10. Continued
(a) (2 points) You are given the following values of the S&P 500 index:
Time S&P 500
0 1000
1 1050
2 1250
3 1175
Calculate the Index Account Value as a percentage of the single premium at the
end of the Index Period. Show all work.
(b) (5 points) A 100% increase in the present value of index-based interest budget
generates a 150% increase in the demand for the product, measured in dollars of
single premium sold.
(i) Describe factors that affect the price elasticity of demand.
(ii) Determine the change in the present value of profits in dollars from
offering the proposed campaigns and recommend whether to proceed.
Show all work.
(c) (5 points) With respect to cash flow testing, assess the selection of a long-term
lapse assumption for this product, considering the effects of the proposed
campaigns.
COURSE 8I: Fall 2004 -11- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Afternoon Session
11. (9 points) A financial review of the term portfolio reveals a lower level of profitability
from the 5-year level term product than originally projected. You have been asked to
re-price the 5-year level term product for your brokerage and direct response distribution
channels.
(a) Compare the effect each of these distribution channels has on the following
assumptions.
(i) Mortality
(ii) Lapse
(iii) Interest
(iv) Expense
(b) Describe elements of compensation used for brokerage distribution.
(c) The term portfolio has experienced lower policy persistency.
(i) Describe the factors that affect persistency.
(ii) Recommend steps to improve persistency for the product.
COURSE 8I: Fall 2004 -12- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Afternoon Session
12. (6 points) XYZ Mutual is planning to sell a new 5-year term dividend-paying product
subject to SFAS120 guidelines.
You are given the following projected best estimate values:
Acquistion Expenses Maintenance
Year
Gross
Premiums
Death
Benefits
Investment
Income
On NLP
Reserves Deferrable
Non-
Deferrable Expenses Dividends
1 1000 224 45 550 100 250 70
2 900 237 63 225 98
3 810 263 54 203 124
4 770 274 45 193 149
5 730 287 39 183 175
You are also given the following projected changes to the Net Level Premium (NLP)
reserve:
Year
Change Due to
Premiums
Change Due to
Benefits
Change Due to
Interest
1 600 -337 36
2 540 -356 50
3 486 -394 43
4 462 -412 36
5 438 -431 31
Assume:
• No surrender Benefits
• Discount rate equals 6%
• No taxes
(a) Contrast the SFAS120 and SFAS60 accounting methodologies with respect to the
recognition of income statement items.
(b) Assess the recoverability of the deferred expenses for this policy and recommend
any changes if necessary. Show all work.
COURSE 8I: Fall 2004 -13- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Afternoon Session
Questions 13 and 14 pertain to the Case Study.
13. (8 points) The valuation actuary at Saturn Life is concerned about the mortality
experience of the term portfolio.
(a) Assess the effect of Saturn’s conversion, re-underwriting and termination options
on the renewal ART mortality assumption.
(b) You are given the following additional information for Saturn’s 5-year level term
plan:
• Mortality is 90% of the 1975-80 Ultimate Table in the absence of selective
lapsation
• qx+5, t−5 equals 80% of qx, t
• Duration five lapse rate is 20%
• 75% of duration five lapses are assumed to be selective
Calculate the duration five mortality rate for a female age 40 using the
conservation of deaths principle. Show all work.
(c) Current best estimate assumptions have been updated to reflect higher expected
mortality due to increased anti-selection at renewal. Other assumptions remain
unchanged. You are given the following as of December 31, 2003, based on
current best estimate assumptions:
• PV benefits and expenses equals $15,000,000
• PV premiums equals $50,000,000
(i) Calculate the premium deficiency for the term portfolio. Show all work.
(ii) Identify any required adjustments to the December 31, 2003 U.S. GAAP
Term Life Insurance balance sheet.
COURSE 8I: Fall 2004 -14- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Afternoon Session
Questions 13 and 14 pertain to the Case Study.

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