16. (10 points) Mercury Life’s traditional insurance product offerings have been successful
with its existing agency distribution. Mercury is expanding its distribution through a
bank channel. The Sales Department believes a term product may be more viable in this
market.
The actuary in charge of experience studies has determined that Mercury’s term mortality
experience is not credible. In setting a pricing basis for the bank channel term product,
the pricing actuary has decided to blend company experience with a similar industry
table.
(a) List the steps of the product development process described by LOMA, including
the tasks involved with each step.
(b) Describe criteria used in a screening process and assess the feasibility of
Mercury’s initiative using screening.
(c) Explain factors for Mercury to consider when relying on an industry table for the
development of the mortality assumption.
(d) You are given:
Mortality Rates (qx) Per
Thousand Lives in Force
Age Company Industry
0 0.1 0.2
1 0.3 0.5
2 0.5 0.7
3 0.7 0.9
4 1.0 1.0
Calculate the blended mortality rates for each age given above, assuming a 50/50
mix of Company and Industry mortality at age zero. Show all work.
COURSE 8I: Fall 2003 -19- STOP
Individual Insurance
Morning Session
17. (5 points) You are given the following information for the calendar year 2002 on a
closed block of 1,000 whole life policies in force on January 1, 2002.
Policy Specifications
Face amount of each policy $100,000
Annual Premium per $1,000 $30
Policy Fee $30
Pricing Assumptions
Maintenance Expense per
Policy
$10, though actual in 2002 was $12, which will be
used for projection in 2003 and beyond.
Maintenance Expense Percent
of Premium
5%, though actual in 2002 was 6%, which will be
used for projection in 2003 and beyond.
Renewal Commissions Percent
of Premium 15%
Hurdle rate 10%
Shareholder dividend is equal to statutory gain/loss each year (i.e., the year end
statutory surpluses are equal to zero)
Premiums and commissions are paid at the beginning of the calendar year
Expenses are paid at the end of the calendar year based on policies effective
beginning of the year
Target surplus and taxes are zero
Financial Information
Total benefits paid in 2002 $3,000,000
Total investment income received in 2002 $900,000
12/31/2001 statuary reserves in force $10,000,000
12/31/2002 statuary reserves in force $12,000,000
12/31/2001 economic value $10,000,000
12/31/2001 PV of projected maintenance
expenses
$2,000,000
Calculate the actual value-based earnings as of December 31, 2002 on this closed block.
Assume that 2002 actual experience matched expectations, except for maintenance
expenses noted above. Show all work.
**END OF EXAMINATION**

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