Exam ILALPM AM - Society of Actuaries

[Pages:12]Life Product Management

Exam ILALPM

MORNING SESSION

Date: Wednesday, October 30, 2019 Time: 8:30 a.m. ? 11:45 a.m.

INSTRUCTIONS TO CANDIDATES

General Instructions

1. This examination has a total of 100 points. It

consists of a morning session (worth 60 points) and an afternoon session (worth 40 points).

a) The morning session consists of 6 questions numbered 1 through 6.

b) The afternoon session consists of 5 questions numbered 7 through 11.

The points for each question are indicated at the beginning of the question.

2. Failure to stop writing after time is called will result in the disqualification of your answers or further disciplinary action.

3. While every attempt is made to avoid defective questions, sometimes they do occur. If you believe a question is defective, the supervisor or proctor cannot give you any guidance beyond the instructions on the exam booklet.

Written-Answer Instructions

1. Write your candidate number at the top of each sheet. Your name must not appear.

2. Write on only one side of a sheet. Start each question on a fresh sheet. On each sheet, write the number of the question that you are answering. Do not answer more than one question on a single sheet.

3. The answer should be confined to the question as set.

4. When you are asked to calculate, show all your work including any applicable formulas.

5. When you finish, insert all your written-answer sheets into the Essay Answer Envelope. Be sure to hand in all your answer sheets because they cannot be accepted later. Seal the envelope and write your candidate number in the space provided on the outside of the envelope. Check the appropriate box to indicate morning or afternoon session for Exam ILALPM.

6. Be sure your written-answer envelope is signed because if it is not, your examination will not be graded.

Recognized by the Canadian Institute of Actuaries.

Tournez le cahier d'examen pour la version fran?aise.

Printed in the U.S.A. Exam ILALPM-Front Cover

? 2019 by the Society of Actuaries 475 N. Martingale Road

Schaumburg, IL 60173-2226

**BEGINNING OF EXAMINATION** Morning Session

1. (6 points) You are given the following financials for calendar year 2018.

Premiums Benefits Expenses Investment Income Investment Income on Required Capital Non-taxable Investment Income % Tax Rate

Solvency Reserve Tax Reserve Required Capital

27,000 12,000 9,000 2,800

180 32% 21% Beginning of Year 91,000 75,000 2,000

End of Year 92,500 79,250 2,215

Assume that the tax reserve has been adjusted to take DAC Tax into account.

(a) (2 points) Calculate the 2018 tax on earnings.

(b) (2 points) Calculate the 2018 distributable earnings.

(c) (2 points) Critique the following statements made by the Chief Actuary of the Company with regard to the 2017 Tax Cut and Jobs Act (Tax Reform).

(A) "The company is anticipating a significant tax benefit due to the tax reform rate change. However, this is largely offset by the RBC, DAC tax and tax reserve changes."

(B) "In addition, the tax reform impact on the company will not vary by product groups or blocks of business."

Exam ILALPM: Fall 2019

- 1 -

Life Product Management

Morning Session

GO ON TO NEXT PAGE

2. (12 points) NIN Life is reviewing its asset management strategy and current asset

holdings.

NIN's strategic asset allocation is:

Asset Type

Cash and Short-Term Notes Government Bonds Corporate Bonds

Real Estate and Mortgage-Backed Securities

Interest Rate Swaps

Target Allocation

10% 30%

30%

Allowable Allocation

0-20% 15-45% 20-40%

30%

10-40%

N/A

As needed for interest hedging, rebalanced annually

NIN's current asset holdings are:

Identifier

Asset

A

Bond

B

Commercial Paper

C

Municipal Bond

D

MortgageBacked Security

E

Treasury Bond

F

Swap

Issuer

BB Rated Corporation AAA Rated Corporation

Large City

Term to Maturity 5 Years

3 Months

3 Years

A Rated Bank 10 Years

US Government 10 Years AA Rated Bank 10 Years

Features

First-Lien, Callable, Private Placement

None

Floating Rate with cap, General Obligation, MIG3-Rated Guaranteed by Fannie Mae None Receive Fixed Leg

(a) (5 points)

(i) Rank NIN's current holdings from least to most credit default risk. Justify your ranking.

(ii) Assess how the ranking would change if based on expected yield in a normal yield curve environment. Justify your answer.

Exam ILALPM: Fall 2019

- 2 -

Life Product Management

Morning Session

GO ON TO NEXT PAGE

2. Continued

(b) (3 points) Explain four possible reasons the 10-Year swap may have a lower yield-to-maturity than the 10-Year Treasury Bond.

(c) (4 points) Propose two adjustments to NIN's holdings or strategic asset allocation for each of the following:

(i) Achieve a yield of 0.5% above the risk-free rate to support product pricing assumptions

(ii) Minimize credit risk, especially default risk

(iii) Minimize interest rate risk by matching asset and liability durations

(iv) Maintain sufficient liquidity to make liability payments as they come due

Exam ILALPM: Fall 2019

- 3 -

Life Product Management

Morning Session

GO ON TO NEXT PAGE

3. (10 points) TEN Life is developing a new Single Premium Universal Life (SPUL) product.

(a) (1 point) List four objectives of a company's liquidity risk policy.

(b) (2 points) Describe product design features that will mitigate liquidity risk for the new SPUL product.

(c) (5 points) You have been asked to assess the level of liquidity risk under a companyspecific stress scenario, given the following modeled output:

Cash flows Investment Income Policy loan repayments New sales Premiums Death Claims Surrender Benefits

Liquidity Stress Scenario

3 month 6 month 1 year

15

20

35

0.25

0.25

0.25

1

1.5

2

10

15

45

4.5

6

8

(i) Evaluate the appropriateness of assessing liquidity risk using only the 3 month liquidity stress scenario. Show your work.

(ii) Recommend next steps to manage potential liquidity risk for this product based on the output of the stress scenario.

(iii) Describe four additional stress scenarios that TEN Life could use to identify liquidity risk.

(d) (2 points) Propose two SPUL product design strategies that can help mitigate interest rate risk. Justify your answer.

Exam ILALPM: Fall 2019

- 4 -

Life Product Management

Morning Session

GO ON TO NEXT PAGE

4. (11 points) HLC Life is developing Product X, a life insurance product with a long-term

care rider.

(a) (6 points) For each of the following: ? Process Risk ? Parameter Risk ? Economic Scenario Risk

(i) (1 point) Define each risk.

(ii) (1 point) Describe the causes and contributing factors of each risk specific to long-term care insurance.

(iii) (1 point) Describe the level of each risk for long-term care insurance. Justify your answer.

(iv) (3 points) Evaluate how each risk is impacted by adding the long-term care rider to a life insurance product.

(b) (3 points) Evaluate the impact to the overall profitability of Product X if increases were made to the following pricing assumptions:

(i) Mortality for disabled lives

(ii) Mortality for active lives

(iii) Lapse rates for active lives

(iv) Incidence rates for active lives

(c) (2 points) Critique the following statements:

(i) HLC could reduce acquisition expenses and streamline the underwriting process for Product X by only underwriting the life insurance application.

(ii) HLC could increase future sales by allowing life insurance policy holders to add the long-term care rider, without underwriting, while their life insurance policy is inforce.

(iii) HLC could limit risk for a long-term care rider by adding a restriction that the loss of activities of daily living must be expected to be permanent.

(iv) HLC could increase sales by adding a critical illness rider that accelerates a portion of the face amount if the policyholder has a life expectancy of less than 12 months.

Exam ILALPM: Fall 2019

- 5 -

Life Product Management

Morning Session

GO ON TO NEXT PAGE

5. (11 points) FIV Life is designing a chronic illness acceleration rider for their term life

insurance products.

Chronic Illness Definition:

Coverage Amounts: Underwriting Classes: Issue Ages: Application: Exclusions: Term Conversion Privilege:

Unable to perform two or more activities of daily living without assistance or diagnosed with a severe cognitive impairment by FIV Life claims underwriter Accelerates 100% of face amount up to 1 million, directly reduces the face amount of the term policy Preferred, standard, and substandard classes 18-80 Fully underwritten term application approved in 2001 Suicide or self-inflicted injuries Option to convert base and rider to permanent product

(a) (4 points) Recommend changes to the product design to mitigate risk.

(b) (3 points) FIV Life is considering reinsuring the rider with the following reinsurance terms:

? The method of reinsurance is YRT using select and ultimate rates that continue point in scale following conversion

? FIV Life will retain the risk on the base life insurance policy ? To promote the rider, FIV Life may offer the rider to existing term life

policyholders without requiring evidence of insurability and reinsure the rider as a new coverage

Explain possible concerns a reinsurer may have with this proposal.

Exam ILALPM: Fall 2019

- 6 -

Life Product Management

Morning Session

GO ON TO NEXT PAGE

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download