LPM Exam UPDATED ACTUAL Questions and CORRECT Answers
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Course
LPM
Institution
LPM
LPM Exam UPDATED ACTUAL
Questions and CORRECT Answers
How do you quantify the cost of mortality volatility? - CORRECT ANSWER- - should
be modeled stochastically
- insurers who do not model mortality stochastically will underprice the products )not be
compensated for the cost of volatility)
...
LPM Exam UPDATED ACTUAL
Questions and CORRECT Answers
How do you quantify the cost of mortality volatility? - CORRECT ANSWER✔✔- - should
be modeled stochastically
- insurers who do not model mortality stochastically will underprice the products )not be
compensated for the cost of volatility)
For term insurance, briefly describe the following characteristics:
- Coverage periods/patterns
- Possible premium patterns and guarantees
- Challenges of different premium schedules
- Par vs. non-par term - CORRECT ANSWER✔✔- Coverage patterns:
- level term: coverage for stated number of years
- decreasing term: DB pattern tied to insurance need (e.g. mortgage or loan)
- increasing term: may have benefits tied to index
- term insurance can also be sold as a rider on other types of policies (e.g. whole life)
Possible premium patterns and guarantees:
- level
- modified: one or two increases over term
- Increasing: every n years
- level then ART (annual renewable term)
- Indeterminate (non-guaranteed) Premium plans: allow insurer to raise premiums in the
future. It allows for aggressive pricing, but raising future premiums will cause the healthiest
lives to lapse, leaving higher mortality risks in force
Challenges of different premium schedules:
- Attained age - everyone age x pays same premium no matter the duration.
Challenge: Simplest to administer, but difficult to create scales that are competitive for a
wider range of ages
- Select scale - unique schedule of future annual premiums for every issue age
,Challenge: have lower premiums, which encourage persistency, but mortality may worsen in
the future
- select and ultimate (S&U) - usually starts w/ a select scale for 5-10 years, then blends to an
attained age scale
Challenge: same as select scale
Par vs. non-par term
Par: policyholder receives dividends (less popular and more expensive)
non-par: policyholder doesn't receive dividends
Par policies have higher premiums, lower deficiency reserves, and higher persistency due to
insured's declining cost
For term insurance, briefly describe the following characteristics:
- Term and non-term riders
- Term conversion options and pricing approaches - CORRECT ANSWER✔✔- Term and
non-term riders
Term riders: term insurance may be available as a rider on a permanent plan or one-year term
riders on par plans
Non-term riders:
- Waiver of Premium (WOP) rider
- Return of Premium (ROP) rider
- Accelerated Death Benefit (ADB) rider
- Guaranteed Insurability rider
- Other Living Benefits riders (chronic illness benefit, critical illness benefit, disability
income benefit, long-term care benefit)
Term conversion options and pricing approaches:
- most common option is to convert term to a permanent (WL) plan, and this is most common
with level term
Three philosophical approaches to charging for options:
1) only policyholders who exercise the option bear the cost
2) all policyholders who want the option available pay a higher premium from the start
3) all policyholders pay a higher premium whether they have any interest in the option or not
,-option 1 is the most expensive to those who exercise the option, while option 3 would be the
cheapest
Briefly describe the primary pricing considerations for term insurance:
- mortality
- persistency (lapse)
- underwriting
- compensation - CORRECT ANSWER✔✔- Mortality:
- the NAR for term is higher than WL
- in aggregate, term mortality is usually lower than WL mortality
Persistency:
- lapse rates can affect mortality
- high early lapses makes it harder to recover acquisition costs
- high lapse rates may erode expected profits
- steeply sloped premium scales can encourage lapses
- first year term lapses are slightly lower than permanent, but renewal term lapses are higher
Underwriting:
- similar to WL
- insureds may be UW for amounts larger than issue face if there's chance of future increases
in coverage
- select & super-select rating classes are becoming more common
- substandard insurance is less available for term than WL
- More insurers are using accelerated underwriting
Compensation:
- varies from company to company
- term has lower compensation than WL since term premiums are lower
Briefly describe the primary pricing considerations for term insurance:
, - expenses and inflation
- profit objectives
- legal and regulatory issues - CORRECT ANSWER✔✔- Expenses and inflation:
- expenses are large percentage of premium (greater than WL)
- Term profitability is very sensitive to expense allocation
- high inflation can erode term profits since term has minimal assets backing it
Profit objectives:
- Reserves have a significant impact on term profitability
- Common term profit objectives: profit margin, return on equity, IRR, surplus strain, and
break-even year
Legal and regulatory issues:
Aspects of term insurance regulated by states:
- coverage length
- advertising, disclosure, marketing practices
- actuarial certifications for policy filings
- contestability period
Describe the following characteristics of whole life:
- key differences w/ term
- par vs. non-par
- premium patterns - CORRECT ANSWER✔✔- Key differences w/ term:
- WL stays in force over the insured's life as long as premiums are paid
- WL provides a tabular cash value based on premiums paid less expense and mortality
charges
Par vs. non-par
- Participating WL - allows policyholder to share in insurer's profits through dividend
payments to policyholder.
Common dividend options:
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