Alu 202 Chapter 1 Exam Questions With Verified Answers Latest Update 2026

ALU 202 CHAPTER 1 EXAM QUESTIONS WITH VERIFIED ANSWERS LATEST UPDATE 2026 Product Pricing Process - Answers The cost of Raw Materials is not known at the time of determining the price of insurance. It is based on actuarially supportable information gained from past experience Strategy Determination in Product Development - Answers The organization must have the skill set to analyze the risk being considered and must be realistic about the underlying cost of different offerings. Profitability Expectation - Answers Key component for product offering, one of the least advanced topics in product development. Life insurance is very cost sensitive and thought to be more of a Commodity. 4 types of risk that must be covered by allocated surplus in product development and pricing - Answers Asset Risk, Insurance risk, Interest rate risk and business risk Asset Risk - Answers the risk that the assets supporting the product line lose some or all of their value Insurance Risk - Answers The risk that the price for the insurance product is inadequate. Caused by mis-estimation of expected mortality Interest Rate Risk - Answers The risk that assets must be sold at a loss in order to meet the case needs of the policyholder. Business Risk - Answers This is a catch all category of risk management to cover anything not included in first 3 category. Underwriting discipline - Answers Is key to building blocks in product design and each one ahs secondary impact on the other. Building Block that do not interact with underwriting in pricing a product - Answers Mortality, lapse rates, expense levels, interest rates, Mortality affect on policy development - Answers The biggest cost in Life insurance product Stringent underwriting causes two things to happen - Answers The expected mortality decreases on the block of policies which results in lower, more competitive prices and fewer people will qualify under the more stringent requirements Actuarially Supportable - Answers Means that both the expected level and relative mortality differences have been demonstrated through time. How Lapse Rate affects profits - Answers The largest decrement on policies in force. Occur 50-100 times more than death. Impact on profits is unpredictable affecting profitability. Lapses early in policy hurt profitability while lapses later in duration improve profitability. Policy must be in force 5 years - Answers to recover the expenses incurred upon issuance Expense Levels Represent - Answers the cost of requirement, the corresponding mortality savings, the proposed insured's adverse reaction to being subjected battery of requirements, the time taken to issue a policy Affects of Interest Rate in policy development - Answers Traditional products keep the investment risk with the company while variable products shift most of the risk to the policyholder The purpose of reserve standards - Answers To ensure enough of the premium earned in the early durations of a contract is held until the probability of death is greater than the premium earned.