4. (9 points) Saturn Life is developing a new variable annuity product that will provide:
• 50 different investment options.
• A variety of guaranteed death, annuity, income and withdrawal benefit options.
• Asset-based expenses that vary with the account value of the policy.
(a) Define each step in the product development process according to LOMA.
(b) Determine and define for this product development project the applicable:
(i) corporate growth strategy,
(ii) marketing strategy and
(iii) type of innovation.
(c) In developing expected lapse assumptions for the new product:
(i) List the factors affecting lapse rates.
(ii) Explain how the expected lapse assumptions would be impacted by each of
the proposed design features, and justify your answer.
(d) The entire product development project is expected to cost $10 million. Saturn’s
variable annuity products are expected to return 1% of premium annually after-tax.
The projected increase in sales is:
Year Without New Product With New Product
1 10% 210%
2 10% 60%
3 10% 10%
Calculate the project’s break-even year. Show all work.
Course 8I: Fall 2005 -5- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Morning Session
Question 5 pertains to the Case Study.
5. (13 points) As the product actuary for Mercury Life, you have been asked to analyze the
feasibility of adding an equity indexed annuity to the fixed annuity product line.
(a) (5 points) You are given the following product design:
• The index period is 6 years.
• The investment earnings rate is 5.5%.
• The first year commission is 4.0% of premium.
• Other expenses and profit equal 5.0% of premium.
• Guaranteed minimum account value is calculated using 90% of premium and
3.00% interest.
• Index account value is calculated using 100% of premium and 100%
participation rate guaranteed for 6 years.
(i) Calculate the affordable option budget. Show all work.
(ii) Determine changes and additions to the product design that would reduce
the actual option costs down to the affordable option budget.
(b) (1 point) Explain the impact of equity volatility on equity indexed annuity
pricing.
(c) (5 points) You are given the results from the initial pricing run:
Time Profit
0 - 25
1 60
2 0
3 0
4 42
5 12
6 - 70
Assume Mercury Life is willing to pay 5% for borrowed money.
(i) Calculate the ROI for this product using the Generalized ROI
Calculation Method. Show all work.
(ii) Assess the calculated ROI compared to Mercury Life’s profit objective.
(iii) Explain practical problems related to calculating ROI.
(d) (2 points) Evaluate the feasibility of adding an equity indexed annuity with
respect to Mercury Life’s target market.
Course 8I: Fall 2005 -6- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Morning Session
6. (9 points) You are reviewing a block of flexible premium UL policies.
(a) Describe steps to determine the minimum cash surrender value for this type of
product according to the NAIC Universal Life Model Regulation.
(b) Your analysis reveals a widening gap between value-based reserves and cash
values. You believe a new experience study is needed to revise the value-based
reserve lapse assumptions.
(i) You are given:
• The existing lapse assumption is based on an internal study conducted
in 1999 of lapses of permanent life policies during the period 1996 to
1998, which included data from an acquisition in 1996.
• Current portfolio lapse data cannot distinguish between fixed and
flexible premium UL policies.
• Industry experience is trending toward lower lapse rates.
Explain how the key principles in studying experience to set assumptions
provide guidance for these specific issues.
(ii) Describe considerations when adjusting a best estimate experience
assumption with provision for adverse deviation.
(c) An illustration for a male, issue age 45, flexible premium UL policy indicates the
coverage remains level for the life of the policy assuming the policyowner
continues to pay the same annual premium since issue.
You are given:
Current Annual Premium $160
Guaranteed Maturity Premium $200
CRVM Net Level Premium $150
Valuation Net Level Premium $125
Guaranteed Maturity Fund at Duration 10 $900
Actual Fund at Duration 10 $700
Cash Value at Duration 10 $650
PV of Benefits at Duration 10 $2,500
45:50 a 13.75
55:40 a 11.25
Calculate the 10th year
(i) CRVM minimum terminal reserve.
(ii) Statutory gain or loss upon surrender.
Show all work.
Course 8I: Fall 2005 -7- GO ON TO NEXT PAGE
Individual Insurance – U.S.
Morning Session