents have incentives to replace business frequently
    a. Higher commission rates in the first year
    b. They can obtain a lower premium for their clients
    c. If agent doesn’t replace policy, another agent may steal the policy

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Approach to Charging for Options in Term Products

A
  1. Costs are borne by people who exercise the option
  2. Cost borne by all people who have the option available
  3. Costs borne by everyone, whether they want the options or not

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Extra Mortality Costs for Conversion

A

A_{(x,m,r)} \textup{ - PV at age x of extra mortality cost due to conversion at year r}\newline\newline
A_{x,m,r} = ${t}p{x,m}$\times$e_{x,m,r}\times$K_{x,m,r}\times$v^{t} \newline\newline
K_{(x,m,r)} \textup{ - PV at age y of extra mortality cost where y = x + r} \newline\newline
K_{x,m,r}=\sum_{t=1}^{\infty}${t-1}p{y,m,r}\times[q_{(y,m,r)+t-1}-q_{[y]+t-1}]\times$NAR_{y+t}\times$v^{t}

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Term Conversion Lapse Experience

A
  1. Decreasing lapses by increasing age at conversion
  2. First year lapses were higher than renewal lapses
  3. Lapse rates for “last chance” conversions tended to be lower
  4. Lapse rates for plans with automatic conversion features were higher
  5. Female lapse rates higher than male lapse rates
  6. At younger ages, lapse rates for paramedical business > non-medical business > medical business
  7. Lapse rates for base policies versus riders varied by product

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Term Conversion Mortality Experience

A
  1. Mortality ratios more favorable for policies that converted prior to the end of the conversion period.
  2. Mortality experience for automatic conversion policies and renewable term plans was very favorable
  3. Decreasing term plans showed significantly higher mortality ratios
  4. Female ratios were lower than male ratios
  5. Select period mortality ratios were lowest for paramedical policies < medical < non-medical policies
  6. Mortality ratios were higher for term conversions (vs. rider conversions)

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Determining the Cost of Options

A

LaTeX needed

Life and Annuity Product Features (LP-105-07) Chap 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Characteristics of UL Products

A
  1. Cash Value
  2. Cost of insurance charge (COI)
  3. Expense charges
  4. Surrender charge
  5. Credited interest rate
  6. Partial withdrawals
  7. Persistency bonus
  8. Current and guaranteed charges
  9. Funds are deposited into the general account
  10. Guaranteed minimum interest rate
  11. Death Benefit Options
  12. Policy Loans
  13. Riders

Life and Annuity Product Features (LP-105-07) Chap 2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

UL Credited Rate

A
  1. Interest rate credited may be declared monthly
  2. One-year guarantees are common
  3. Portfolio or new money rates
  4. Credited Rate = Earned Rate - Spread
  5. Policy fees have been replaced by only crediting current interest to AV in excess of $x

Life and Annuity Product Features (LP-105-07) Chap 2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Advantages/Disadvantages of Fixed Premium UL (FPUL)

A

Advantages of FPUL (vs. flexible premium)

  1. Similar to traditional products
  2. Policyholder has minimum guaranteed benefits
  3. Higher premium is used in calculating the commission
  4. Fixed premiums may enhance persistency

Disadvantages of FPUL

  1. No premium flexibility
  2. Additional premiums can complicate administration
  3. Vanishing premium dependent on interest rates
  4. Vanishing premium provision is subject to lawsuits

Life and Annuity Product Features (LP-105-07) Chap 2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Advantages of Group UL

A
  1. Many states allow expense loads to be changed on a group by group basis
  2. Multiple employer trusts allow for efficiencies in contract filing
  3. GUL includes features like experience rating and mortality charges based upon historical experience
  4. Guaranteed issue limits

Life and Annuity Product Features (LP-105-07) Chap 2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Source of Profit Analysis For UL

A

CRIES

  1. Cost of insurance charges less death benefit paid
  2. Reserve released in excess of AV released
  3. Interest earned less interest credited
  4. Expense charges less expenses and commissions
  5. Surrender charges

Life and Annuity Product Features (LP-105-07) Chap 2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

VUL has similarities to UL and Fixed Premium Variable Life

A

Similarities to fixed premium variable life include:

  1. Separate accounts
  2. Several investment options
  3. Sales loads may be limited by regulation
  4. Other charges may be limited

Similarities to UL

  1. Flexible premium payments
  2. Death Benefit Types 1 & 2 are available
  3. Changes in DB allowed
  4. Monthly charges
  5. Charge for riders deducted from fund
  6. Combination of front and back-end loads
  7. Commissions based on more than one factor

Life and Annuity Product Features (LP-105-07) Chap 3

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Types of Fixed Premium Variable Life

A
  1. Dutch Design
    a. Not currently in use by a U.S. company
    b. Simplest design, but required premiums vary over time
    c. DB / premium constant in # of shares
  2. New York Life Design
    a. LaTex needed DB = Face(0)*(actual CV / tabular CV)
    b. CV tabular is the CV if separate account earns exactly the AIR (Assumed Interest Rate)
  3. Equitable Design
    a. Used by almost every company in the US
    b. LaTex needed DB = Face(0) + (Excess of investment performance over AIR)/A(x+t)

Life and Annuity Product Features (LP-105-07) Chap 3

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Characteristics of Survivorship Insurance

A
  1. Pays death benefit on the second death
  2. Can take the form of UL, traditional par WL, and excess interest WL
  3. Single Status vs. Dual Status
  4. Joint age calculation
  5. Substandard and uninsurables
  6. Flexibility is important – death benefits and premiums
  7. Competitive, sophisticated, affluent market
  8. Common riders
    a. Policy split
    b. Estate preservation rider
    c. First-to-die term rider
    d. Automatic increase in death benefit
  9. Sold in the estate planning and business insurance market

Life and Annuity Product Features (LP-105-07) Chap 4

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Substandards and Uninsurables for Survivorship

A
  1. Many survivorship sales are to older couples with substandard ratings
  2. This is OK since there are two lives – need one life to be healthy
  3. Increase in cost is much smaller than with a single life coverage
  4. Even if one life is uninsurable, may be offered with rate-up to age 90
  5. Important to distinguish between uninsurable lives and terminally ill

Life and Annuity Product Features (LP-105-07) Chap 4

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Riders on Survivorship Products Usually Have an Explicit Charge Because

A
  1. Valuation issues arise if free term insurance is provided
  2. Market is sophisticated and knows that nothing is free
  3. Cost is relatively small and insureds are willing to pay for it

Life and Annuity Product Features (LP-105-07) Chap 4

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Pricing Considerations for Survivorship

A
  1. Mortality
  2. Lapses –very high persistency
  3. Expenses – have to underwrite two lives
  4. Reinsurance – large face amounts and heavy reinsurance
  5. Cash value, reserves, and taxation
    a. High cash value OK since lapses are low
    b. High cash value will increase tax reserve and will increase profits.
  6. Pricing Methodology – differences compared to single life products
    a. Joint age calculation
    b. Mortality contagion factor
    c. Adjust retention limit
    d. Reinsurance costs
    e. Automatic increase in death benefit

Life and Annuity Product Features (LP-105-07) Chap 4

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Mortality Assumption for Survivorship

A
  1. High face amounts will lead to strict underwriting
  2. Degree of underwriting concessions should be considered
  3. Joint accident risk and Broken heart syndrome
  4. All survivorship insurance is medically underwritten
  5. Socio-economic class of lives insured
  6. Impact of very low lapses on long-term mortality
  7. Married individuals should be lower than aggregate
  8. Higher exposure to female population
  9. More exposure to older ages

Life and Annuity Product Features (LP-105-07) Chap 4

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Ways to Cover Substandard Mortality

A

FLAT Return

  1. Flat extra premiums
  2. Lien method
  3. Advance in age
  4. Table ratings
  5. Return of premiums

Life and Annuity Product Features (LP-105-07) Chap 5

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Considerations When Determining Extra Premiums for Substandard Risks

A
  1. Number of and Definitions for Substandard Rating Classes
  2. Gross extra premium calculations
  3. Mortality – start with base mortality with no margins
  4. Subdivision by male/female and smoker/nonsmoker
  5. Subdivision by plan
  6. Expenses
  7. Not taken and lapse rates
  8. Extra cost of extended term and reduced paid up
  9. Premium paying period
  10. Supplementary benefits
  11. Reduction or removal of ratings

Life and Annuity Product Features (LP-105-07) Chap 5

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Gross Extra Premium Calculations

A

LaTex needed.

Life and Annuity Product Features (LP-105-07) Chap 5

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

FPDA Surrender Charge Designs

A
  1. SC associated with each premium payment (% of premium)
  2. SC as a % of the sum of the premiums paid in past x months
  3. SC as a % of min(AV, last x years’ premiums)

Life and Annuity Product Features (LP-105-07) Chap 6

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Penalty-free partial withdrawal provisions

A
  1. Enables the contract holder to surrender a portion of AV without SC
  2. Limits on the number of PW per year and the amount of PW
  3. Amount withdrawn may be limited to 50% of paid premiums
  4. Usually subject to a minimum withdrawal amount ($25-$100)
  5. Usually a minimum AV requirement after withdrawal

Life and Annuity Product Features (LP-105-07) Chap 6

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Bonus Features for Deferred Annuities

A
  1. Annuitization bonuses – Often 2%-10% of AV
  2. Persistency bonuses
  3. Bonuses on large AVs
  4. New funds bonuses - additional 100 bps in first year after a deposit

Life and Annuity Product Features (LP-105-07) Chap 6

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Pricing Considerations for Deferred Annuities

A
  1. Asset/Liability risk
  2. Interest spread and crediting strategy
  3. Withdrawal assumptions
  4. Mortality
  5. Commissions and expenses
  6. External factors
  7. Surplus strain (first year commission and reserve increase)
  8. Scenario/Sensitivity testing
  9. Profit Objectives
  10. Pricing horizons – 10 to 20 years is common

Life and Annuity Product Features (LP-105-07) Chap 6

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Interest Spread For Deferred Annuities

A
  1. Credited Rate = Earned Rate - Spread
  2. New money or portfolio method
  3. Common to have target spread between 125-200 bps
  4. Useful to break spread into
    a. Expenses
    b. Losses on surrenders not offset by surrender charges
    c, Product features
    d. Risk charge
    e. Profits

Life and Annuity Product Features (LP-105-07) Chap 6

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Deferred Annuity Mortality, Commission, and Expenses

A

Mortality

  1. Not a significant factor in the pricing of DAs
  2. GMDB may cause mortality to be more important
  3. Select and ultimate mortality is not appropriate since there’s no underwriting
  4. Little industry guidance

Commissions and Expenses

  1. First year commission between 3% - 8% is common
  2. Trailer commissions are common
  3. Acquisition expenses are relatively low
  4. Maintenance expenses are relatively low

Life and Annuity Product Features (LP-105-07) Chap 6

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

Bailout Pricing

A
  1. Additional surplus strain due to statutory reserve requirements
  2. Value of option = cost of excess lapses + lost SCs + cost of artificially supporting a high credited rate
  3. Use dynamic interest scenario testing
  4. The cost will be the additional spread required to force median profit result to equal the profit under a deterministic profit test
  5. Approximate cost = avg lost SC * excess lapse rate * prob of trigger
  6. Total option cost = Cost of the option + cost of the additional required surplus

Life and Annuity Product Features (LP-105-07) Chap 6

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

Characteristics of Variable Deferred Annuities

A
  1. Funds can be deposited into separate accounts or general account
  2. Product Guarantees
    a. Full AV will be paid at death (no SC)
    b. Some guarantee that DB must be stipulated minimum
    c. Guaranteed maximum expense charges
  3. Product Charges
    a. Front-end load
    b. Rear-end load (SC)
    c. Percentage of asset charge
    d. Other Fees – may be assessed a periodic fixed fee

Life and Annuity Product Features (LP-105-07) Chap 7

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Pricing Considerations for Variable Deferred Annuities

A
  1. Expense charges should be solved given desired profits
  2. Lapses – two measures: withdrawals and premium persistency
  3. Average size – measured in terms of premium
  4. Expenses
    a. Similar to fixed deferred annuities
    b. Higher administration expenses due to daily asset calc

Life and Annuity Product Features (LP-105-07) Chap 7

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Pricing Considerations for Income Annuities

A
  1. Mortality
  2. Premium Taxes, Commissions, and Administrative Expenses
    a. Assess all charges explicitly up front
    b. Commission rates range 2%-4% of GP
    c. Administrative charges expressed as per life or percent of benefits
  3. Statutory Surplus Strain
    a. Actuarial reserve established at issue will typically exceed the premium charged

Life and Annuity Product Features (LP-105-07) Chap 8

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Mortality For Income Annuities

A
  1. Industry studies are available
  2. Use sex distinct mortality rates
  3. Mortality improvements should be priced into product to add conservatism
  4. Substandard mortality should be used for certain income annuities (structured settlements)

Life and Annuity Product Features (LP-105-07) Chap 8

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Reasons for Lower Lapses on Post-Level Premium Term

A
  1. Policyholder complacency
  2. Automatic bank draft
  3. Meet short term needs while shopping around for new coverage
  4. Policyholder accepts increased premium
  5. Life events (divorce, marriage, birth of a child, unemployment, etc.)

Evolving Strategies…Post-Level Term Profitability

48
Q

Structures for Post-Level Premium Term

A
  1. Original Approach - large premium jump followed by ART premium scale
  2. Simplified Re-Underwriting - separate classes that receive different ART premium scales
  3. Graded Approach - premiums step-up every five years
  4. Class-Continuation Approach - separate classes that receive different ART rates, but scales converge over time

Evolving Strategies…Post-Level Term Profitability

49
Q

Post-Level Term - Original Approach Advantages and Disadvantages

A

Advantages of the traditional approach

  1. Reflects aging, wear-off of underwriting over the level term period
  2. Assigns an appropriate premium for the risk
  3. Increase premium will minimize reserves

Disadvantages of the traditional approach

  1. Large shock lapse at the end of the level term period
  2. Deteriorating mortality experience
  3. Claims volatility
  4. Reputation risk - some people see a 30x increase in premium

Evolving Strategies…Post-Level Term Profitability

50
Q

Post-Level Term - Simplified Re-Underwriting Goals and Challenges

A

Goals of this approach

  1. Reduce the size of the shock lapse
  2. Provide smaller premium increases to the best risks
  3. Learn more about the health of insureds

Challenges with this approach

  1. Signal value - may alert policyholder of pending premium increase
  2. Difficulty in communications

Evolving Strategies…Post-Level Term Profitability

51
Q

Post-Level Term - Graded Approach Goals and Challenges

A

Goals of this approach

  1. Reduce the size of the shock lapse
  2. Provide smaller premium increases upfront
  3. Eventually move everyone to aggregate rates

Challenges with this approach

  1. Best risks still have motivation to replace coverage
  2. Increase in premiums may not reflect risk of the remaining pool
  3. Future mortality experience is unknown

Evolving Strategies…Post-Level Term Profitability

52
Q

Post-Level Term - Class-Continuation Goals and Challenges

A

Goals of this approach

  1. Reduce the size of the shock lapse
  2. Provide smaller premium increases to the best risk classes
  3. Use the results of previous underwriting

Challenges with this approach

  1. Not widely used in practice
  2. A preferred risk 10-15 years ago may have an impairment today

Evolving Strategies…Post-Level Term Profitability

53
Q

Direct Writer Term Conversion Considerations

A
  1. Convert policies will have higher levels of mortality
  2. Restrictions
    Policy duration limitations (e.g. up to the end of the term period)
    Age limitations (e.g., up to age 70)
    Cannot convert while on waiver
  3. Data Issues
    a. Might not be separately tracked in admin system
    b. The number of converted policies is often understated
    c. Limited experience data
  4. Two methods to price for cost of conversion
    a. Include excess mortality in permanent pricing
    b. Include excess mortality in the term pricing

Term Conversions - A Reinsurer’s Perspective

54
Q

Reinsurer Term Conversion Considerations

A
  1. Reinsurer can cover conversions in the term or permanent treaty
  2. YRT - separate or blended rates
  3. Coinsurance - need separate YRT rates
  4. Reinsurers have limited experience data

Term Conversions - A Reinsurer’s Perspective

55
Q

Underwriting Types

A
  1. Fully underwritten
  2. Medical / Paramedical
  3. Nonmedical
  4. Simplified Issue
  5. Guaranteed Issue
  6. Guaranteed-to-Issue

Life Insurance Underwriting in the United States (LP-130-14)

56
Q

Medical / Paramedical Exam

A
  1. Height and weight measurements
  2. Blood pressure readings
  3. Pulse rate
  4. Blood draw
  5. Urine specimen
  6. Series of medical questions

Life Insurance Underwriting in the United States (LP-130-14)

57
Q

Guaranteed Issue Underwriting

A
  1. Few medical questions (or none)
  2. No medical / paramedical, blood or urine
  3. Cannot be turned down for coverage, with a few exceptions
  4. Small face amounts
  5. Return of premium upon death in first two years

Life Insurance Underwriting in the United States (LP-130-14)

58
Q

Information in Full Policy Application

A
  1. Identifying information (Name, Address, Gender, DOB)
  2. Social security number
  3. Drivers license number
  4. Citizenship
  5. Occupation
  6. Financial information
  7. Smoking status
  8. Plan information
  9. Other coverage
  10. Whether the applicant has ever been denied coverage
  11. Owner
  12. Beneficiary

Life Insurance Underwriting in the United States (LP-130-14)

59
Q

Developments in Life Underwriting

A
  1. Smoker/Nonsmoker
  2. Preferred underwriting
  3. Older age underwriting
  4. Predictive modeling
  5. Financial underwriting
  6. Policy Ownership
  7. Remote underwriting
  8. Outsourced underwriting
  9. Straight-through processing

Life Insurance Underwriting in the United States (LP-130-14)

60
Q

Key Elements of Preferred Underwriting

A
  1. Alcohol and drug abuse
  2. Blood pressure
  3. Build
  4. Cholesterol
  5. Family history
  6. MVR
  7. Personal medical history
  8. Tobacco use

Life Insurance Underwriting in the United States (LP-130-14)

61
Q

Knock-out vs. Credit/Debit Approach

A
  1. Knock-out approach - applicant needs to meet minimum criteria in a specified number of categories
  2. Credit/debit approach - credits and debits are compiled for the various categories and the total score determines the risk class
  3. Combination approaches
    a. Start with credit/debit approach
    b. Certain criteria will knock-out the applicant
  4. Exceptions on a case by case basis

Life Insurance Underwriting in the United States (LP-130-14)

62
Q

Special underwriting for Older Ages

A
  1. Cognitive testing
  2. Functional testing
  3. Changes to the traditional levels of underwriting acceptance
  4. Supplemental questionnaire
    a. Living arrangements
    b. Ability to perform Activities of Daily Living (ADL)
    c. Social activities
    d. Physical activities
    e. Mental activities
    f. Travel

Life Insurance Underwriting in the United States (LP-130-14)

63
Q

Drivers of Change in Life Underwriting

A
  1. Speed - reduce time between policy application and policy issue
  2. Age-based underwriting - thresholds should vary with age
  3. Holistic approach - all information needs to be considered
  4. New work realities - remote underwriting will continue to grow
  5. Regulatory changes
  6. Accuracy - if there is a better way to assess risk in a cost effective manner, the industry will gravitate towards these methods

Life Insurance Underwriting in the United States (LP-130-14)

64
Q

New Medical Markers

A

you will NOTT be a CCHHAMP without studying

  1. NT-proBNP - Congestive heart failure
  2. Oxidized LDL - Early detection of plaque and heart attack risk
  3. TNF (Tumor Necrosis Factor) alpha - Cancer
    4, Troponin I and T - Determines if damage to heart
  4. CBC (Complete Blood Count) - wider variation in widths implies higher mortality
  5. Cystatin C - Renal (kidney) function
  6. Hemoglobin - Anemia and other physiological diseases
  7. Hemoglobin A1c - Metabolism of glucose
  8. Apolipoprotein A and B - Lipid test
  9. Microalbumin - Early renal disease related to Diabetes
  10. Phospholipase A2 - Used to predict cardiac event or stroke

Life Insurance Underwriting in the United States (LP-130-14)

65
Q

Protective Value Study

A

Costs

  1. Cost of the test
  2. Upfront training
  3. Time spent by the underwriter and the other personnel on an ongoing basis
  4. Cost of APS (attending physician statement)

Benefits

  1. Mortality savings due to this test
  2. Mortality savings due to needing to order an APS
  3. For replacement test, cost of the eliminated test

Life Insurance Underwriting in the United States (LP-130-14)

66
Q

Applications of Automated Underwriting Alert Systems

A
  1. Alert underwriters to risk factors which are out of a normal range
  2. Advantages
    a. Easier to implement and maintain
    b. Allows underwriters to focus upon important information
  3. Disadvantage
    a. These systems cannot automatically make underwriting decisions

Automated Life Underwriting: Phase 2

67
Q

Applications of Automated Underwriting Automated Simplified Issue and Non-medical

A
  1. Make underwriting decisions based on a predefined set of rules
  2. Common to limit face amount to 100K-250K
  3. Advantages
    a. Challenging, but manageable to implement and maintain
    b. Completes underwriting for many applicants
    c. Very popular for certain markets
  4. Disadvantage
    a. Only available for smaller policies

Automated Life Underwriting: Phase 2

68
Q

Applications of Automated Underwriting Automated Para-medical and Non-medical

A
  1. Translate underwriting manuals into programmed rules
  2. Advantages
    a. Can replace underwriters for a subset of policies
    b. Can drive ordering of requirements for cause
    c. Can provide reasons why policies are referred to an underwriter
  3. Disadvantages
    a. Many applications still require underwriter review
    b. Very costly to implement and maintain

Automated Life Underwriting: Phase 2

69
Q

Automated Underwriting Operational Efficiency

A

Sources of cost savings:

  1. Reduction in time an underwriter spends on each case
  2. Reduction in call volume from producers to underwriters
  3. Reduction in clarifying emails between producer and underwriter
  4. Improved quality of application data (electronic format forces quality)

Sources of expenses inefficiencies

  1. Systems may order more attending physician statements (APS)
  2. High cost of implementing the automated underwriting system
  3. Reviewing more cases than intended

Automated Life Underwriting: Phase 2

70
Q

Automated Underwriting Other Benefits and Challenges

A
  1. Many agents like the rapid response underwriting decisions
  2. More consistent than traditional underwriting
  3. Buyer’s remorse - increase in first year lapse rates
  4. Implementation takes more resources than expected
  5. Inexperienced underwriters can lose effective training grounds

Automated Life Underwriting: Phase 2

71
Q

What are the legal rights of the policy owner in a mutual company?

A
  1. Favorable experience is used to increase surplus or pay dividends
  2. The policy owner owns a piece of the mutual insurance company
  3. The policy owner will get a fair and equitable share of the surplus
  4. Each line of business should be self-supporting, with little or no subsidization
  5. Each block of business should contribute to retained surplus

Policyholder Dividends (LP-110-07)

72
Q

The Dividend Actuary

A

Who is the Dividend Actuary?

  1. Must be a member of the American Academy of Actuaries (AAA)
  2. Chief Actuary, senior corporate actuary, or individual life actuary
  3. The dividend actuary must know the company’s history

What are the Dividend Actuary’s responsibilities?

  1. Responsible for signing the Interrogatory for Individual Life to Schedule M of the statutory income statement
  2. Must recommend a dividend scale to the board of directors
  3. The dividend actuary will recommend to the board the aggregate amount of dividend to distribute
  4. Must distribute dividends in an equitable manner in proportion to the major source of earnings
  5. If the board chooses not to distribute dividends in a manner recommended by the Dividend Actuary and this action is not consistent with AAA standards of practice, it should be disclosed in the annual statement

Policyholder Dividends (LP-110-07)

73
Q

Sources of Earnings That Drive a Dividend Scale

A
  1. Interest – largest component
  2. Mortality – assess mortality by block if credible
  3. Expenses – allocations should be equitable
  4. Persistency – ripple effects
  5. Other Items
    a. Taxes
    b. Mergers
    c. Reinsurance

Policyholder Dividends (LP-110-07)

74
Q

Sources of Earnings That Drive a Dividend Scale Interest Component

A
  1. Capital gains
    a. Capital gains can be a substantial portion of investment income
    b. Should realize capital gains in an equitable method
  2. Investment crediting methods: Portfolio or IYM
    a. Both methods are acceptable
    b. Mutual companies tend to use the portfolio method
  3. Policy loans – fixed or variable rate – direct or indirect recognition of loans
  4. Assets backing the dividend interest rate
    a. Only actively invested assets should back the dividend interest rate
    b. Assets such as occupied real estate should not impact the dividend scale

Policyholder Dividends (LP-110-07)

75
Q

Methods Used When Changing Dividend Scales

A
  1. Pegging
    a. Pay last year’s dividend if the new scale produces a lower dividend
  2. Substitution
    a. Replace current dividend formula, with the prior dividend formula
    b. This can be very costly
    c. Only use for new issues where dividends are small
  3. Experience premium method
    a. Just like pegging but carries the cost of pegging into future years

Policyholder Dividends (LP-110-07)

76
Q

Adjusting Dividends for Experience

A
  1. Each block, if large enough, should reflect its own experience
  2. Small blocks should be averaged with the results of the entire company
  3. Mortality should be averaged over 3-5 years to add stability
  4. Expense allocation between blocks of business must be equitable

Policyholder Dividends (LP-110-07)

77
Q

Retained Surplus

A
  1. What is reasonable retained surplus?
    a. Companies try to target a broad range
    b. Retained surplus needs to be enough to allow the business to grow
  2. Entity surplus
    a. Entity surplus = permanently retained surplus
    b. Each group of policyholders must contribute to entity surplus
    c. The larger the amount of risk OR the larger the amount of first year strain, the larger the expected contribution to entity surplus
  3. Limitations on aggregate retained surplus
    New York limits retained surplus to the greater of 10% of statutory reserves or the square root of the sum of the squares of 7% of statutory reserves and 35% of health premiums

Policyholder Dividends (LP-110-07)

78
Q

Past Tax Law Changes Impacting Dividends

A
  1. 1959 Tax Act
    a. Flaw was the “arithmetic menge formula”
    b. Dividends were not deductible
    c. Modco reinsurance to turn investment income into underwriting gains
  2. Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)
    a. Dividends were partially deductible
    b. 77.5% for mutual companies and 85% for stock companies
  3. Deficit Reduction Act of 1984 (DEFRA)
    a. 100% deductibility of dividends
    b. Moved from net level reserves to CRVM reserves
    c. Dividends were changed from incurred basis to cash basis
    d. Required to stop using modco reinsurance loop hole
    e. Introduced the equity tax
  4. Tax Reform Act of 1986 – changed tax rate and forgave modco offenders
  5. DAC Tax

Policyholder Dividends (LP-110-07)

79
Q

Ways to Reflect the Equity Tax in the Dividend Scale

A
  1. Charge tax as it is incurred
  2. Best estimate average over a period of time – this creates stability
  3. Increase the annual contribution to surplus
  4. Use the target surplus formula and consider any excess tax as belonging to entity surplus
  5. Use the target surplus for each block of business (less diversification) and any excess tax belongs to retained surplus
  6. Charge the equity tax on the actual surplus of a given block

Policyholder Dividends (LP-110-07)

80
Q

Ways to Reflect the DAC Tax

A
  1. As it is incurred for each block of business
    a. Results in a large reduction in dividends followed by an increase in dividends
    b. More complicated than the percent of premium method
  2. As a flat percentage of premium charge
    a. Can view the tax just like a premium tax
    b. This method is the simplest way the handle the DAC tax

Policyholder Dividends (LP-110-07)

81
Q

Stand-Alone LTCI Product Features

A
  1. Benefit triggers - 2 out of 6 ADLs or cognitive impairment
  2. Inflation protection of 5% per year is common
  3. Benefit designs
    a. Daily, weekly, or monthly max
    b. Expense reimbursement, indemnity, or disability-based
    c. Maximum benefit periods/amounts (in year or dollars)
  4. Elimination period
  5. Policies can cover one or multiple lives
  6. Premium structure
    a. Regulations require that premiums do not increase after age 65
    b. Level lifetime pay is most popular
    c. Filed as guaranteed renewable
    d. Discounts similar to individual life products

Quantification of Natural Hedge…Linked to LTC

82
Q

LTCI/Life Rider Product Features

A
  1. Base life product can be UL, VUL, EIUL, whole life, etc.
  2. LTC is paid out via accelerated benefit (AB)
  3. LTC benefits reduce face amount
  4. Maximum amount paid will be a percentage of face amount
  5. Common to add on an additional extension of benefits (EOB) rider to extend benefits beyond what AB rider will pay
  6. Cross Funding payout structures - benefit payments are taken partially from the cash value and partially from the net amount of risk

Quantification of Natural Hedge…Linked to LTC

83
Q

LTCI / Annuity Combo Product Features

A
  1. Base plan can be fixed annuity, variable annuity, or EIA
  2. Cross funding payout structures:
    a. Tail design
    b. Coinsurance Design
    c. Pool Design
  3. Inflation protection
  4. Waiting period will limit early duration claims

Quantification of Natural Hedge…Linked to LTC

84
Q

LTCI Combination Product Considerations

A
  1. Tax considerations
    a. 1035 exchanges are allowed
    b. Charges to pay for LTCI benefits are not considered a distribution
    c. Distributions from qualified riders attached to annuities are tax free
  2. Target Market
    a. Age 55+ (they better understand the need for LTC)
    b. Affluent customers (single premium is common)
    c. Exchange from existing life or annuity products
  3. Distribution
    a. Stand alone has many road blocks to sales
    b. Producers want a simple product that is easy to explain

Quantification of Natural Hedge…Linked to LTC

85
Q

Roadblocks to stand-alone LTCI sales

A
  1. Lack of education
  2. Underwriting
  3. High cost
  4. “Use it or lose it” benefit

Quantification of Natural Hedge…Linked to LTC

86
Q

Key Risks for LTCI Products

A
  1. Persistency - lapse supported product
  2. Investment - low interest rates are a strain to pricing
  3. Morbidity - high incidence and low terminations are a strain to pricing
  4. Inflation - risk that LTC costs increase in the future

Quantification of Natural Hedge…Linked to LTC

87
Q

Natural Hedge for Combination LTCI Products

A
  1. Persistency - lower lapses is a strain to LTCI but can increase profits for base products
  2. Investment - pass-through nature of investment risk for life and annuity products will make combination products “less risky”
  3. Mortality - high mortality is good for LTCI but bad for Life Product
  4. Incidence Rates - higher incidence rates first uses policyholder funds

Quantification of Natural Hedge…Linked to LTC

88
Q

Universal Long-term Care Insurance Product Design

A
  1. Unbundled LTCI product
  2. Account value increases with premiums paid and decreases with expense charges and cost of insurance charges
  3. Interest is credited to the account value
  4. Flexible premiums
  5. Flexible benefits
  6. The policy lapses if the account value goes to zero

Deconstructing Long-Term Care Insurance (LP-131-15)

89
Q

Universal Long-term Care Insurance Advantage and Disadvantages

A

Advantage of Universal LTC

  1. Lower interest rate risk
  2. Lower persistency and expense risk
  3. Current/Guaranteed charge structure similar to UL
  4. Premium and benefit flexibility

Challenges of Universal LTC

  1. Presence of account value will increase cost
  2. Insurer may still have to increase cost of insurance charges if claims experience is poor
  3. Insurance industry is slow to accept change
  4. Distribution - more complicated, need sales people to explain benefits

Deconstructing Long-Term Care Insurance (LP-131-15)

90
Q

CI Product Design

A
  1. Sold with life insurance or on stand alone basis
  2. Level premiums and face amount
  3. Fully underwritten
  4. Full face amount paid if diagnosed with “covered condition”
  5. Must live 30 days past diagnosis to get benefit
  6. No payment for cancer claim if diagnosed within 90 days of issue
  7. Return of premium on death if diagnosis within 30 days of issue
  8. No cash values

Pricing Critical Illness Insurance in Canada (LP-126-13)

91
Q

Versions of CI Product

A
  1. Basic –> Covers 3-4 conditions, such as heart attack, stroke, cancer, bypass surgery
  2. Enhanced –> Covers up to 20 conditions
  3. Enhanced + ROPX –> Covers up to 20 conditions + return of premium upon expiry
  4. Enhanced + ROPX + ROPS –> Covers up to 20 conditions + return of premium upon expiry + return of premium upon surrender

Pricing Critical Illness Insurance in Canada (LP-126-13)

92
Q

Pricing Considerations of CI

A
  1. Main challenge – getting good CI incidence rates
  2. Expenses, compensation, taxes are similar to term life insurance
  3. Approaches to developing premium rates
    a. Modeling approach
    b. Competitive approach
  4. Most business is reinsured
  5. Risk classes (gender, smoking status, band, and issue age)
  6. Sensitivity testing and scenario testing – similar to life pricing
  7. Limitations, definitions, exclusions
  8. Anti-selection

Pricing Critical Illness Insurance in Canada (LP-126-13)
Product Design of CI (LP-127-13)

93
Q

Process to Develop CI Incidence Rates

A
  1. Obtain government data for various illnesses
  2. Adjust data to fit the covered conditions
  3. Adjust data for future trends
  4. Insured to population adjustment
  5. Split data into smoker vs. non-smoker incidence rates
  6. Use ratios to turn an aggregate table into a select and ultimate table
  7. Compare table to CI incidence rates in other countries to check for reasonableness

Pricing Critical Illness Insurance in Canada (LP-126-13)

94
Q

Covered Conditions for CI

A

The Big 4
1. Cancer
2. Heart attack
3. Stroke
4. CABG
The next three
1. Multiple sclerosis
2. Kidney failure
3. Major organ transplant
Others
1. Cardiovascular (heart valve replacement, aortic surgery)
2. Degenerative (motor neuron disease, Parkinson’s, Alzheimer’s)
3. Brain (coma, benign, brain tumor)
4. Head (blindness, deafness, loss of speech)
5. Body (loss of limbs, paralysis, major burns, occupational HIV)

Product Design of Critical Illness in Canada (LP-127-13)

95
Q

CI Exclusions

A
  1. Self inflicted
  2. Drinking and driving
  3. Drugs
  4. Criminal offense
  5. Two year misrepresentation

Product Design of Critical Illness in Canada (LP-127-13)

96
Q

Features of CI

A
  1. Return of premium on death
  2. Return on premium on expiry
  3. Return of premiums on surrender – similar to a cash value
  4. Increasing or decreasing face amount
  5. Partial benefit paid for non-life threatening diseases
  6. Medical consulting services at time of claim
  7. Premiums are often fully guaranteed

These features can be standard or optional

Product Design of Critical Illness in Canada (LP-127-13)

97
Q

Life Insurance Acceleration Riders

A
  1. Terminal illness rider - accelerate a portion of face amount when policyholder has a life expectancy of less than 12-24 months
  2. Chronic illness rider - accelerate a portion of face amount when policyholder is unable to perform two or more ADLs
  3. Critical illness rider - accelerate a portion of face amount when policyholder is subject to a critical illness

Life Insurance Acceleration Riders

98
Q

Chronic Illness Rider Product Design

A
  1. Accelerated amount is considered a form of policy loan
  2. The amount accelerated will accrue with interest
  3. Policyholder will still pay premium on the full face
  4. Rider often has an explicit fee

Life Insurance Acceleration Riders

99
Q

Chronic Illness Rider Risk Control

A
  1. Supplemental underwriting
  2. Limiting issue ages
  3. Cognitive testing
  4. Partial face is paid and interest charged on accelerated amount
  5. Annual limits on the accelerated amount
  6. Licensed health care practitioner certifies policyholder is eligible
  7. Reserving the right to pay for an independent examination
  8. Permanent loss of ADLs
  9. Limiting riders to certain table ratings

Life Insurance Acceleration Riders

100
Q

Acceleration Rider Reinsurance

A
  1. Most insurance participate in terminate illness acceleration riders
  2. Reinsurer participation in other acceleration riders varies
  3. Reinsurers are more comfortable with permanent rather than term
  4. Reinsurer participation considerations:
    a. Plan design
    b. Risk controls
    c. Discounting
    d. Experience with living benefits
  5. Reinsurer may want portion of rider fee

Life Insurance Acceleration Riders

101
Q

EIA Product Design

A
  1. Single premiums are most common
  2. Index Account Value (IAV) available at the end of the Index Period
  3. GMAV designed to satisfy SNL

LaTex needed

  1. Account value will be the greater of the IAV and the GMAV

Equity Indexed Annuities (LP-102-07)

102
Q

Components of the Indexed Based Interest Calculation

A
  1. Index – S&P 500 is most common
  2. Index Period – usually 7-10 years
  3. Index Growth %
  4. Participation Rate – applied to the Index Growth %
  5. Floor – usually 0%, which floors the IAV at the single premium
  6. Cap – will cap index-based interest
  7. Margin – method to decrease the index-based interest

Equity Indexed Annuities (LP-102-07)

103
Q

Index Growth %

A

PAR

  1. Point-to-Point Index Growth %
    a. Ignores interim ups and downs of the market
    b. Considered more exact
    c. Index Growth % = (Final Closing Level / Initial Closing Level) - 1
  2. Average Index Growth %
    a. Averaging method will produce 55-60% of the PTP growth

LaTex Needed

  1. Ratcheting - locks in returns so that they cannot be lost by future poor index performance

Equity Indexed Annuities (LP-102-07)

104
Q

Other EIA Design Features

A
  1. Annual Reset EIAs – indexed based interest components are guaranteed for shorter periods
  2. Flexible premiums – may have reduced GMAV
  3. Lower GMAV interest rates – SNL has changed, which allows for lower GMAV interest rates
  4. Index growth measurements
    a. Binary Returns – Utilizes “either or logic”
    b. High Water – uses the highest point to calculate the IAV
  5. Customer Choice
    a. Index Choice
    b. Index Growth - averaging or point-to-point
    c. Fixed Interest - receive a fixed rate for any contract year
    d. Fund Transfer - can transfer funds between return methods
  6. Inducements to purchase
  7. GMAV alternatives – can define GMAV as 100% of single premium that accumulates at a 2% rate

Equity Indexed Annuities (LP-102-07)

105
Q

EIA Pricing and Design Considerations

A
  1. EIA Funding
    Method #1 – Long term Guarantee
    - Premium = GMAV Cost + PV Profit/Expenses + PV Index Budget
    - Need to set aside premium to cover future costs

Method #2 – Short Term Guarantee

  • Net Earned Rate = Pricing Spread + Hedging Costs
  • GMAV funding can be included in a pricing spread
  • Need to adjust IAV features to keep hedging costs down
  1. Funding Index-Based Interest
    - Back indexed based interest with call options – OTC or Exchange
    - Static hedging or dynamic hedging
  2. Other EIA Pricing Considerations

Equity Indexed Annuities (LP-102-07)

106
Q

Static and Dynamic Hedging

A

Static Hedging

  1. May require complex options (OTC market, interaction with banks)
  2. Buy-and-hold investment strategy , often using OTC options
  3. Most common static hedge involves a call spread option
  4. Funding ratio is generally < 100% due to lapse and death

Dynamic Hedging

  1. Can utilize actively traded options from an exchange
  2. Involves monitoring the delta and other “Greeks”
  3. If (delta * notional amount) is held, the IAV will be completely funded
  4. Requires periodic rebalancing

Equity Indexed Annuities (LP-102-07)

107
Q

Other EIA Pricing Considerations

A
  1. Customer choice – need to monitor customer behavior
  2. Index return method – monthly averaging and point-to-point are most common
  3. Policy guarantees – one year guarantees are common because of low interest rates
  4. GMAV funding – key risks are default and interest rate risk

Equity Indexed Annuities (LP-102-07)

108
Q

EIA Reserving Considerations

A

Actuarial Guideline 33 - covers CARVM, which makes the liability the maximum of the highest present value of cash flows

Actuarial Guideline 35: developed for EIAs as an interpretation of CARVM

Type 1 Method (book value based)

  • Enhanced Discounted Intrinsic Method (EDIM)
  • Book value of hedging instruments is basis for the reserve
  • Hedged as required criteria must be met

Type 2 Methods

  • CARVM with updated market values method (CARVM-UMV)
  • Market value reserve method (MVRM)
  • Type 2 methods do not require hedged as required criteria

Equity Indexed Annuities (LP-102-07)

109
Q

Equity Indexed Annuities SNL Implications

A
  1. Old Law
    a. CV must be LaTex needed
    b. Flexible premium requires 65% of first year premium and 87.5% of renewal premiums
  2. Temporary Law
    a. Temporarily changed the 3% to 1.5%
  3. New Law
    a. SPDAs and FPDAs
    b. Accumulation rate based on the 5-year CMT less 125 basis points, subject to 1% min and 3% max
    c. Reset provision
    d. Additional 100 basis point reduction allowed for EIAs

Equity Indexed Annuities (LP-102-07)

110
Q

Requirements of EIA Investment Plan and Hedging Strategy

A
  1. Name, qualifications, and experience of investment or ALM manager
  2. Types of assets planned to back contracts
  3. How much premium will be earmarked for derivatives investing
  4. Statutory authority that permits use of derivatives
  5. List of possible counter-parties
  6. Description of due diligence performed
  7. Descriptions of risk management with respect to hedging risks
  8. Availability of hedging instruments
  9. How accounting of derivatives can distort income statement or balance sheet
  10. How assets funding EIAs will be separated from non-indexed contracts
  11. Plans for being hedged as required, if applicable

Equity Indexed Annuities (LP-102-07)

111
Q

Factors Which Influence Starting of Withdrawals for Variable Annuities

A
  1. Source of funding - after age 70 qualified annuities take more withdrawals
  2. Size of contract
  3. Deferral incentives
  4. Duration
  5. Distribution channel

Variable Annuity Guaranteed Living Benefits Utilization

112
Q

Variable Annuity Withdrawals Other Considerations

A
  1. Majority of owners take withdrawals through systematic withdrawal plans (SWPs)
  2. Once owners start withdrawals, they tend to continue
  3. Older owners are more likely to take withdrawals through SWP
  4. SWP owners tend to stay within the maximum withdrawal amount
  5. Younger owners are more likely to take out more than the max withdrawal

Variable Annuity Guaranteed Living Benefits Utilization

113
Q

Variable Annuity Surrenders Considerations

A
  1. If a policyholder is going to use the rider, surrender rates are low
  2. If older than 65 and not taking withdrawals, surrender rate increases
  3. U-shaped relationship when compared to percent of benefit maximum
  4. In-the-money will decrease surrenders
  5. Withdrawal activity can be a leading indicator of surrender activity

Variable Annuity Guaranteed Living Benefits Utilization

114
Q

Variable Annuity With GLWB Current Market Stats

A
  1. Average age was 63
  2. Average premium was 129k
  3. Average contract value was $135k
  4. At the beginning of 2013, 79% of contracts issued before 2013 were in-the-money
  5. 23% of contracts had at least some withdrawal activity during 2013
  6. Median amount withdrawn was $5,800 or 6.4% of contract value
  7. Little additional premiums beyond the first year
  8. Surrender rates were 3%
  9. Average GLB rider cost was 320 bps

Variable Annuity Guaranteed Living Benefits Utilization

115
Q

Variable Annuity With GMWB Current Market Stats

A
  1. 48% of owners are 70 or older
  2. At the beginning of 2013, 53% of contracts issued before 2013 were in-the-money
  3. 47% of contracts had at least some withdrawal activity during 2013
  4. Median amount withdrawn was $6,000
  5. Little additional premiums beyond the first year
  6. Surrender rates were 8.2%
  7. Average GMWB rider cost was 213 bps

Variable Annuity Guaranteed Living Benefits Utilization

116
Q

Variable Annuity With GMIB Current Market Stats

A
  1. Average age is 63
  2. At the beginning of 2013, 83% of contracts issued before 2013 were in-the-money
  3. Annuitization rate was for only 0.3%
  4. 27% of contracts had at least some withdrawal activity during 2013
  5. Median amount withdrawn was $6,000
  6. Little additional premiums beyond the first year
  7. Surrender rates were 3.9%

Variable Annuity Guaranteed Living Benefits Utilization

117
Q

Variable Annuity With GMAB Current Market Stats

A
  1. Average age is 59
  2. At the beginning of 2013, 18% of contracts issued before 2013 were in-the-money
  3. 17% of contracts had at least some withdrawal activity during 2013
  4. Median amount withdrawn was $7,000
  5. Surrender rates were 10.9%
  6. Average rider cost was 222 bps

Variable Annuity Guaranteed Living Benefits Utilization

Life Pricing Exam (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions