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Life Insurance Source of Earnings

Life Insurance Source of Earnings. Participating policies (mutual companies) Universal life type policies (SFAS 97) Amortization of DPAC ≈ gross profits Mortality, persistency, interest, expenses. Post Mortem Analysis. causes of superior / inferior performance.

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Life Insurance Source of Earnings

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  1. Life Insurance Source of Earnings • Participating policies (mutual companies) • Universal life type policies (SFAS 97) • Amortization of DPAC ≈ gross profits • Mortality, persistency, interest, expenses

  2. Post Mortem Analysis • causes of superior / inferior performance

  3. Estimation Error − Process Error • Estimation error: difference between forecast and true expected value • Process error: difference between true expected value and realization

  4. Workers’ Compensation • Static vs dynamic DPAC amortization • Charged, expected, and actual results • Solicitation costs on not-taken policies

  5. Analysis Levels • Individual factor • Policy year • Policy cohort

  6. Contribution Principle • Policyholder dividends ≈ contribution to profits • Three factor models

  7. Persistency • Increased withdrawals → • Increased current earnings • Lower future earnings

  8. Loss Cost Trend • Fast track data to countrywide trends • Countrywide trends to state trends • State trends to predict loss cost changes

  9. Estimation Error and Process Error

  10. Loss Trend Analysis (2)

  11. Loss Trend Analysis (1)

  12. Credibility • Estimating past experience • Removing sampling error

  13. Interest Spread

  14. Retention Rates • Historical 90% retention • New policy year: 80% retention • Acquisition costs: 20% new; 5% renewal • ELR: 80% new; 70% renewal • Total new-renewal spread: 25%

  15. Solicitation Costs

  16. Retrospectively Rated Policies • High non-ratable losses • Low investment income • Excessive expenses • High lapse rates or not-taken rates

  17. Item Values • Value in pricing analysis • Expected cost at policy inception • Actual (realized) cost

  18. Ratable Losses

  19. Retro Source of Earnings

  20. Pricing Paradigms • Premium / loss paradigm • Credit / charge paradigm

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