3. (12 points) ABC Life is selling a deferred variable annuity product that provides for a
return of premium death benefit. ABC is considering alternative death benefit designs.
(a) (3 points) List the sectors included in an environmental analysis and evaluate the
sectors as they relate to variable annuity death benefits.
(b) (3 points) The marketing area would like to add an annual ratchet design.
(i) Compare the risk associated with the annual ratchet design to other possible
death benefit designs. Explain your answer.
(ii) Describe techniques to manage the risks associated with alternative death
benefit designs.
(c) (6 points) You are given:
Account Value on valuation date $980.00
Separate Account Value on the valuation date $980.00
Net asset charges 1%
Valuation rate 7%
Assumed year 1 drop in Account Values -14%
Assumed recovery rate 14%
Surrender charges None
Highest Anniversary Account Value $1,000.00
Average Account Value year 1 $1,009.40
Average Account Value year 2 $1,069.96
Account Value at time 1 $1,038.80
Account Value at time 2 $1,101.13
Mortality rate for year 1 0.017
Mortality rate for year 2 0.019
Survival rate from time 0 to end of year 1 0.983
Survival rate from time 0 to end of year 2 0.964
Calculate the statutory reserve for the annual ratchet death benefit at time 0, 1 and
2 using the methodology prescribed in the Valuation of Living and Death Benefit
Guarantees for Variable Annuities note. Show all work.
COURSE 8I: Fall 2004 -4- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Morning Session
4. (5 points)
(a) Describe the advantages and disadvantages of:
(i) YRT reinsurance, and
(ii) Coinsurance.
(b) You are given the following information for a level term life insurance product:
Total Face Amount $100,000,000
First Year Premium $1,000,000
Policy Fee None
Premium Tax 2%
First Year Commission 50% of first year premium
Other First Year Expenses $750,000
Solvency Reserve at Issue $50,000
Assume:
• Premium and reinsurance premium are paid annually at the beginning of
the year.
• Unearned portion of a one-year term insurance benefit equals 50% of the
YRT reinsurance premium.
• No federal income tax or required capital.
• Ceded percentage equals 90%.
• YRT reinsurance premium rate equals 0.20 per thousand of face amount.
• Coinsurance reinsurance allowance equals 90%.
Calculate the estimated first year strain at issue for
(i) YRT reinsurance, and
(ii) Coinsurance.
Show all work.
COURSE 8I: Fall 2004 -5- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Morning Session
This question pertains to the Case Study
5. (6 points) You are Saturn Life’s product management actuary for the term life insurance
portfolio. Your responsibilities include:
• Monitoring term life new-business sales and in-force experience,
• Advising product development, investment and marketing departments of
current developments, and
• Reporting product profitability and capital requirements to senior
management.
(a) (1 point) Identify and describe the types of internal product management reports.
(b) (5 points) Explain how each would be used to manage Saturn’s term life
business.
COURSE 8I: Fall 2004 -6- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Morning Session
6. (12 points) XYZ Life is developing a dual-life status flexible premium joint and last
survivor universal life insurance product (Survivor UL).
(a) (3 points) For pricing the Survivor UL product:
(i) Describe approaches to reflect the dual-life status including the advantages
or disadvantages of each approach.
(ii) Explain other factors to be considered in developing a mortality
assumption unique to a last survivor product.
(b) (3 points) XYZ Life’s current single-life UL products have experienced
withdrawal rates of 7% in policy year 1, grading to 5% by policy year 5.
(i) Describe considerations in setting persistency assumptions for Survivor
UL.
(ii) Propose changes to the lapse rate assumption to reflect persistency in a
volatile interest rate environment.
(c) (6 points) The following steps outline a procedure to determine minimum UL
reserves for duration t.
Revise or add information to make each step compliant with the NAIC UL Model
Regulation.
Step Procedure
1 Calculate a Guaranteed Maturity Premium (GMP) as the level premium
that provides an endowment at the latest maturity date under the contract,
calculated from the valuation date using valuation assumptions.
2 Calculate a set of Guaranteed Maturity Funds (GMF’s) as of the valuation
date using valuation basis assumptions, and assuming that gross premiums
are paid.
3 Produce a set of “guaranteed death benefits” and a “guaranteed maturity
benefit” by projecting forward from the valuation date t, using valuation
assumptions, tions, the GMFt and assuming gross premiums are paid. Calculate
the present value of these future benefits at time t ( ) PVFBt using
valuation assumptions.

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