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  • March 12th, 2016


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  1. You are an actuary in charge of the life product development area of Storrs Life Insurance Company (SLIC). Storrs Life has been selling a 10-year Yearly Renewable Term (YRT) product for some time now, and has a considerable record of company experience for this product.  You have an excel file on HuskyCT which contains our current pricing assumptions for a Female Age 50 Non-smoker.  On this file you will find our best estimate mortality rates, the Statutory mortality rates, and the current YRT premiums that we charge a female age 50 non-smoker. (All other assumptions-such as face amount, earned interest rate etc. are the same as what we used in class for a Male age 50).  You should build these assumptions into your model to produce our pricing assumptions for a Female age 50 non-smoker for our current YRT product.  You should not change these YRT premiums or any of the assumptions.  These are the rates and assumptions for the product we currently sell, based on years of experience with this product, and we are not intending to change them at this time.


  1. You have been asked to recommend whether or not Storrs Life should introduce a 10 year Level Premium Term product, and if yes, at what price. Your major competitors have introduced Level Premium Term life products, and the popularity of this design has been cited as a cause for the declining sales numbers at SLIC.  Your actuarial students have developed a model for this product (already done in class!).  You, as the head of the product development department, need to decide whether or not to recommend that Storrs Life begin to sell this level premium term product, and, if so, at what premium rate per $1000 (for this assignment, for a Female non-smoker issue age 50).  You will do this by comparing the risks of selling a Level Premium Term product with the risks of selling the YRT design.  You must submit a report discussing your sensitivity and scenario tests performed on all of the risks incurred in selling these policies.  In particular, since your chief actuary is already familiar with your YRT product, but your company has never sold a level premium term design, you must point out all significant differences in the risks of these two products, as determined by your testing. Of course, you must also explain, as best as you are able, what is causing these differences. Based on this analysis, you should recommend whether or not SLIC should sell the level premium term product, and, if yes, at what price.


  1. Storrs Life’s pricing goal is a minimum Risk-Adjusted IRR of 15.0%. In other words, your target IRR is based on distributable earnings including the allocation of Benchmark Surplus.  Your decisions should be based on this Risk-Adjusted IRR profitability measure.  Note: Storrs Life has an opportunity cost of capital of 13%.  If you choose to also discuss the net present value of your results, you should calculate the NPV using an interest rate of 13% (not 15%).


  1. As noted above, you must perform sensitivity tests and at least one scenario test for each You may also include Break-even tests. (If you do, Break-even tests should be based on the 13% Opportunity Cost of Capital, not the hurdle rate of 15%). You should start by listing all of your pricing assumptions. In your sensitivity tests you should test all of the risks associated with selling these products, by testing changes to all of the pricing assumptions.  In particular, as noted above, because your chief actuary is familiar with the YRT design, but is not familiar with the Level Premium Term design it is essential that you identify any risks that are significantly different in the two designs.  (That is identify and explain assumptions that affect one policy significantly more or differently than the other).  These assumptions need special attention in your report, and you should explain these differences as best as you are able.   In fact, based on your results and analysis you may even decide to change the pricing assumptions you are using for the level premium term product.  If you do this, be sure to explain your reasoning.

On the other hand, if changes to an assumption produces similar results for the two products, and does not pose much risk, a brief mention is all that is required.  (An example for this situation is provided in the Helpful Hints document)


  1. Note that you should not change the statutory reserve assumptions. These are set by the regulators, and cannot be changed- so do not perform sensitivity tests on them.


For both products, you should perform at least one scenario test- changing two related, or dependent variables.  Explain why you think these two assumptions are related to each other.  That is, explain why a change in one assumption would cause you to believe the other assumption would change in the direction and magnitude you tested.

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