PBR Seminar Case Study #2

Test Drive the New VM-20 2012 CASE STUDY 2 – Wednesday Application of Mortality Requirements You are the appointed actuary for Life Only Insurance Company, which started writing business in January 2014 with three main products – a universal life product with a lifetime secondary guarantee, a Whole Life product, and a 20 year Term life product. The same 5-class underwriting requirements have been used for the UL and Term products, but the Whole Life product is simplified issue. It is now 2021 and you have 6 years of mortality experience and the requirements of VM-20 have been in effect for 6 years. The details of the products are the same as those provided in Case Study 1. After careful consideration by underwriting and pressure from marketing, your company has decided to introduce a new whole life product that is fully underwritten, with 3 risk classes (preferred non-tobacco, residual standard non-tobacco and tobacco) and, for the term and universal life plans, a new Ultra preferred risk class.

Details regarding the underlying experience to-date are in the attached exhibit. The Actual to Expected study was conducted for exposure years 2014 through 2020 and the underlying expected basis was the 2008 VBT RR100 NS/SM ANB Tables. Credibility determined using Limited Fluctuation with 95% credibility and 5% margin of error.

Term and UL underwriting classes/qualification percentages

Original

% qualifying

Proposed

% qualifying

Ultra PNT

15%

SPNT

30%

SPNT

20%

PNT

25%

PNT

20%

SNT

35%

SNT

35%

PTB

5%

PTB

5%

STB

5%

STB

5%

Whole life underwriting classes/qualification Original

% qualifying

Proposed

% qualifying

PNT

N/A

PNT

55%

NT Simplified Issue

60%

SNT

35%

TB Simplified Issue

40%

TB

10%

1850 M Street NW

Suite 300

Washington, DC 20036

Telephone 202 223 8196

Facsimile 202 872 1948

www.actuary.org

In setting the revised underwriting requirements, your company consulted with two of its reinsurers and obtained input into the expected mortality level as well as % qualifying for each class. In addition, one reinsurer provided its own experience for fully underwritten whole life insurance, which they claim has 90% credibility overall and claims meeting the sufficient data requirement for 35 durations.

1.) List the considerations for establishing the revised expected mortality for the changes in underwriting for the term and whole life plans. What existing experience can be used for the whole life fully underwritten insurance?

2) What is the sufficient data period for the term, UL and whole life products? At what level is this determined?

3) In reviewing the mortality experience, you have identified that there was recently a change in the contestable claims processing, which should result in reduced first year claims. In addition, the company recently identified a rogue underwriter which has since been terminated. This underwriter was making significant exceptions. Company investigation has identified nearly 10% of the claims by count and 15% by amount should not have been incurred as the policies would not have been issued without the exceptions. The company has since implemented improved controls and governance to ensure this level of underwriting exception does not occur going forward and plans for improved claims as a result.

Describe the considerations for incorporating these changes in future mortality experience.

4) What applicable industry tables would you use - describe your process for determining which is appropriate?

5) Describe the considerations for mortality improvement.

6) What level of margin would apply to: a) Your own company experience b) The chosen applicable industry table(s) 7) Describe the additional considerations to the mortality assumption and why you would or would not incorporate into the prudent estimate assumption.

1850 M Street NW

Suite 300

Washington, DC 20036

Telephone 202 223 8196

Facsimile 202 872 1948

www.actuary.org