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Course 8I: Fall 2005 -1- GO ON TO NEXT PAGE
Individual Insurance – Canada
Morning Session
**BEGINNING OF EXAMINATION 8**
INDIVIDUAL INSURANCE – CANADA
MORNING SESSION
1. (4 points) A recent mortality experience study shows that the substandard portion of the
company’s life insurance policies has worse than expected experience.
(a) Explain reasons substandard mortality experience may be higher than expected.
(b) Describe methods to reflect substandard risks in life insurance products.
(c) Determine the best method to reflect each of the following substandard risks:
(i) Obesity with diabetes
(ii) Recovering from a temporary impairment
(iii) Hazardous occupation
(iv) Normal blood pressure but family history of coronary artery disease
Course 8I: Fall 2005 -2- GO ON TO NEXT PAGE
Individual Insurance – Canada
Morning Session
2. (5 points) A U.S. life insurance company is proposing a flexible premium deferred
annuity with the following features:
%26#8226; Each deposit receives a guaranteed interest rate for the first five years based
on new money rates with an annually renewable interest rate thereafter.
%26#8226; The minimum interest rate credited on funds and used in determining
minimum nonforfeiture amounts is guaranteed to be no less than 3%.
%26#8226; The surrender charge is 15% of the current contract year deposit, plus 10%
of the prior contract year deposit.
%26#8226; Surrender charges are waived upon annuitization.
%26#8226; Return of principal is guaranteed during the first contract year.
%26#8226; A death benefit is not provided during the deferral period.
%26#8226; The annuitization bonus is 2% of account value.
%26#8226; An annual fee of $75 is charged at the beginning of each contract year.
%26#8226; An administrative load of 6% is applied to each deposit.
(a) Determine changes needed to the proposed product design in order to meet the
requirements of the Standard Nonforfeiture Law for Individual Deferred
Annuities.
(b) For a contract purchased on January 1, 2005, you are given:
Five-year constant maturity treasury rates
January 1, 2005 5.85%
January 1, 2006 5.50%
January 1, 2007 5.25%
January 1, 2008 4.75%
January 1, 2009 4.00%
Credited interest rate from January 1, 2005 to January 1, 2010 4.00%
Nonrefundable state premium tax rate 2.00%
Initial deposit paid on January 1, 2005 $50,000
Additional deposit paid on January 1, 2008 $5,000
Partial withdrawal on January 1, 2009 $10,000
Calculate the minimum nonforfeiture value allowed as of December 31, 2009
according to the Standard Nonforfeiture Law. Show all work.
Course 8I: Fall 2005 -3- GO ON TO NEXT PAGE
Individual Insurance – Canada
Morning Session
3. (5 points) You are given the following assumptions for a variable annuity product with
a guaranteed minimum death benefit (GMDB):
Account Value at time 0 $1,500
Death Benefit at time 0 $1,750
Deposit Paid to Date $1,750
Net Asset Charges 1.00%
Valuation Rate 5.50%
Assumed First Year Drop -14%
Assumed Fund Recovery 14%
Death Benefit Guarantee Type Roll-up
Roll-up Interest Rate 5%
Duration of Contract 5 years
Valuation Time (t) 0 1
Surrender Charges as a percentage of deposit paid 7% 6%
GMDB Mortality Rates per thousand - 17.192
Survival Function 1.0000 0.9828
t
Projected Integrated
Reserve
2 1,409.22
3 1,419.49
4 1,425.54
5 1,416.31
(a) (1 point) Explain the calculation of the integrated reserve according to Actuarial
Guideline 34.
(b) (4 points) Calculate the integrated reserve at time 0, according to Actuarial
Guideline 34. Show all work.
Course 8I: Fall 2005 -4- GO ON TO NEXT PAGE
Individual Insurance – Canada
Morning Session
Questions 4 and 5 pertain to the Case Study.
4. (9 points) Saturn Life is developing a new variable annuity product that will provide:
%26#8226; 50 different investment options.
%26#8226; A variety of guaranteed death, annuity, income and withdrawal benefit options.
%26#8226; Asset-based expenses that vary with the account value of the policy.
(a) Define each step in the product development process according to LOMA.
(b) Determine and define for this product development project the applicable:
(i) corporate growth strategy,
(ii) marketing strategy, and
(iii) type of innovation.
(c) In developing expected lapse assumptions for the new product:
(i) List the factors affecting lapse rates.
(ii) Explain how the expected lapse assumptions would be impacted by each of
the proposed design features, and justify your answer.
(d) The entire product development project is expected to cost $10 million. Saturn’s
variable annuity products are expected to return 1% of premium annually after-tax.
The projected increase in sales is:
Year Without New Product With New Product
1 10% 210%
2 10% 60%
3 10% 10%
Calculate the project’s break-even year. Show all work.
Course 8I: Fall 2005 -5- GO ON TO NEXT PAGE
Individual Insurance – Canada
Morning Session
Questions 4 and 5 pertain to the Case Study.
5. (13 points) As the product actuary for Mercury Life, you have been asked to analyze the
feasibility of adding an equity indexed annuity to the fixed annuity product line.
(a) (5 points) You are given the following product design:
%26#8226; The index period is 6 years.
%26#8226; The investment earnings rate is 5.5%.
%26#8226; The first year commission is 4.0% of premium.
%26#8226; Other expenses and profit equal 5.0% of premium.
%26#8226; Guaranteed minimum account value is calculated using 90% of premium and
3.00% interest.
%26#8226; Index account value is calculated using 100% of premium and 100%
participation rate guaranteed for 6 years.
(i) Calculate the affordable option budget. Show all work.
(ii) Determine changes and additions to the product design that would reduce
the actual option costs down to the affordable option budget.
(b) (1 point) Explain the impact of equity volatility on equity indexed annuity
pricing.
(c) (5 points) You are given the results from the initial pricing run:
Time Profit
0 - 25
1 60
2 0
3 0
4 42
5 12
6 - 70
Assume Mercury Life is willing to pay 5% for borrowed money.
(i) Calculate the ROI for this product using the Generalized ROI
Calculation Method. Show all work.
(ii) Assess the calculated ROI compared to Mercury Life’s profit objective.
(iii) Explain practical problems related to calculating ROI.
(d) (2 points) Evaluate the feasibility of adding an equity indexed annuity with
respect to Mercury Life’s target market.
Course 8I: Fall 2005 -6- GO ON TO NEXT PAGE
Individual Insurance – Canada
Morning Session
6. (9 points) You are reviewing a block of flexible premium UL policies.
(a) Describe steps to determine the minimum cash surrender value for this type of
product according to the NAIC Universal Life Model Regulation.
(b) Your analysis reveals a widening gap between value-based reserves and cash
values. You believe a new experience study is needed to revise the value-based
reserve lapse assumptions.
(i) You are given:
%26#8226; The existing lapse assumption is based on an internal study conducted
in 1999 of lapses of permanent life policies during the period 1996 to
1998, which included data from an acquisition in 1996.
%26#8226; Current portfolio lapse data cannot distinguish between fixed and
flexible premium UL policies.
%26#8226; Industry experience is trending toward lower lapse rates.
Explain how the key principles in studying experience to set assumptions
provide guidance for these specific issues.
(ii) Describe considerations when adjusting a best estimate experience
assumption with provision for adverse deviation.
(c) You are given:
%26#8226; The block contains both level cost of insurance (COI) policies and yearly
renewable term (YRT) cost of insurance policies.
%26#8226; The best estimate ultimate lapse rate for the level COI business is 1% with an
MfAD of 10%.
%26#8226; The best estimate ultimate lapse rate for the YRT COI business is 8% with an
MfAD of 15%.
Describe the lapse component calculation of a year-end 2005 MCCSR
submission, including prescribed assumptions for the block.
Course 8I: Fall 2005 -7- GO ON TO NEXT PAGE
Individual Insurance – Canada
Morning Session
7. (7 points) XYZ Life produces value-based financial statements.
You are given:
%26#8226; The hurdle rate is 12%.
%26#8226; The risk-free rate of return is 4.0%.
%26#8226; The inflation rate is 1.5%.
%26#8226; Beta is 2.0.
(a) (1 point) Describe the CAPM formula and calculate the implied rate of return on
average equity investments.
(b) (2 points) Describe validation techniques used to evaluate the accuracy and
reliability of model office projections used in value-based financial anlysis.
(c) (4 points) ABC Life offers the same term life insurance product as XYZ. XYZ’s
premiums are 5% higher than ABC’s. Both companies have the same inflation,
investment and hurdle rates.
XYZ has priced the product to achieve an IRR of 13%.
(i) Compare first year earnings for XYZ for the following reporting methods.
%26#8226; PPM,
%26#8226; Value-based financial reporting, and
%26#8226; Level ROE financial reporting.
(ii) Determine which company would report higher first year earnings under
each of the reporting methods. Justify your answer.
Course 8I: Fall 2005 -8- GO ON TO NEXT PAGE
Individual Insurance – Canada
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