Contents DIE. ot mee eee xi ACKNOWLEDGMENTS . . . Part I PRopucT DEVELOPMENT FUNDAMENTALS . . « see EE 1 Carrer 1 | Lipe INSURANCE OVERVIEW. 6... 2 1.1 | Introduction... 2... ata mmers same 3 1.2. | Life Insurance Basics... 2. ee 3 1.3 | Purpose of Life Insurance... 6... ee ee 5 14 | Life Insurance Products 2... 0 2 ee 6 1.5 | Taxation of Life Insurance Products... 2.2... 36 1.6 | Life Insurance Distribution... 2. 6 ee 39 17 | Alignment... 00.2000 Bid 28398 Bw 47 18 | Exercises... elem sw mrt 48 £9 | Angwetsnw cers ue emda dda awaer nea 50 CHAPTER 2 | PRODUCT DEVELOPMENT. 2.20 ee 55 2:1 | Introduction. . 6. pace see e eee sane 55 2.2 | Product Strategy... 2.0... mitt wi ey oe me 56 2.3 | Product Development Organization... 0.0... + 62 2.4 | Pricing Strategy... 2... sem ares an 67 5 | Market Research... 0.2... cee 77 2.6 | Preliminary Product Design... 2... 2. 80 2.7 | Final Product Design... 0. ee 94 2.8 | Product Implementation. ©... 2... eee 108 2.9 | Product Management... 2.2... cee ee UB 2.10 | Exercises... 022. eee geazea WH 211 | Answers... ee 19 CHAPTER 3 | PRICING ASSUMPTIONS. 2... ee ee veas 15 3. Introduction. © 2. ee 125 3.2 | Mortality Assumptions... 2... 0.00022. 127 3.3. | Lapse Assumptions... 2... - 2. 1563.4 | Interest Rate Assumptions... 2... 2... 2. 170 3.5 | Expense Assumptions... 2.0... soe 197 3.6 | Average Size Assumptions... 2.2... 2 ee 220 3.7 | Sales Assumptions . . . 224 3.8 | Sensitivity Testing and Scenario ‘lesting. .. 2... . 227 BO | Beercises: os. eve en ee es 230 310 | Answers. ee 235 Part IT Propucr Pricinc 243. CHapTer 4 | Basic ACTUARIAL MATHEMATICS. 2... 2 02 2 ee 245 4d Introduction 245 4.2 | Notation Methodology 246 43 Interest 247 44 | Mortality 22.2.0... 2... 254 45 | Lapses... 20... 4.6 | Factors for Pricing. . 4.7 | Joint Life Mortality. 48 | Pricing Example... 2... ee eee 49 | Exercises 269 4.10 | Answers... 2.2... 273 Cuapter 5 | Lire INSURANCE CASH FLOWS 2... 2 ee 2. 297 5.1 Introduction. ©... ee 2. 277 5.2 | Premiums for Pre-Scheduled Products... 2... 280 BS | Bepetisess sua c ssn mwee iiss wears 280 5.4 Death Benefits and Claim Expenses... 2... 283 5.5 | Surrender Benefits... . . . 286 5.6 | Dividends fee 287 5.7 | Pure Endowment Benefits... 2... .....0-. 287 5.8 Dynamic Product Calculations . . 288 5.9 | Life Insurance Cash Flows for Dynam 297 5.10 | Cash Flow Summaries... 2... 0202. 2. 300 5.11 | Pricing Model 302 S12 || Exercisese <2: sce emy sy i 303 5.13. | Answers 308Contents Carter 6 | RESERVES 2... ee 313 6.1 | Introduction. . . 313 6.2 | Purpose of Reserves... 2-2. 0. cee. 31S 6.3 | Reserve Methods... . 2.2... wonvene BIR 64 | Valuation... 2.2... ee 344 6.5 | Impact of Reserves on Pricing. 6. ee 356 6.6 | International Survey of Reserve Methods... . . . 365 6.7 | Pricing Example 368 6.8 | Exercises 374 6.9 | Answers... ee verseas BFF CHAPTER 7 | REINSURANCE 2. ee 383 7.1 — | Introduction . -. 383 7.2 | Reinsurance Defined... 2. ee 384 73 Reflecting Reinsurance... 2... 6. sees 390 74 | Yearly Renewable Term... 2.2... ss 2. 392 7.5 | Coinsurance . tee 404 7.6 | Pricing Model. 2... 410 ZA | Bxerdisegoy ¢ 3 23H 3 4t4 a Hews sees All 7.8 | Answers. oe . 5 4i4 CHAPTER 8 | INVESTMENT INCOME. . SPOR EEEER MRS GGas AT &1 | Introduction. 2 417 8.2 | Policy Loans. . . 420 8.3 | Invested Assets. . win ne ea mm ee . 424 8.4 | Total Investment Income... 6... 0.0. oe 427 85 | Pricing Model 427 8.6 | Exercises... . 428 8.7 | Answers... 43h CHapter 9 | TAXES... 2 2. ee 435 91 Introduction... . . . 435 9.2 | Tax on Earnings . ‘ 436 9.3 | Tax on Investment Income Less Expenses... . . 446 9.4 | Tax on Capital 9.5 | Total Tax. . 9.6 | Deferred Taxes9.7 Pricing Example... 2... ee 456 9.8 | Exercises. 458 9.9 | Answers . 460 9.10 | Appendix . 463 CHapTer 10 | REQUIRED CAPITAL . 10.1. | Introduction . 4 10.2. | Asset Default Risk. 2... ee 469 10.3. | Insurance Risk... 22. ee + 472 104 | Interest Rate Risk 474 10.5 | Interest Spread Ris 478 10.6 | Other Risk. . 479 10.7 | Impact of Required Capital on Distributable Earnings. . 480 10.8 | Survey of Requi 482 10.9 | Pricing Model 494 10.10 | Exercises. . 494 10.11 | Answers . . 496 CHapTeR 11 | PROFIT MEASUREMENT AND ANALYSIS... 2 6. se 2. 499 11 | Introduction 499 11.2. | Distributable Earnings 499 11.3. | Stockholder Earnings. . 502 U4 | Selection of Profit Goals. 2... 2... ee ee 507 11.5. | Present Values . 512 11.6 | Profit Measures : . 515 1.7 | Pricing Model... ee 534 118 | Exercises... . 537 11.9 | Answers... . 542 CHAPTER 12 | QUARTERLY CALCULATIONS «2 2 2 2 ee 553 12.1. | Introduction 553 12.2 | Notation and Expense Rates . 554 12.3 | Basic Actuarial Mathematics . 555 12.4 | Cash Flows for Pre-Scheduled Products... 2... 561 12.5. | Cash Flows for Dynamic Products... 2.0... 573 12.6 | Summary of Cash Flows. . . . 579127 | Reserves... eee 581 12.8 | Remsurance.. 2.2... a 593 12.9 | Investment Income... 2.22 ee 605 12.10 | Taxes... 607 12.11 | Required Capital 611 12.12 | Profit Measures . 612 12.13 | Pricing Model... 2 ee 618 12.0% | Exercises. «os so emg ei eGR et ee me 620 12.15 | Answers... 2. 623 Caper 13 | ANNUITY AND INVESTMENT Propucts. . . . 631 13.1 | Introduction. 6... 631 13.2. | Annuity and Investment Products . 632 13.3. | Product Development... -.......0..00. 653 13.4 | Pricing Assumptions . 653 13.5. | Annuity and Investment Product Cash Flow 665 13.6 | Reserves. 22.2 eee 673 13.7. | Reinsurance 678 13.8 | Investment Income . . . 680 13.9 | Taxes... 0... 680 13.10 | Required Capital... . : 681 13.11 | Profit Measurement and Analysis 682 13.12 | Pricing Example . 685 13.13 | Exercises... 2... GLE ste mmnneee 691 13.14 | Answers 694 Parr IIT MODELING AND FINANCE. 2.0... eee ees 701 CHAPTER 14 | FINANCIAL MODELING. ©. 2 703 14.1 | Introduction... 6.0.2. ..0% 703 14.2. | Modeling of Liabilities. . . 703 14.3. | Asset/Liability Modeling 728 14.4 | Asset/Liability Matching 754 145 | Exercises... 22 ee 772 14.6 | Answers... 2-2 eee eee eeeChapter 15 | STOCHASTIC MODELING... 15.) 15.2 15.3 15.4 15.5 15.6 15.7 15.8 154 15.10 Cuaprer 16 | FINANCIAL MANAGEMENT... 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 16.10 GLOSSARY. INDEX OF VARIABLE DEFINITIONS. ee ee ee INDEX... ss | Introduction... 0... ee ee eee Overview of Stochastic Modeling. 2.2... Random Variables... 2. . - Stochastic Mortality 6... 0. eee Stochastic Interest Rates... 2 ee ee ee | Bffects on Liabilities... 2... eee Effects on Assets... 6 ee ee Summarizing Stochastic Results... 2... 5. BROS, bo be ee ee | Answers. 2... 002 - Introduction. . 6... ee ee eee ‘Tools of Financial Management... 2.2... | Acquisition or Sale of Business... 2... 0+. Risk Management... . Earnings Management . . Capital Management. Achieving Financial Goals... 0.0. ee ee | Conclusion 2.2... ee | Exercises Answers... . 785 785, 787 794 797 806 822 831 856 859 871 871