1
Q
What is a Cost Benefit Study?
A
A comparison of costs associated with underwriting requirements and the benefits from identifying extra mortality
Benefits refer to insurance dollars that would be paid out if the requirement were not ordered.
2
Q
What are protective value studies?
A
Another term for cost-benefit studies
These studies assess the value of underwriting requirements.
3
Q
Why are cost/benefit studies important in the risk-management process?
A
They assess whether the investment in obtaining risk evidence produces an adequate return
This helps justify underwriting expenses.
4
Q
What do underwriting requirement expenses often face in organizations?
A
Challenges due to high or increasing costs
These expenses are typically a budgetary item in the new business and underwriting department.
5
Q
What skills should underwriters develop to add value to their organization?
A
Skills to communicate and defend both expenses and savings
This includes understanding the mortality benefit side of the equation.
6
Q
What is a primary objective of the chapter regarding underwriters?
A
To help underwriters understand both sides of the cost/benefit equation
Focus is on the mortality benefit side.
7
Q
Why do cost/benefit studies need updating?
A
Due to changes in pricing, mortality tables, actual experience, and the competitive landscape
New vendors may introduce different relevant information for underwriters.
8
Q
What do insurance companies create for age-and-amount underwriting requirements?
A
Tables indicating when a requirement is needed
These tables are based on various factors, including cost/benefit studies.
9
Q
What defines the break-even points in cost/benefit studies?
A
The age and face amount at which a requirement is justified
Cost per case and mortality rate by age are fixed numbers used in these calculations.
10
Q
How does face amount affect the cost/benefit calculation?
A
It determines the total benefit from extra deaths
For example, two extra deaths at a $1 million face amount result in $2 million in payments.
11
Q
What is the purpose of dynamic requirement testing in life insurance underwriting?
A
To determine the proposed insured’s requirement path based on key features at each decision tree branch
Conditional probability defines what requirements to pursue.
12
Q
True or false: Fewer cost/benefit studies are being published in the industry now compared to the past.
A
TRUE
The industry still values these studies but fewer are being conducted.
13
Q
What role do actuaries play in the underwriting process?
A
- Contribute to underwriter’s skill set growth
- Help explain the benefit side of cost/benefit studies
- Assist in defending numerical findings
Actuaries are allies to underwriters in conducting studies.
14
Q
What software is recommended for number crunching in cost/benefit studies?
A
Excel
Spreadsheets can handle summarizations, table constructions, and various calculations.
15
Q
Fill in the blank: Underwriters should strive to perform cost/benefit studies on their own to enhance their _______.
A
value
Mastering skills reduces hand-offs and workload for others.
16
Q
What does the term frequency & severity refer to in actuarial circles?
A
- Hit rate (frequency of debits found)
- Average number of debits found (severity of findings)
This concept helps estimate mortality changes based on requirements.
17
Q
What is the mortality impact if an abnormal HbA1c is ratable on 4% of cases with an average rating of +75%?
A
3% increase in mortality
Calculated as 4% x 75%.
18
Q
What should underwriters keep in mind regarding mortality assumptions?
A
They impact product pricing and company guidelines
Different companies may have varying decisions based on these assumptions.
19
Q
What is a common question asked of underwriters regarding requirements?
A
How will mortality change if a requirement is not required?
This can be addressed with a thorough study or a quick estimate.
20
Q
What percentage of premium is assigned to cover mortality for direct carriers?
A
50%
This indicates the significant portion of premium allocated to mortality coverage in the life insurance industry.
21
Q
A 3% increase in mortality reduces profitability by how much?
A
1.5%
This relationship highlights the sensitivity of profitability to changes in mortality rates.
22
Q
For every 2% increase in mortality, profits reduce by what percentage?
A
1%
This rule of thumb helps in understanding the impact of mortality on profit margins.
23
Q
What is the HbAlc test ratable percentage of the time?
A
4%
This low rate indicates that most of the time, the test does not yield significant findings.
24
Q
What is the sentinel value of a test?
A
An important factor influencing insurance applications
It refers to the impact of testing requirements on individuals’ decisions to apply for insurance.
25
True or false: **Sentinel value** will show up in a cost/benefit study.
FALSE
## Footnote
Sentinel value is significant but often remains unquantified in cost/benefit analyses.
26
What is a classic requirement example mentioned in the text?
Cocaine testing
## Footnote
This example illustrates the prevalence of certain tests in the insurance population compared to the general population.
27
What does **anti-selection** occur when?
The age-and-amount grid is out of step with the competition
## Footnote
This can attract applicants whose medical conditions may go undetected.
28
What is the **1% Rule** in underwriting?
Converts present value of death benefits to 1% of face amount
## Footnote
This model provides a quick estimation method for underwriters.
29
For a **$500,000 face amount**, what is the present value (PV) of future benefits according to the 1% Rule?
$5,000
## Footnote
This calculation is based on the 1% of the face amount.
30
If a case warrants a rating of **table B** or fifty debits, what does the PV translate to?
$2,500
## Footnote
This is calculated as 50% of the PV for the face amount.
31
What does **protective value dollars** equal?
Debits (%) x PV
## Footnote
This formula helps in estimating the financial impact of debits on mortality dollars.
32
The 1% Rule is too high for which age group?
Younger ages
## Footnote
Conversely, it is too low for older ages, indicating its limitations.
33
What does **NSP** stand for in life insurance underwriting?
Net Single Premium
## Footnote
NSP refers to the premium collected today that covers all future benefit payments for a given face amount.
34
The **1% rule** is a simplified model for what in life insurance?
Net Single Premium (NSP)
## Footnote
It indicates the amount needed to cover all future claims for a specific policy.
35
What is the purpose of **Present Value (PV)** in cost/benefit studies?
To roll back all future claims to one present value number
## Footnote
This number, when collected today, is sufficient to cover all future death benefit payments.
36
In cost/benefit studies, what is typically reported as the **pricing horizon**?
The period over which deaths are observed and counted
## Footnote
Most studies consider deaths expected to occur 10-20 years into the future.
37
What is the mortality rate for a **45-year-old non-smoker** in policy year 1 according to the 2015 VBT?
0.38 deaths per 1,000
## Footnote
This data is used for calculating premiums and expected claims.
38
If 1,000 individuals buy $1,000 life insurance policies, how much premium is needed to cover anticipated deaths in year 1?
$1
## Footnote
This is a simplified example showing how premiums can cover death claims.
39
Fill in the blank: The **fundamental rule of premium** states that if 1,000 individuals all bought $1,000 life insurance policies and one person dies every year, everyone pitches in $_______ to cover the benefit.
$1
## Footnote
This illustrates the basic principle of risk pooling in insurance.
40
What is the **total anticipated deaths** after 10 years for 1,000 individuals insured according to the provided mortality rates?
9.96 deaths
## Footnote
This is calculated by summing the deaths per 1,000 over the 10-year period.
41
What does the **SOA** stand for in the context of mortality rates?
Society of Actuaries
## Footnote
They provide public access to mortality tables used in insurance studies.
42
True or false: The **1% rule** indicates that a company needs to collect $5,000 to cover all future claims for each $500,000 policy.
TRUE
## Footnote
This rule simplifies the understanding of how premiums relate to future claims.
43
What is the **stated interest rate** mentioned in the text?
5%
## Footnote
This interest rate is used for calculating the growth of funds to meet future claims.
44
The formula for future value growth is expressed as (1 + **interest rate**) ^ years. What is the future value of $1.00 after 10 years at a 5% interest rate?
$1.63
## Footnote
This is calculated using the formula (1 + 5%)^10.
45
To find out how much needs to be collected today to grow to $1.00 in the future, what is the formula used?
1 / (1 + **interest rate**)
## Footnote
For a 5% interest rate, this results in $0.61.
46
If 1,000 insureds start, and a **4% lapse rate** is applied, how many remain after 1 year?
960
## Footnote
1,000 - (1,000 x 4%) = 960 remain.
47
What term describes the tables created by actuaries that consider both **lapses** and **deaths**?
Double decrement tables
## Footnote
These tables account for reductions in the population due to both factors.
48
After 10 years of constant lapses at a 4% rate, what percentage of the original population remains?
66.48%
## Footnote
This is calculated using the formula 96% ^ 10.
49
What is the **net single premium (NSP)** or present value of mortality dollars for 45-year-old non-smoker males over the next 10 years?
$5.84
## Footnote
This value represents the amount needed to cover expected death claims.
50
True or false: A **cost/benefit study** is the same as a mortality study.
FALSE
## Footnote
A cost/benefit study incorporates assumptions about mortality, interest, and lapse rates.
51
What is the impact of **lapses** on the observed mortality rates?
Reduces deaths observed
## Footnote
The reduction in the insured population due to lapses decreases the number of deaths counted.
52
To identify the present value of an increase in mortality, what should be subtracted?
Standard NSP from substandard NSP
## Footnote
This calculation helps in understanding the impact of different risk ratings.
53
What is the purpose of the **NSP calculations** in underwriting?
To assess mortality differences before and after requirements
## Footnote
NSP stands for Net Single Premium.
54
How do some companies calculate the **present value of mortality dollars**?
By converting debit into present value by 0-year age ranges
## Footnote
This method is not technically correct due to different survival patterns.
55
What is the **PV for 100 debits** for a 45-year-old male according to the 2015 VBT?
$9.84/$1,000
## Footnote
This value is slightly less than $10/$1,000, which is 1% of the face amount.
56
What is the **lapse rate** mentioned in the table?
4%
## Footnote
This rate is used in the calculations for the present value.
57
What is the **interest rate** used in the calculations?
5%
## Footnote
This rate is also part of the present value calculations.
58
What is the first step in producing a **study** according to the document?
Identify the Goal/Object of the Study
## Footnote
All stakeholders should understand the study goal before proceeding.
59
Who should be included as **stakeholders** in the study?
* Underwriter
* Actuary
* Vendor procurement
* Medical director
* IT department
* Data scientist
* Marketing department
* Research staff
* Upper management
## Footnote
Stakeholder buy-in is crucial for the acceptance of study results.
60
True or false: The document implies there is only one way to perform a **cost/benefit study**.
FALSE
## Footnote
The document emphasizes that the outlined steps are not the only method for conducting a study.
61
What is the **minimum sample size** needed to apply confidence intervals assuming a normal distribution?
35 hits
## Footnote
This is needed in any given cell to allow for the application of confidence intervals.
62
To define sample size, divide 35 by the **expected hit rate**. If the hit rate is 1%, what is the sample size?
3,500 cases
## Footnote
This means that 3,500 cases need to be considered in the sample for a 1% hit rate.
63
True or false: A sample size of 100 records is adequate if the hit rate is expected to be 1%.
FALSE
## Footnote
A sample size of 100 records is inadequate as there is a 37% chance it would not contain a single hit.
64
What types of cases should be included in the **sample selection** for underwriter review?
* Rated cases
* Declined cases
* Not taken cases
## Footnote
The block of cases should not consist solely of issued and placed cases.
65
What is the **fundamental goal** of underwriting?
To identify impairments and assign debits for each impairment
## Footnote
This is crucial for conducting a cost/benefit study.
66
In a cost/benefit study, a requirement is only valuable when it finds _______.
debits
## Footnote
Understanding this helps reduce the workload for underwriting staff.
67
Who is responsible for rendering **underwriting judgement**?
The underwriter
## Footnote
Underwriting judgement is essential for creating cost/benefit studies.
68
What are **routine age-and-amount requirements** focused on?
They are the focus of most cost/benefit studies
## Footnote
These are ordered as standard procedures.
69
What does 'for cause' requirements imply in underwriting?
They are expected to result in adverse information
## Footnote
These are ordered to clarify or quantify a rating or resolve questions about impairments.
70
More than one requirement can find the same _______.
impairment
## Footnote
This is a common occurrence in underwriting.
71
What is a key fundamental of underwriting regarding impairments?
Recording the rating for an impairment
## Footnote
This includes listing the impairment, debits, and requirements that found the impairment.
72
What are two methods to assign value to requirements that find impairments?
* Share debits equally
* List requirements in a predefined order
## Footnote
These methods help in determining the value of each requirement.
73
What does **timing** refer to in the context of life insurance underwriting requirements?
How long it takes to obtain a requirement
## Footnote
If obtained at application time, it rises to the top of the list; if delayed, it falls lower.
74
What does **friction** indicate in the life insurance purchasing process?
The effort expended by the customer to purchase life insurance
## Footnote
Lower friction typically leads to a higher likelihood of purchase.
75
What should be the focus of **case documentation** in life insurance underwriting?
Keeping it to a minimum
## Footnote
Focus on items necessary to produce findings for the study goals.
76
What is the benefit of leveraging the **IT department** in life insurance underwriting?
Populate data on cases to be reviewed
## Footnote
IT can download datasets in common formats like CSV, reducing redundant data entry.
77
What type of data format is commonly used across the industry for datasets?
CSV file format
## Footnote
Easily read in table format by Excel or other spreadsheet languages.
78
What is the purpose of using **lookup tables** in Excel for underwriting?
Generate ratings for BMI based on underwriting guidelines
## Footnote
This helps streamline the underwriting process.
79
In the case example study, what was the sample population reviewed?
1,000 male NS applicants ages 50-59
## Footnote
Only 150 were substandard/declined cases.
80
Why is the sample reviewed by underwriters considered a **nonrandom sample**?
Cases selected were targeted based on underwriting decision
## Footnote
Only substandard/decline cases are reviewed to maximize underwriter time.
81
What does 100 debits equal for male NS, 55-year-olds in terms of cost?
$24.76/$1,000
## Footnote
Dividing by 100 converts the value to 1 debit, which equals $0.25/$1,000.
82
What does the **total expense** per case amount to?
$79.50
## Footnote
This includes vendor expenses, underwriting time, and incidental costs.
83
How many cases were targeted for review by the underwriters?
150
## Footnote
These were substandard/declined cases from a total of 1,000 cases in the study.
84
What is the **total number of debits** found in the study?
1,800
## Footnote
This total includes various ratings of debits across the cases reviewed.
85
What is the **average debits** for rated cases?
112.5
## Footnote
This is calculated from the total debits divided by the number of hits (16 cases).
86
What is the **average debits** relative to the whole population of 1,000 cases?
1.8
## Footnote
This average is calculated from the total debits divided by the total population of cases.
87
What is the **present value (PV$)** of 1 debit in extra mortality dollars?
$0.25/$1,000
## Footnote
This value is used to calculate the benefit per case.
88
What is the **break-even face amount** calculated from the cost per case and average PV$ per case?
$177,000
## Footnote
This is derived from dividing the cost per case by the average PV$ per case.
89
What is the **Benefit/Cost ratio (B:C)** when the face amount is $500,000?
$2.83
## Footnote
This indicates that for every $1 spent, the mortality found is $2.83.
90
Fill in the blank: The **cost per case** is fixed at _______.
$79.50
## Footnote
This cost includes all associated expenses for underwriting.
91
What is the **average PV$ benefit per case** calculated from average debits?
$0.45/$1,000
## Footnote
This is calculated by multiplying average debits by the PV$ of 1 debit.
92
What is the **average face amount** in the total sample population?
$350,000
## Footnote
This average is used to summarize the overall study findings.
93
Calculate the **benefit** using the formula: Benefit = Face Amount x PV x 1,000. What is the benefit for a face amount of $350,000?
$157,500
## Footnote
The calculation uses a PV of 0.00045.
94
What is the **cost** calculated in the study?
$79,500
## Footnote
The cost is derived from multiplying $79.50 by 1,000.
95
What is the **B/C ratio** calculated in the study?
1.98
## Footnote
The B/C ratio is calculated as Benefit / Cost.
96
What is the **breakeven point** identified in the study?
$177,000
## Footnote
This point indicates where benefits equal costs.
97
True or false: The model described was used by **Frank Pieplow** in his ALU chapter on Cost/Benefit Studies.
TRUE
## Footnote
The model mirrors descriptions from Harry Woodmen's article on paramedicals.
98
What does the study limit its focus to regarding **age**?
50-59-year-old males
## Footnote
This demographic is why the age 55-year-old value was chosen for translating 1 debit into present value dollars.
99
What is required for a more expansive study covering a wider age range?
More debit-to-present-value-dollar translations
## Footnote
PVSs are required for each decennial age band, gender, and tobacco status.
100
In the case example, what does **25 cents** represent?
The value of 1 debit
## Footnote
This value is used for converting debits into benefit dollars.
101
What does the actuarial department supply to the underwriter in the second case example study?
NSP tables
## Footnote
These tables display risk class present value dollars per thousand dollars of life insurance.
102
How does the underwriter produce the **protective value**?
Multiplying the answer times face amount/$1,000
## Footnote
This calculation is based on the difference in rating before and after the requirement is considered.
103
What is the **average face amount** in the total sample population?
$350,000
## Footnote
This average is used to summarize the overall study findings.
104
Calculate the **Benefit** using the formula provided: Benefit = _______.
$350,000 x 0.00045 x 1,000
## Footnote
This results in a Benefit of $157,500.
105
What is the **Cost** calculated in the study?
$79.50 x 1,000
## Footnote
This results in a Cost of $79,500.
106
What is the **B/C ratio** calculated in the study?
$157,500 / $79,500 = $1.98
## Footnote
This ratio indicates the relationship between benefits and costs.
107
What is the **breakeven point** identified in the study?
$177,000
## Footnote
This point indicates where benefits equal costs.
108
Who used the model described in the study for **Cost/Benefit Studies**?
Frank Pieplow
## Footnote
His work mirrors that of Harry Woodmen in the article on 'Paramedicals'.
109
What does the **value of 1 debit** represent in the case example?
25 cents
## Footnote
This value is used to convert debits into benefit dollars.
110
The study is limited to **which age group**?
50-59-year-old males
## Footnote
This limitation affects the translation of debits into present value dollars.
111
What is required for each **decennial age band** in the study?
PSs for each age band, gender, and tobacco status
## Footnote
This ensures accurate risk assessment across different demographics.
112
In the case example study, what does the underwriter multiply to produce the **protective value**?
Answer times face amount/$1,000
## Footnote
This calculation is based on risk class present value dollars per thousand dollars of life insurance.
113
What does the underwriter populate in the **mortality benefit calculation**?
* Age
* Gender
* Smk/Status
* Debits
* Face Amt
## Footnote
These variables are essential for determining the present value of mortality benefit.
114
How do you calculate the **PVA x Face/1,000**?
Multiply the [PVA/$1,000] x Face Amt/1,000
## Footnote
This calculation determines the present value of mortality benefit for an individual policy.
115
What is the **present value of mortality benefit** for record 5?
$8,666
## Footnote
This is calculated as 350 x $24.76.
116
What is the **total present value of mortality benefit dollars** from table 4?
$157,257
## Footnote
This figure closely approximates the $157,500 summary finding described in version 1.
117
What percentage of **EKGs produced a hit** in the study?
1.6%
## Footnote
This indicates the rarity of findings in underwriting.
118
What is the average number of **debits found per case** in the study?
1.8 debits
## Footnote
This can be calculated as total debits/total population = 1,800/1,000.
119
If the EKG is removed, mortality will increase by _______ in 50-59-year-olds.
1.8%
## Footnote
This is based on the finding that 1 debit equals a 1% increase in mortality.
120
What is the overall **B:C ratio** for the study?
$1.98
## Footnote
This means for every $1 spent, the return is $1.98.
121
What is the break-even point for obtaining a **resting EKG**?
$177,000
## Footnote
This figure represents the cost-effectiveness of obtaining an EKG.
122
What additional considerations are mentioned regarding the **mortality benefit calculation**?
* Additional expense surcharge
* Cost of good business lost
* Expenses for additional clarification requirements
## Footnote
These factors can affect the overall calculation but are not covered in detail.
123
What influences results in the context of requiring an **EKG**?
Sentinel value
## Footnote
Sentinel value can lead to different interpretations of the necessity of obtaining an EKG.
124
What might companies insist on regarding the **B:C ratio** before ordering a requirement?
2:1 or higher
## Footnote
This ratio is often used as a threshold for making decisions about requirements.
125
What is a potential alternative test to the **EKG** mentioned in the text?
NT-proBNP
## Footnote
NT-proBNP could serve as a replacement test in certain scenarios.
126
How do changes to the **underwriting age-and-amount grid** affect communication?
Needs to be communicated to automatic reinsurers
## Footnote
Changes will impact the carrier's mortality and the reinsurers.
127
What is a potential consequence of requiring an **EKG**?
Good business lost
## Footnote
Requiring an EKG may deter potential clients or business opportunities.
128
What should stakeholders consider after the study has been completed?
Varying views on company actions
## Footnote
Different stakeholders may have conflicting opinions on the next steps for the company.
129
What is a key factor to consider regarding how changes affect **product price**?
How much changes affect product price
## Footnote
Understanding the financial implications of changes is crucial for decision-making.
130
True or false: The competition's actions do not influence the decision to require an **EKG**.
FALSE
## Footnote
The competition's practices can significantly impact the decision-making process.
ALU 202
flashcards
Decks in class (7)
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