ALU 202 CORRECT EXAM QUESTIONS AND
ANSWERS SET A+
✔✔With more stringent underwriting, 2 things happen - ✔✔1. Expected mortality
decreases on the block of policies that qualify at this tighter level of criteria. 2. Resulting
in lower, more competitive prices.
Fewer individuals will qualify under the more stringent underwriting requirements.
✔✔Insureds that just miss qualifying for a company's preferred rates will likely do 1 of 3
things - ✔✔1. Find a company with slightly less restrictive preferred criteria and obtain a
preferred classification from that company.
2. Be unhappy that they did not qualify and drop out of the buying pool altogether.
3. Purchase the residual standard policy from your company.
✔✔the largest decrement affecting the number of policies ultimately in force - ✔✔lapse
rates that occur in a product
✔✔It's not uncommon for a product to have - ✔✔50-100 times more lapses than deaths
✔✔Early duration lapses - ✔✔lapses that hurt profitability
✔✔Later duration lapses - ✔✔Lapses that improve profitability
✔✔On average, a policy must be in force for at least X years to recover the expenses
incurred upon issue. - ✔✔at least 5 years to recover the expenses incurred
✔✔Expense levels built into the product represent - ✔✔the agent's compensation,
corporate overhead, support of an agency system, advertising, and underwriting
expenses
✔✔Traditional products keep the investment risk - ✔✔with the company
,✔✔variable products shift most of the investment risk to - ✔✔the policyholder.
✔✔In the US, statutory reserve standards are established by - ✔✔state regulation and
are generally consistent across the nation
✔✔In Canada statutory reserves are established by - ✔✔federal regulation
✔✔The reserve basis standards include - ✔✔an underlying mortality table, maximum
interest rates, and methodology to be used.
✔✔The purpose of the reserve standards is - ✔✔to make sure enough of the premium
earned in the early durations of a contract is held until the time when the group of
policyholders ages and the probability of death is greater than the premium received
✔✔Principles Based Reserves (PBR) - ✔✔focuses more closely on an appropriately
conservative based best-estimate assumption basis
✔✔Non-Forfeiture Laws - ✔✔for policies that have a level premium structure, the
policyholder pays too much for coverage in the early duration of the contract and not
enough in the later years
✔✔Surplus Needs - ✔✔a safety net is referred to as capital requirements or risk-based
capital
✔✔Tax Law - ✔✔n the US, states can levy a tax that is normally collected on the
premium revenue that is received by an insurer
✔✔Federal taxes paid by an insurance company are income based and affected by 3
main components - ✔✔Corporate tax rate
Tax reserves
Deferred acquisition cost (DAC) tax
✔✔Protective value refers to - ✔✔the relationship of mortality savings from a
requirement to the cost of administering the particular requirement
✔✔One of the biggest dangers in the construction of a new policy design is - ✔✔to think
that once a process is defined and the price is set, then product management is
complete
✔✔How much profit is derived from premiums - ✔✔a very small percentage of premium
✔✔Reasons for addressing requirement value - ✔✔1. Improvements in secular or
industry mortality
2. Cost-cutting efforts
,3. Underwriting requirement review associated with new product offerings
4. Simplifying processes for the producer and consumer
5. Questions as to the value of an existing requirement
6. Competitor landscape
7. New possible underwriting requirements
✔✔Cost-benefit studies provide - ✔✔provide objective evidence to evaluate the cost-
effectiveness of an underwriting requirement
✔✔Cost refers to - ✔✔the expenses associated with ordering and analyzing the
requirement
✔✔Benefit refers to - ✔✔the mortality identified by the requirement and also means
insurance benefit that would be paid out if the requirement were not ordered
✔✔A requirement's value is based on - ✔✔the mortality it identifies
✔✔Mortality reductions associated with underwriting requirements can - ✔✔can
improve the company's overall rate of return on its investments.
✔✔Mortality experience can - ✔✔can vary by company, resulting in cost-benefit studies
differing by company
✔✔Requirements rarely produce - ✔✔no value, if a requirement is eliminated, chances
are there will be some mortality given up by a company
✔✔Factors to consider when comparing peer companies' age-and-amount limits for
underwriting requirements with those used by another company - ✔✔1. What was the
basis used to set a company's current limits, such as, results from cost-benefit studies
or analyses of peer companies' limits.
2. Other requirements and the related limits for them used
3. The underwriting manual used and how it is used
4. The underwriting philosophy used versus that used by peer companies
5. Underwriting proficiency in case workups
6. Target market
7. Distribution system
8. Products marketed
9. Mortality and other expense expectations
10. Experience-monitoring capabilities.
✔✔Life insurance premiums are based on - ✔✔the mortality rate exhibited by the
population for a particular age, gender, and tobacco status
✔✔Net Single Premium (NSP) - ✔✔or present value of future mortality, identifies the
benefit side of a cost-benefit study.
, ✔✔Pricing Horizon - ✔✔identifies the number of years the mortality covers
✔✔Discount Rate - ✔✔where money can be invested today to grow to the necessary
sum 20 years in the future
✔✔Lapse Rate - ✔✔The NSP considers the reduction in benefits paid out due to the
number of insureds lapsing their coverage.
✔✔The first step in doing a cost-benefit study is - ✔✔to determine the objectives to be
achieved, such as which underwriting requirements to review
✔✔A key factor for success of a study is - ✔✔A key factor for success is consistency.
Meaning assigning fewer people to do the work to avoid variability in opinions
✔✔Two primary goals of a cost-benefit study are - ✔✔to define how often the
requirement identified extra mortality and to define the size or magnitude of the hit
✔✔Limitations of cost-benefit studies - ✔✔have certain limitations because they cannot
take into account factors such as the sentile effect, the cost of good business lost by
delay in taking final underwriting action and the effect of the open market on business
when there are changes in market and/or risk classifications employed.
✔✔Hit rate - ✔✔the percent of time a requirement will cause a change in underwriting
risk class
✔✔The greatest value in a cost-benefit study is found in - ✔✔is found in declined cases
✔✔Essential Items Recorded for Cost-Benefit Study - ✔✔File number, such as
rejections, postponements, filed closed, issued, placed or not taken.
Gender
Age
Tobacco use status
Type of insurance
Policy face amount (including term or GIRs, sum of total of all apps on one life, and use
the highest face amount if alternate policies requested).
Type of underwriting requirement under study
Reason for ordering requirement
Additional requirements that can be triggered by the first item ordered
Cost of requirement
Final action with or without the requirement
Protective value of the requirement.
ANSWERS SET A+
✔✔With more stringent underwriting, 2 things happen - ✔✔1. Expected mortality
decreases on the block of policies that qualify at this tighter level of criteria. 2. Resulting
in lower, more competitive prices.
Fewer individuals will qualify under the more stringent underwriting requirements.
✔✔Insureds that just miss qualifying for a company's preferred rates will likely do 1 of 3
things - ✔✔1. Find a company with slightly less restrictive preferred criteria and obtain a
preferred classification from that company.
2. Be unhappy that they did not qualify and drop out of the buying pool altogether.
3. Purchase the residual standard policy from your company.
✔✔the largest decrement affecting the number of policies ultimately in force - ✔✔lapse
rates that occur in a product
✔✔It's not uncommon for a product to have - ✔✔50-100 times more lapses than deaths
✔✔Early duration lapses - ✔✔lapses that hurt profitability
✔✔Later duration lapses - ✔✔Lapses that improve profitability
✔✔On average, a policy must be in force for at least X years to recover the expenses
incurred upon issue. - ✔✔at least 5 years to recover the expenses incurred
✔✔Expense levels built into the product represent - ✔✔the agent's compensation,
corporate overhead, support of an agency system, advertising, and underwriting
expenses
✔✔Traditional products keep the investment risk - ✔✔with the company
,✔✔variable products shift most of the investment risk to - ✔✔the policyholder.
✔✔In the US, statutory reserve standards are established by - ✔✔state regulation and
are generally consistent across the nation
✔✔In Canada statutory reserves are established by - ✔✔federal regulation
✔✔The reserve basis standards include - ✔✔an underlying mortality table, maximum
interest rates, and methodology to be used.
✔✔The purpose of the reserve standards is - ✔✔to make sure enough of the premium
earned in the early durations of a contract is held until the time when the group of
policyholders ages and the probability of death is greater than the premium received
✔✔Principles Based Reserves (PBR) - ✔✔focuses more closely on an appropriately
conservative based best-estimate assumption basis
✔✔Non-Forfeiture Laws - ✔✔for policies that have a level premium structure, the
policyholder pays too much for coverage in the early duration of the contract and not
enough in the later years
✔✔Surplus Needs - ✔✔a safety net is referred to as capital requirements or risk-based
capital
✔✔Tax Law - ✔✔n the US, states can levy a tax that is normally collected on the
premium revenue that is received by an insurer
✔✔Federal taxes paid by an insurance company are income based and affected by 3
main components - ✔✔Corporate tax rate
Tax reserves
Deferred acquisition cost (DAC) tax
✔✔Protective value refers to - ✔✔the relationship of mortality savings from a
requirement to the cost of administering the particular requirement
✔✔One of the biggest dangers in the construction of a new policy design is - ✔✔to think
that once a process is defined and the price is set, then product management is
complete
✔✔How much profit is derived from premiums - ✔✔a very small percentage of premium
✔✔Reasons for addressing requirement value - ✔✔1. Improvements in secular or
industry mortality
2. Cost-cutting efforts
,3. Underwriting requirement review associated with new product offerings
4. Simplifying processes for the producer and consumer
5. Questions as to the value of an existing requirement
6. Competitor landscape
7. New possible underwriting requirements
✔✔Cost-benefit studies provide - ✔✔provide objective evidence to evaluate the cost-
effectiveness of an underwriting requirement
✔✔Cost refers to - ✔✔the expenses associated with ordering and analyzing the
requirement
✔✔Benefit refers to - ✔✔the mortality identified by the requirement and also means
insurance benefit that would be paid out if the requirement were not ordered
✔✔A requirement's value is based on - ✔✔the mortality it identifies
✔✔Mortality reductions associated with underwriting requirements can - ✔✔can
improve the company's overall rate of return on its investments.
✔✔Mortality experience can - ✔✔can vary by company, resulting in cost-benefit studies
differing by company
✔✔Requirements rarely produce - ✔✔no value, if a requirement is eliminated, chances
are there will be some mortality given up by a company
✔✔Factors to consider when comparing peer companies' age-and-amount limits for
underwriting requirements with those used by another company - ✔✔1. What was the
basis used to set a company's current limits, such as, results from cost-benefit studies
or analyses of peer companies' limits.
2. Other requirements and the related limits for them used
3. The underwriting manual used and how it is used
4. The underwriting philosophy used versus that used by peer companies
5. Underwriting proficiency in case workups
6. Target market
7. Distribution system
8. Products marketed
9. Mortality and other expense expectations
10. Experience-monitoring capabilities.
✔✔Life insurance premiums are based on - ✔✔the mortality rate exhibited by the
population for a particular age, gender, and tobacco status
✔✔Net Single Premium (NSP) - ✔✔or present value of future mortality, identifies the
benefit side of a cost-benefit study.
, ✔✔Pricing Horizon - ✔✔identifies the number of years the mortality covers
✔✔Discount Rate - ✔✔where money can be invested today to grow to the necessary
sum 20 years in the future
✔✔Lapse Rate - ✔✔The NSP considers the reduction in benefits paid out due to the
number of insureds lapsing their coverage.
✔✔The first step in doing a cost-benefit study is - ✔✔to determine the objectives to be
achieved, such as which underwriting requirements to review
✔✔A key factor for success of a study is - ✔✔A key factor for success is consistency.
Meaning assigning fewer people to do the work to avoid variability in opinions
✔✔Two primary goals of a cost-benefit study are - ✔✔to define how often the
requirement identified extra mortality and to define the size or magnitude of the hit
✔✔Limitations of cost-benefit studies - ✔✔have certain limitations because they cannot
take into account factors such as the sentile effect, the cost of good business lost by
delay in taking final underwriting action and the effect of the open market on business
when there are changes in market and/or risk classifications employed.
✔✔Hit rate - ✔✔the percent of time a requirement will cause a change in underwriting
risk class
✔✔The greatest value in a cost-benefit study is found in - ✔✔is found in declined cases
✔✔Essential Items Recorded for Cost-Benefit Study - ✔✔File number, such as
rejections, postponements, filed closed, issued, placed or not taken.
Gender
Age
Tobacco use status
Type of insurance
Policy face amount (including term or GIRs, sum of total of all apps on one life, and use
the highest face amount if alternate policies requested).
Type of underwriting requirement under study
Reason for ordering requirement
Additional requirements that can be triggered by the first item ordered
Cost of requirement
Final action with or without the requirement
Protective value of the requirement.
