10. (4 points) You are auditing the GAAP results for ABC Life, a company that has recently
begun worksite marketing with the introduction of a new simplified issue version of its
flagship whole life product.
•A bonus commission was used to promote the product’s launch.
•Pricing mortality for the new product is based on a blend of the company’s
experience and industry worksite marketing experience.
•The provision for adverse deviation (PAD) on the new product is the same as
the PAD for the flagship product.
•A new valuation system is being used for both products.
(a) Explain the general guidelines for performing a satisfactory audit.
(b) Describe what items you would highlight as part of your work plan.
(c) Assess the appropriateness of the PAD for the new product.
COURSE 8I: Fall 2003 -12- GO ON TO NEXT PAGE
Individual Insurance
Afternoon Session
11. (11 points) XYZ Life is a U.S. mutual life insurance company that sells individual term
and participating whole life insurance products. XYZ is developing either a flexible
premium universal life insurance product (FLEXUL), or a fixed premium universal life
insurance product (FIXUL).
You are given the following for the proposed FIXUL product, for a male, issue age 35:
•Premium is $1,200 payable annually for life.
•The initial face amount is $100,000.
•Guaranteed face amount is $100,000 for life.
•Current assumptions are 5.5% credited interest rate and cost of insurance
rates equal to 50% of the 1980 CSO Male Aggregate Mortality table.
•Guaranteed and Nonforfeiture assumptions are 4.5% interest and 100% of
the 1980 CSO Male Aggregate Mortality. Assume that these assumptions
are acceptable under the Standard Nonforfeiture Law for Life Insurance
Model Regulation.
•Cash surrender values will be the current fund value, less the applicable
policy year surrender charge.
•Surrender charges are 125% of the annual premium in years 1-5, grading
linearly to zero at the end of year 15.
Key tabular values for a male, issue age 35:
Current Assumptions Guaranteed Assumptions
End of
Policy Year
Fund
Value
PV of
Future
Benefits
PV of $1
Premium
Paid
Annually
Fund
Value
PV of
Future
Benefits
PV of $1
Premium
Paid
Annually
At Issue N/A $13,060 $16.67 N/A $21,620 $18.20
1 $1,159 13,657 16.56 $1,040 22,425 18.01
2 2,375 14,279 16.44 2,113 23,256 17.82
3 3,652 14,926 16.32 3,221 24,113 17.62
4 4,991 15,600 16.19 4,364 24,998 17.42
5 6,396 16,301 16.05 5,540 25,908 17.21
COURSE 8I: Fall 2003 -13- GO ON TO NEXT PAGE
Individual Insurance
Afternoon Session
11. Continued
(a) Identify internal and external constraints that might cause XYZ to be unsuccessful
offering universal life insurance.
(b) Describe product characteristics that distinguish fixed premium UL from flexible
premium UL.
(c) Determine the fifth year current cash surrender value for a male issue age 35 and
verify that it complies with the fifth year cash surrender value as calculated under
the Universal Life Insurance Model Regulation. Show all work.
(d) Assess the benefits of using reinsurance and issuing surplus notes to assist with
capital management as the new product line grows.
COURSE 8I: Fall 2003 -14- GO ON TO NEXT PAGE
Individual Insurance
Afternoon Session
12. (7 points) A Canadian insurance company sells only universal life with equity and
segregated fund investment options. The company would like to increase sales by
introducing its product in the United States.
You are given the following information about the current universal life product:
•Flexible premiums within limits allowed by Canadian and U.S. tax laws
•Cost of insurance charges are level to age 100
•Per policy annual charge of $60
•Investment options: 5-year guaranteed interest, Canadian equity, U.S.
equity, International equity
•Minimum death benefit is 75% of premiums paid
•Surrender charges are 100% of the target premium for 5 years, grading to
zero by the end of 10 years
•An annual bonus equal to 0.25% of the accumulation fund is paid starting
in year 15
(a) With respect to introducing this product in the U.S., assess the appropriateness of
each of the following target marketing strategies.
(i) Undifferentiated marketing
(ii) Concentrated marketing
(iii) Differentiated marketing
(b) Assess the appropriateness of the UL product features and recommend changes
that would make this product easier to introduce in the U.S.
(c) Describe factors to consider when setting future premium assumptions for
valuation under the Canadian Asset Liability Method.
COURSE 8I: Fall 2003 -15- GO ON TO NEXT PAGE
Individual Insurance
Afternoon Session
Question 13 pertains to the case study.

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