CLU exam 1 CH 11

Agents' commissions and agency expenses, state premium taxes, and selection costs are all costs that tend to relate most directly to the amount of insurance.

False

The use of bands (broad amount-of-insurance classifications) has largely replaced the policy-fee approach as the most common method insurers use to deal with per-policy expenses.

False

If the net level premium per $1,000 for a participating ordinary life policy is $12 and the loading factors the insurer adopts are 22 percent of the gross premium, a constant of $1.00 per $1,000, and a constant of $50 per policy, the gross premium for a $100,000 policy is $1,614.

False Because of the insurer's 22 percent loading factor, 78 percent of the gross premium must provide $1,200 for benefits (100 x $12) and $150 for expenses ([100 x $1] + $50). Because 78 percent of the gross premium must be $1,350 to cover benefits and expenses, the gross premium for the $100,000 ordinary life policy is $1,730.77, which is calculated by dividing $1,350 by .78.

Gross premiums for nonparticipating life insurance policies typically are computed by adding a loading to the net premium.

False Gross premiums for participating, rather than nonparticipating, life insurance policies are typically computed by adding a loading to the net premium. Gross premiums for nonparticipating life insurance policies are typically found independent of the net premiums by using realistic factors for mortality, interest, expenses, contingency allowances, and profit.

If "most probable" mortality, interest, expense, and termination rates have been used in calculating gross nonparticipating premiums, a company can improve its competitive situation most easily and effectively by changing any of those assumptions.

False If "most probable" mortality, interest, expense, and termination rates have been used in calculating gross nonparticipating premiums, there is little possibility that the competitive situation can be improved by changing any of those assumptions. Instead, such factors as amortizing acquisition expenses over a longer period, narrowing the profit margin if a specific allowance for profit has been made in the premium calculations, imposing more stringent underwriting requirements, making less conservative investments, and achieving greater operating economies might improve the competitive situation.

Investment expenses are an important explicit component of a life insurance company's loading used for computing gross premiums.

False Investment expenses are recognized as a reduction of gross investment income. These expenses are not covered by an explicit loading of the net premium.

The asset share at the end of a given year for a block of identical nonparticipating policies equals the asset share at the end of the previous year plus the premiums received and the interest assumed to be earned during the year minus the expenses, death benefits, surrender benefits, and dividends assumed to be paid during the year.

False Nonparticipating policies do not pay dividends. Thus, dividends are not reflected in asset share calculations for nonparticipating policies.

Of the four assumptions affecting asset shares for nonparticipating gross premiums, only the impact of terminations increases with duration.

False Of the four assumptions affecting asset shares for nonparticipating gross premiums, only the impact of interest increases with duration. The impact of mortality, terminations, and expenses decreases over time.

The most common approach that mutual insurance companies use to derive participating gross premiums is to calculate and test tentative gross premiums that reflect dividend assumptions as well as most probable assumptions about mortality, interest, expense, and termination rates.

False Some mutual insurance companies derive participating gross premiums by calculating and testing tentative gross premiums that reflect dividend assumptions, as well as most probable assumptions about mortality, interest, expense, and termination rates. However, the most common approach that mutual insurance companies use for deriving participating gross premiums is to add a loading to the net premium.

Asset share calculation tests proposed gross premiums for both adequacy and competitiveness.

False The asset share calculation is concerned only with the adequacy of the proposed gross premiums. Once this has been established, the gross premiums at representative ages are compared with those of other companies operating in the same territory to learn whether the rates are competitive.

Because state premium taxes apply to every premium payment including the first policy year, the actuary must calculate the present value of the state premium tax percentage to determine the factor to be included in the loading.

True

Gross premiums for participating policies are strongly influenced by both (1) adequacy (as tested by asset share calculations) and (2) premium rates of competing insurers.

True

If it takes 10 years for the asset share for a trial nonparticipating gross premium to equal the policy reserve and a company wants to recoup its acquisition expenses for the policy in 8 years, the trial gross premium will be increased by an amount equal to the difference between the asset share and the reserve at the end of the validation period divided by the amount a premium increase of $1 per year will increase the policy's asset share by the end of the 8th policy year.

True

In practice, actuaries compute the present value of renewal commissions by discounting for mortality and interest to determine the amount that is then amortized over the premium-paying period and thereby obtain the level yearly amount for inclusion in the loading.

True

The chief difference between deriving gross participating premiums and gross nonparticipating premiums is the set of actuarial assumptions used.

True

The tentative premium tested in an asset share calculation for a nonparticipating life insurance policy might be the current premium for the policy or the premium charged by a competing company.

True

To calculate the present value of expenses, it is necessary to know the time of their occurrence.

True

To determine the amount of first-year expenses to include in a level loading and, therefore, amortize these expenses over the premium-paying period, the actuary divides the first-year expenses by the present value of a life annuity due of $1 per year for the premium-paying period.

True

Total loading from all policies should cover a company's total operating expenses, provide a margin of safety and a minimum dividend for participating policies, and contribute to profits or surplus.

True

When a policy's asset share is larger than its surrender value but less than the reserve, the insurance company experiences a gain if the policy lapses but experiences a loss if the policy matures then as a death claim.

True

When a policy's asset share is less than its surrender value in the early years because of high first-year expenses, the insurer incurs a loss if the policy is terminated.

True

When the asset share for a policy exceeds its reserve, the policy contributes to surplus when it is surrendered or matures.

True

When the gross premium is computed with a loading consisting of a percentage of the gross premium, a constant amount for each $1,000 of insurance, and a constant amount for each policy, the gross premium rate per $1,000 will decrease with an increase in the face amount of the policy.

True