What are cost-benefit studies
Integral part of the risk-management process
provides info to assess if the dollars invested in obtaining evidence to assess a risk are producing an adequate return on the company’s investment
What is a cost benefit study?
A study that compares cost (expenses) associated w/gathering and analyzing underwriting requirement info, with the benefit dervised from the identification of extra mortality found by the requirement.
Cost benefit studies are an integral component used by companies to do what?
set direction for the underwriting department
are cost-benefit studies similar from company to company?
No, they are unlikely to replicate and may not resemble findings from other companies.
What are some factors to consider in comparing other companies’ age-and-amount limites for underwriting requirements with thoses used by any company in particular, aside from instinct?
- the bases used to set a company’s current limit,
- other requirements used and the related limits used
- the underwriting manual used and how its used
- the uw philosophy used versus that used by peer companies
- underwrirting proficiency in case
- Target market
- distribution system
- products marketed
9.mortality and other expenses
10 experience-monitoring capabilities.
What are the steps in conducting a study?
determine the objectives to be acheived, such as requirements to be reviewed. > this determines the kind of data to capture. > assure its precise. > determine whose involved and play what roles.
What is underwriting judgement?
The underwriter uses their discretion to make a decision
What is the sentinel effect
this deters proposed insurers with known or suspected impairements or abN lab findings from applying for insurance or cause them to apply for amount below the requirement threashold limits. Others walk away when they learn a test is needed.
Will not show up in a cost/benefit study but that does make them unimportant.
What is the objective of the methodology of the Sentinel effect?
Antiselection
This occurs when a company’s age/amt rules result in fewer requirements when compared to other companies.
This might attract applicants who can qualify for coverage because medical conditions they have may not be required.
The 1% rule
“Back of the envelope” model based on converting present value of death benefits to 1% of the face amount.
EX) $500K FA, the PV of future benefits is 1% x $500K = $5K per $500K of life insurance.
When quantifying and analyzing studies. After changes are made based on the results you may find you need to investigate the ripple effect of the changes. For example when changes are made in using underwriting requirements, it can be illuminating to evaluate the potential impact on what other changes?
- broad measures, such as number of applications received,
- incidence of adverse underwriting decisions,
- average time taken to reach a final decision
- incidentce of request from producers for exceptions
- total out of pocket expenses for u/w requirements
- choice of incidence of use of other requirements.
First Step to Cost-Benefit Study
Determine the objectives to be achieved, such as which underwriting requirements to review. The nature of the study to be conducted and the kind of data to capture will depend on which requirement is to be reviewed.
What is the next step to Cost Benefit Study?
Define value. The fundamental goal of underwriting is to identify impairments and assign debits for each impairment.
The study takes it one step further and asks: what requirement(s) found the impairment? A requirement is only valuable when it finds debits.
Age/amt req are the focus on most cost/benefit studies.
Friction refers to what?
the effort expended by the customer to purchase the life insurance.
Factors affecting which underwriting requirement to evaluate
- Competition
- Perception (the a particular requirement is no longer valuable at the certain age and amount threshold).
- Increasing cost of doing business
What are some examples of cost-benefit studies for various u/w requirements?
- APS
- CXR
- Claims trend analysis
- EKG
- inspection reports
- Laboratory tests
- MIB
- methodology of conducting cost-benefit studies
- MVR
- Older ages
- PMED’
- Preferred u/w
- px hx.
Steps in conducting cost-benefit study
- Select a random sample of cases with underwriting requirements to be evaluated. Should represent dec, pp, and incomplete cases.
- Cases should require full underwriting.
- Items to consider recording
- Cost-benefit or cost-effectiveness of each requirement can be estimated by: (1) determine proportion of requirements resulting in an adverse decision. (b) Determine the average % of extra mortality uncovered. (c) Estimate the dollar value of protection per dollar spent on the requirement if it was solely responsible for the adverse action. (d) Net savings from obtaining a particular requirement are estimated by subtracting their cost from their value. (e) The value of the requirement for supplemental benefits (GI, TDB, ADB).
- Recording information for study purposes should be done by a small number of individuals (preferably underwriters) to assume uniformity and accuracy in the details coded.
- The additional costs aside from the requirement should be calculated (i.e., cost of requesting, time to review, etc).
- In addition - time taken to obtain various req’ts, as well as process various types of apps. The expenses associated w/ underwriting req’ts in comparison to the assumptions used in determining gross premiums.
What is the break-even amount of insurance?
the particular amount at which the increase in mortality cost anticipated from not obtaning an u/w requirement is counterbalanced by the corresponding reduction in underwriting cost.
True or False
The extent to which the break-even amount deos not reflect all fo the important costs and benefits, whether quantifiable or not, should be considered at least subjectively in the process of judgementally adjusting the break-even amount to a level that seems to be most reasonable given the strengths and limitations of the study.
True
True or False,
the higher the amount of insurance to be written without a particular u/w requirement the greater is the risk of speculation and/or anti-selection,.
True,
Net single premium
the premium collected today that covers all future benefit payments for a given face amount.
the 1% rule is simplified in the NSP model.
T/F. Published studies often use mortality rates from industry tables that are free and publicly available on the society of actuaries website.
True.
Pricing horizon
the period over which deaths are observed and counted.
