13. (14 points) The CEO of Saturn Life proposes to develop and market a dividend paying
participating Universal Life (par UL) product to compete with Mercury Life’s
participating Whole Life product, the leading product in the market. The CEO forecasts
$50 million of first year premium from sales during the first twelve months. Cost of
insurance rates, expense loads, and the interest crediting rate are fixed and guaranteed by
the terms of the contract.
(a) (1 point) List the risks, according to Kotler’s Marketing Management, to the
successful development of a new product and assess Saturn’s par UL product
proposal with respect to each of these risks.
(b) (3 points) Describe objectives and issues for establishing a financial structure for
dividends.
(c) (1 point) Explain considerations Saturn Life needs to make in selling
participating policies as a stock company.
(d) (7 points) Saturn Life uses US GAAP for its management accounting basis.
For the first year policy projection you are given:
Solvency Based Income Statement
(in thousands) Solvency Based Balance
Sheet (in thousands)
Premium $50,000 Assets $19,250
Investment Income 228
Reserve 17,500
Death Benefits 5,000 Required Capital 1,750
Surrenders 308
Reserve Increase 17,500
Commissions 45,000
Fixed Expenses
1,750
Net Income (19,330)
Dividend 0
Income-Based Information (in thousands)
Benefit Reserve $29,368
Initial DAC $43,000
DAC Amortization Factor 50%
DAC Interest Rate 4%
COURSE 8I: Fall 2002 - 12 - GO ON TO NEXT PAGE
Individual Insurance
Afternoon Session
13. Continued
Policy information
Interested Credited in First Year $1.2 million
Cost of Insurance 36.95% of premium
Surrender Charge 2.475% of premium
Expense Loads 3% of premium
Initial Death Benefit $500,000 per policy
Number of Policies 5,000
Annual Lapse Rate 5%
Assume:
•No taxes.
•Deaths occur prior to lapses.
•Lapses occur at end of policy year.
•Policies are all equal size.
•No dividends are paid in year 1.
•ROE is based on end of year US GAAP Equity.
•The ROE is the same for all years.
•The Statutory ROI is equal to the ROE.
(i) Describe the appropriate SFAS accounting treatment of this product
design.
(ii) Calculate the end of first year DAC balance and construct the first year
management basis income statement and balance sheet. Show all work.
(iii) Calculate the first year ROE and evaluate whether the ROE would be
acceptable to Saturn Life. Justify your assumptions and show all work.
(e) (2 points) Recommend a course of action for the development of the product.
Justify your response.
COURSE 8I: Fall 2002 - 13 - GO ON TO NEXT PAGE
Individual Insurance
Afternoon Session
14. (6 points)
(a) (2 points) Describe and evaluate the following price setting methods:
•Markup Pricing
•Target Return Pricing
•Perceived Value Pricing
•Value Pricing
•Going-Rate Pricing
(b) (3 points) You have been asked to price a direct-marketed 1-year level term
product.
You are given the following initial estimates of the product’s costs:
Underwriting expenses per thousand of face amount issued $20
Total administrative costs $20,000
Mortality cost per thousand of face amount issued $4
Capital requirement $27,300
Average size $5,000
Expected sales 1,000 policies
Desired return 9.15%
Determine the difference between the break-even volume using:
(i) the Markup Pricing method; and
(ii) the Target Return Pricing method.
Show all work.
(c) (1 point) Your primary competitor is currently the market leader and has high
brand awareness. However, its ratings are not as high as yours. You are targeting
your premiums to be lower than theirs. Describe the possible reactions the
competitor will have to your new product.
COURSE 8I: Fall 2002 - 14 - GO ON TO NEXT PAGE
Individual Insurance
Afternoon Session

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