1
Q
What is the primary relationship that ensures profitability in an insurance company?
A
The relationship between the pricing actuary and the underwriter
This relationship is crucial for determining the profitability of insurance products.
2
Q
What is a unique feature of life insurance products regarding pricing?
A
The cost of the ‘raw materials’ is not known at the time of determining the life insurance price
Profitability can only be assessed after the last policy has lapsed or the last policyholder has died.
3
Q
Who is ultimately responsible for setting mortality assumptions in life insurance pricing?
A
The product development actuary
This role is critical for ensuring the expected profitability of life insurance products.
4
Q
What two key items must an organization consider for effective product strategy?
A
- Skill set to analyze risks
- Realistic understanding of underlying costs
These considerations impact the organization’s ability to sell different insurance products.
5
Q
True or false: The mortality expectation for a simplified issue approach is the same as that for a fully underwritten product.
A
FALSE
Understanding these differences is crucial for appropriate pricing.
6
Q
What is a significant component of a product offering in life insurance?
A
Profit expectation
It is often one of the least sophisticated parts of the product development process.
7
Q
What must be fully resolved between the underwriter and the product actuary?
A
Any contemplated change
This resolution is necessary to determine implications on the underlying profitability of the product.
8
Q
What approach is needed to produce confidence in a product’s expected profitability?
A
A strong interdisciplinary approach
This involves collaboration between actuaries and underwriters.
9
Q
What impact do target market and product features have on life insurance?
A
They significantly impact the ultimate cost of the product
This includes the sales approach and underwriting process.
10
Q
What is the primary driver of competitive pressure in the life insurance marketplace?
A
The belief that life insurance products are bought as a commodity
11
Q
Define surplus in the context of life insurance.
A
Capital held above the expected needs of the product to ensure all policyholder claims are met
U.S. companies must hold a certain amount of surplus to satisfy regulatory bodies and rating agency concerns.
12
Q
What are the three types of risk focused on by the National Association of Insurance Commissioners (NAIC) in the risk-based capital (RBC) formula?
A
- Asset risk
- Underwriting/insurance risk
- Other risk
13
Q
True or false: An insurance product has significantly less risk than a federally insured savings bank account.
A
FALSE
An insurance product has significantly more risk, hence the expected return should be higher.
14
Q
How does risk vary by product in life insurance?
A
Surplus can be assigned based on a product’s design
The product must make a return on both cash flows and the surplus assigned to it.
15
Q
What is the key risk for a term product in life insurance?
A
Underwriting risk, specifically mortality risk
This differs from accumulation-based products, which have more asset risk.
16
Q
Fill in the blank: The formula focuses on material risks that are common for the ________ type.
A
insurance product
Interest rate risk is included in the life RBC formula due to its material impact.
17
Q
What is a common historical method for allocating risk in life insurance?
A
Flat amount per $1000 of in force approach
This method, while quantifiable, is considered simplistic.
18
Q
What should expected returns correlate with in all ventures, including life insurance?
A
The amount of underlying risk present
This notion extends across all products in the capital markets.
19
Q
What is the single biggest cost in a life insurance product?
A
Mortality
For a term plan, mortality can account for roughly 50-60% of the gross premium.
20
Q
What are the pricing components discussed in product design?
A
- Mortality
- Lapse rates
- Expense levels
- Interest rates
These components are key building blocks in product design and underwriting.
21
Q
True or false: Being overly aggressive in underwriting can erode expected profitability.
A
TRUE
If underwriters are more aggressive than the pricing assumptions, it can quickly erode profitability.
22
Q
Historically, what percentage of applications were approved as standard risks for insurance purposes?
A
90-95%
The remaining applications were split between substandard offers and declinations.
23
Q
What has changed in the mortality classification processes over the last three decades?
A
They have become more complex with the proliferation of preferred risk products
Preferred risk underwriting produces more classifications with increasingly homogenous groups.
24
Q
What are two outcomes of more stringent underwriting criteria?
A
- Expected mortality decreases
- Fewer individuals qualify for preferred status
This results in lower prices but limits the pool of qualified individuals.
25
What is the impact of **preferred risk underwriting** on pricing?
It leads to lower, more competitive prices
## Footnote
However, it also means fewer individuals will qualify under stringent requirements.
26
What must be considered regarding individuals who do not qualify for **preferred status**?
They fall into the standard or residual standard pool
## Footnote
There are many dynamics to consider for this group.
27
What is the **least homogenous group** in insurance underwriting?
standard group
## Footnote
Proposed insureds that just miss qualifying for a company's preferred rates.
28
What are the **three actions** proposed insureds may take if they do not qualify for preferred rates?
* Find a company with less restrictive preferred criteria
* Drop out of the buying pool
* Purchase the residual standard policy
## Footnote
These actions reflect the choices available to those who miss qualifying for preferred rates.
29
What is the trend in the insurance industry regarding **underwriting practices**?
Moving towards **accelerated underwriting (AUW)**
## Footnote
This shift is based on underwriting requirements that can be obtained instantly.
30
What are some **questions** that need to be addressed in the product pricing process?
* Will underwriting expenses and mortality costs offset each other?
* What is the impact of new underwriting tools?
* Are new markets and distribution processes well understood?
* How will instant issue affect policy dynamics?
## Footnote
These questions highlight the complexities in modern underwriting practices.
31
Why is it important for **underwriters and actuaries** to work together?
To define **mortality expectations** and classify risks
## Footnote
This collaboration ensures a common understanding of risk assessment.
32
How do actuaries and underwriters differ in their approach to risk?
* Actuaries think of large groups of homogenous risks
* Underwriters focus on the absolute risk of the individual
## Footnote
This distinction is crucial in building a large group of homogenous risks.
33
What does it mean for mortality expectations to be **actuarially supportable**?
* Expected level and relative mortality differences must be demonstrated through studies
* Observed differences in clinical medicine must be extrapolated to insured applications
## Footnote
This ensures that mortality assumptions are based on reliable data.
34
What is the largest decrement affecting the number of **policies ultimately in force**?
Lapses
## Footnote
Lapses can be 50-100 times more than deaths in a product.
35
How do lapses compare to mortality in terms of their impact on **profitability**?
Lapses have a **direct impact** on profitability
## Footnote
Unlike mortality, whose impact on profitability is always predictable, lapse rates that differ from assumptions can move the profitability in either direction. 
36
What is the impact of **early duration lapses** on profitability?
Hurt profitability
## Footnote
Early duration lapses occur when the premium collected is greater than the mortality cost.
37
What is the impact of **later duration lapses** on profitability?
Improve profitability
## Footnote
Later duration lapses occur when the premium collected is less than the mortality cost.
38
What is a common duration for **level term policies** in the U.S.?
20 to 30 years
39
What can a difference between an assumed ultimate lapse rate of **4%** per year and actual experience of **2%** lead to?
Disaster for profitability
## Footnote
This highlights the importance of accurate lapse assumptions in pricing.
40
On average, how long must a policy be in force to recover the **expenses incurred** upon issue?
At least five years
## Footnote
This includes underwriting costs and first-year commissions.
41
What factors are included in the **expense levels** built into a product?
* Agent's compensation
* Corporate overhead
* Support of an agency system
* Advertising
* Underwriting expenses
## Footnote
These factors contribute to the overall cost structure of insurance products.
42
What is the balancing act among the following factors in underwriting?
Balancing act among:
* Cost of a requirement
* Corresponding mortality savings that occurs due to the obtaining of a requirement. 
* Proposed insured's adverse reaction to being subjected to a battery of requirements for the desired level of coverage 
* Time taken to issue a policy
## Footnote
Underwriters must consider these factors to make informed decisions.
43
True or false: An underwriter should make decisions based on the **expected duration** of the policy.
FALSE
## Footnote
Decisions should not be based on assumptions about policy duration or individual longevity.
44
Does a higher premium cost for a product necessarily indicate more **underwriting expense**?
No
## Footnote
The difference in premium costs may be due to underlying risks and benefits rather than underwriting expenses.
45
For products like **term insurance**, how significant is the earned interest rate?
Has few implications
## Footnote
This is similar to a child's piggy bank where small amounts do not significantly change with varying interest rates.
46
For products like **whole life** and **universal life**, what is the impact of the assumed earned rate?
Significant bearing on profitability
## Footnote
A change of just 1% in the earned rate can be worth $1 million each year.
47
What are the **reserve standards** established by regulation in the United States?
* Statutory reserve standards
* Underlying mortality table
* Maximum interest rates
* Methodology to be used
## Footnote
These standards ensure enough premium is held until the probability of death increases.
48
What is the orientation of **statutory reserve standards** historically?
Conservative
## Footnote
They are designed to err in favor of policyholders.
49
What does the concept of **principles-based reserves (PBR)** focus on?
Conservative based best-estimate assumption basis
## Footnote
This approach has recently become a reality in reserve standards.
50
Traditional products keep the investment risk with the company while variable products shift most of the investment risk to the ______?
Policyholder
51
What are **non-forfeiture laws** designed to do?
Allow for the return of excess premium in the form of cash value if the policyholder lapses the policy
## Footnote
These laws apply to policies with a level premium structure.
52
What is meant by **surplus needs** in insurance?
A safety net beyond the level of reserves held, referred to as capital requirements or risk-based capital (RBC)
## Footnote
This is necessary in case experience turns out to be worse than expected.
53
What are the **three main components** affecting federal taxes paid by an insurance company in the U.S.?
* Corporate tax rate
* Tax reserves
* Deferred acquisition cost (DAC) tax
## Footnote
These components influence how quickly companies pay their taxes.
54
True or false: The **DAC tax** allows full deductibility of acquisition expenses in the year they were incurred.
FALSE
## Footnote
The DAC tax forces recognition of these expenses over a 10-year period.
55
In Canada, insurance companies are subject to corporate taxes at which levels?
* Federal level
* Provincial level
## Footnote
Federal taxes relate primarily to income, while provincial taxes relate to premiums.
56
To price a product, what must be scheduled out?
A series of expected expenses coupled with a stream of premium payments
## Footnote
This is necessary to produce a profit that meets corporate requirements.
57
Before introducing a product, what must be checked to ensure its success?
* Agent compensation
* Consumer competitiveness
## Footnote
These factors help ensure the product has a good chance of being successful in the marketplace.
58
What must be done before a product is made available for sale in a state?
It must be filed with and approved by the state
## Footnote
This is a regulatory requirement for insurance products.
59
What are the **two main decision processes** in the interaction between the actuary and the underwriter during product development?
* Setting of the underwriting requirements
* Reasonableness of the pricing expectations
## Footnote
These processes are crucial for effective pricing and underwriting in insurance.
60
What is the **central component** of the underwriting process?
Establishment of the underwriting requirement grid
## Footnote
This grid is essential for determining the necessary underwriting requirements.
61
What are the **two components** of the underwriting requirement process?
* Verifying information obtained from the proposed insured
* Discovering information that is either new to or is being concealed by the proposed insured
## Footnote
These components help ensure accurate assessment of risk.
62
Define **protective value** in the context of underwriting requirements.
The relationship of mortality savings from a requirement to the cost of administering the requirement
## Footnote
Protective value helps determine whether a requirement should be ordered based on its cost-effectiveness.
63
When should an underwriting requirement be ordered based on protective value?
When greater mortality cost is saved than the cost of the requirement
## Footnote
This principle guides the decision-making process in underwriting.
64
What is the first consideration in establishing a valid **protective value study**?
Which requirement identified the underlying impairment
## Footnote
Understanding which requirement uncovered an impairment is crucial for accurate credit assignment.
65
In the example of **hypertension**, which requirement gets credit for uncovering the condition?
The application
## Footnote
If the proposed insured did not admit hypertension, the paramedical exam would then receive credit.
66
What is the second consideration in a protective value study?
The proposed insured's behavior
## Footnote
This includes how underwriting requirements may affect the application process and policy acceptance rates.
67
True or false: Extending the application process through underwriting requirements can lead to an increase in the rate of not taken policies.
TRUE
## Footnote
This can result in incurred underwriting expenses without corresponding premium income.
68
What factors can be analyzed in the construction of a protective value study?
* Policy size
* Timeliness of information
* Policyholder behavior
## Footnote
These factors are important for understanding the effectiveness of underwriting requirements.
69
What is the **protective value** in the context of underwriting?
The confirmation through the underwriting process that an individual does not have a given impairment
## Footnote
This contrasts with the general belief that it measures expected mortality differences.
70
True or false: The **mortality discount** represents the difference between select and ultimate mortality due to expected mortality differences.
FALSE
## Footnote
The mortality discount reflects confirmation of no impairment through underwriting, not just expected mortality differences.
71
What happens to the chance of impairment as one moves **further from underwriting**?
The greater the chance that an impairment has occurred
## Footnote
However, it does not confirm that an impairment has actually occurred.
72
Why is the interpretation of **protective value studies** important?
To assign an appropriate level of mortality discount based on impairment identification
## Footnote
This is crucial for accurate underwriting practices.
73
What should companies consider when establishing **underwriting requirement guidelines**?
* Competitors' practices
* Market standards
## Footnote
Being 'at the market' is essential to avoid attracting additional risks.
74
What effect does establishing underwriting requirements that are **ahead of the market** have?
Proposed insured behavior will be modified, attracting additional risks
## Footnote
Historical examples, like the HIV epidemic, illustrate this effect.
75
What is a significant factor in the **mortality results** of policies written without a blood profile?
The difference of one dollar in face amount requirements
## Footnote
Policies at $100,000 versus $100,001 show statistically relevant mortality differences.
76
What is the **first issue** to consider regarding underwriting requirements and mortality results?
The relationship between underwriting requirements and mortality results
## Footnote
This involves understanding how these factors interact.
77
What is the **value judgment** in underwriting requirements?
Different sets of parameters deliver different mortality results
## Footnote
There is no set of underwriting parameters that is 'right' or 'wrong'.
78
What does the **'you get what you pay for'** concept imply in underwriting?
Fewer requirements and a shorter process lead to higher mortality
## Footnote
This does not mean the underwriting model is incorrect or flawed.
79
What is a critical aspect of **product management** after pricing is set?
Proactively manage the block of business and understand risks
## Footnote
Product management is just beginning after the price is set.
80
Why is it important to manage all phases of the **pricing cycle**?
Small percentage increases in mortality can significantly affect profit
## Footnote
Profit is a very small percentage of premium.
81
What can changes to **underwriting requirements/guidelines** include?
* Modifying age-and-amount limits for treadmill EKG
* Changes in frequency of attending physician's statements
## Footnote
Changes can be explicit or subtle.
82
What does the **published underwriting grid** reflect?
Defined set of mortality expectations
## Footnote
Some organizations explicitly reflect expectations for each underwriting criterion.
83
What is a common misconception about **subtle changes** in underwriting processes?
They have no measurable impact on mortality expectations
## Footnote
This is especially easy to assume when the process is implicit.
84
What percentage of deaths can the underwriting selection process eliminate?
Over 70%
## Footnote
This highlights the aggregate value of underwriting.
85
What is the **first year of a policy** compared to in underwriting?
Results of individuals of the same attained age in the ultimate portion of mortality expectations
## Footnote
This comparison helps in assessing the underwriting process and its impact on pricing.
86
What does the underwriting process add to the **discount**?
A significant amount
## Footnote
Not all underwriting requirements provide the same savings and vary by gender or age.
87
What must be taken into account when considering changes in the **underwriting process**?
Cost changes and mortality differences
## Footnote
An objective view is imperative for accurate assessments.
88
What is a **red flag** in the underwriting process?
Information that prompts further exploration by the underwriter
## Footnote
The historical behavior of the underwriting department is reflected in the cost structure and mortality results.
89
What happens if an organization relaxes how often an **APS** is obtained?
Existing experience may not be usable in future assumptions
## Footnote
Changes in the underwriting process must be communicated to product development actuaries.
90
What is more relevant than the absolute underwriting process?
Changes made to the process
## Footnote
Both conservative and liberal changes need evaluation and reflection in product expectations.
91
What controversial topic exists in the underwriting community?
Exceptions
## Footnote
The industry itself created the controversy surrounding exceptions in underwriting.
92
Before preferred underwriting, what percentage of applications were issued as applied for?
Roughly 90%
## Footnote
This contrasts sharply with today's preferred underwriting process.
93
In today's preferred underwriting process, what percentage can qualify for the best underwriting class?
10-20%
## Footnote
This indicates a shift towards more stringent underwriting decisions.
94
What pressure develops when many applications require a more stringent **underwriting decision**?
Significant pressure on the process
## Footnote
Many individuals may appear healthy but still face disappointing decisions.
95
What impact can granting **exceptions** have?
A discernable impact on the mortality that develops from the block of business
## Footnote
This topic warrants extensive discussion and analysis.
96
What should an organization do with **exceptions** granted in underwriting decisions?
* Fully document all exceptions
* Analyze type and frequency of exceptions
* Share information with the product actuary
## Footnote
This helps determine the impact on expected mortality and necessary adjustments.
97
How does an actuary determine the **cost of an exception**?
By looking at the premium differential between the appropriate class and the contemplated class over the expected life of the policy
## Footnote
This approach considers that individuals do not die 'on average'.
98
True or false: Organizations that frequently grant **exceptions** tend to receive more requests for exceptions.
TRUE
## Footnote
Organizations that stand firm on exceptions tend to receive fewer requests.
99
What can it take to overcome the expected loss of placing a **competitive case**?
Up to a dozen appropriately priced risks
## Footnote
This highlights the financial prudence needed in underwriting.
100
What are some **costs** incurred when underwriting is not financially prudent?
* Financial loss on mortality of the case
* Allocation of scarce resources to suboptimal units
* Opportunity costs
## Footnote
Resources include capital, underwriter time, and actuary time.
101
What is a common **misconception** regarding early claims in underwriting decisions?
That an early claim indicates a poor risk or poor decision
## Footnote
The survival of a case does not necessarily define a good risk either.
102
What should the **feedback mechanism** in underwriting consider?
* Risks that died
* Risks that lived
## Footnote
Both outcomes provide insights into the underwriting process.
103
Which functions need to be involved in discussions about claims incurred during the **contestable period**?
* Claims function
* Underwriting function
## Footnote
This collaboration helps assess the appropriateness of the underwriting process.
104
What is the **feedback mechanism** for policyholders that do not die?
Audit
## Footnote
Cases should be analyzed regularly in a peer review type of approach for continual education of the underwriting staff.
105
The results of analyses should be shared across the organization with which functional areas?
* Underwriting area
* Claims function
* Actuaries
## Footnote
Sharing results enhances the learning organization aspect, increasing the chance of meeting organizational goals.
106
What is the single most important aspect to consider when dealing with **price-sensitive cases**?
Make a completely informed decision
## Footnote
This ensures that the proposed insured is also making an informed decision.
107
What drives the **speed of change** in product pricing?
* Competition
* Changes in the underwriting process
* Expansion to additional markets
## Footnote
Speed is a critical factor in maintaining ongoing profitability.
108
What should product decisions be based on to ensure ongoing profitability?
Realistic assumptions
## Footnote
Regularly measuring experience against these assumptions is crucial.
109
What type of model should be used in the pricing approach to reflect underlying risks?
Capital model
## Footnote
The model should adjust capital allocation based on the level of risk undertaken.
110
What is essential for the success of creating **risk classes** in underwriting?
Healthy respect and coordination among underwriting, actuarial, and marketing functions
## Footnote
This collaboration maximizes the chance of successful product offerings.
111
True or false: Hoping a product is profitable is a valid strategy.
FALSE
## Footnote
An honest assessment of profitability expectations is essential for effective decision-making.
ALU 202
flashcards
Decks in class (7)
# Cards
