Marketing for Actuaries (LIMRA) - Chapter VII

Marketing for Actuaries (LIMRA) - Chapter VII - ILLUSTRATION AND DISCLOSURE

Competition

consumer level - competing against otehr cos w/ similar products
distribution level - compete for agents or other sales sources
inter-industry competition - consumer savings and retirement dollars
mainly focused on price comptetition adn disclosure regs
price comparison - measures relative attractiveness of pols avail from diff cos
policy benefit disclosure - informing prospects of structure of policy offered
- prems, CVs divs, options and supp benfits
life ins is usually "sold" instead of "bought" - different from most consumer products

Cost Index for Price Comparison

old std basis - net cost = sum prems for 20 years - 20 yr CV - illustrated divs
70s - suggesting int adj cost index
- slow acceptance b/c
  - controversy over choice of new cost comparison system
  - apprehension that emphasizing comparative costs might hampter selling and discourage prospects from buying
  - failure to sufficiently recognize risks of buying needed coverage
  - failure to sufficiently recognize the risks of delay
- feds started looking @ alternate indexes and spurred cos to react
- ind adj finally adopted by NAIC in 76
- myth: cost alone is basic comparison factor among ins products - int adj method perpetuates this
  - doesn't help buyers assess appropriateness of product to their needs
- consumerists often forget that one of the benfeits for buyer is education and services of a professional agent
- efforts to improve quality and availability of comparative info ineffectove for several reasons
  - failure by industry leaders (and actuaries) to recognize delay may lead to widespread buyer rejection of ins
  - problems in comparing dissimilar policies - policy types adn company philosophies (new money vs portfolio)
  - agent's ability to vary illustrations - esp int racditing rates
  - actuaries who confuse illustrations w/ projections and reject any form of comparative analysis
  - regulators and regulations that have not kept pace w/ products

Illustrations as Method of Comparison

historically used to show effects of dividends
b/c of external copetition, began using illustrations to show inner workings as comparison to external products
tech alloed agents to produce illustrations on the fly
if done on a consistent basis, illustrations provide valid comparison
abuse of illustrations have caused may problems

Illustration Model Reg and ASOP 24

NAIC working group indentified # of computer illustration problems
- inappropriate use of illustrations to estimate future performance and compare policies
- lack of accountability of any of the parties to the sale
- lack of standardized format fo rlife ins illustrations
- lask of std and consistent definitions, lang, assumptions adn methodology
- inadequate description of the policy
- consumers not notified of changes in current assumptions
- insufficient penalty provisions exist for disclosure violations
- current regulatory approaches out-of-date considering desings of poliices being sold today
NAIC Life Ins Illustration Model Reg - app 1995
- provided for protection of consumers
- fostered consumer education by making illustrations understanbable
- provided illustration formats
- prescribed standards
- req'd disclosure in connection w/ illustrations
- created illustration actuary
Illustration Actuary - certifies illustratoin based on ASB standards
ASOP 24 provides guidance
"Illustrated Scale" must be supportable (disciplined current scale)
- to appease regulators concerns over "bait and switch" scales (non-guar elements)

SelfSupport Test

policy form should not be supported by another policy form or another source
accumulated value of policy CF using disciplined current scale and underlying assumptions s/b >= illustrated PO valued for 15th anniv and every illustrated point beyond

Lapse-Supported Test

req prohibits illustration of non-guar elements in poliicies deemed lapse supported
req degined lapse-support test - used disciplined scale assumptions except years 6+ assume 100% persistency
- intended to insure that any persistency bonuses included in test

Illustration Assumptions

disciplined current scale assumptions s/b based on actual experience to extent experience is current, determinable, and credible
- otherwise use actual exp/trens of similar blocks from
  - same co
  - other co
  - other sources
  - in above order
major experience factors
- interest mortality taxes
- direct sales costs all other expenses persistency
- aggregation reinsurance changes in methodology
model req defines min expenses w/ 3 option approaches
- approach must be used for all policy forms during certification year
  - Fully Allocated Unit expenses
  - Marginally Accocated Unit Expenses
    - similar to fully but excluded corp overhead adn general adv
  - GRET
- marginal only to used if > GRET
- GRET can only be used if > marginal (in aggregate)
- can always use fully allocated as minimum
- cannot project favorable trends into future
- Illustration Actuary needs to certify scale
  - scale has not changed since last certification and experience doesn't warrant changes OR
  - scale has changed since issue only to extent chagnes are reasonably consistent w/ changes in exp assumptions underlying current disciplined scale OR
  - currently payable scale has been made less favorable to PO since last certification and change is more than current experience would necessitate
- Illustration Actuary should certify annually
  - and for newly introduced forms before new policy form is illustrated
- certification should contain
  - for business issued in last 5 years, if currently payable scale as been reduced since last cert for reasons unrelated to exp changes
  - statement as to whether inconsistency between illustrated non-guar elements for new policies adn similar inforce policies
  - statemetn whether illustrated non-guar elements for new and inforce pols consistent w/ non-guar element amts actually credited or charged to smae or similar forms
  - statement as to choice of expense assumptions

Copyright © 2004 Steve Welander.
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