NOTE: If you use any source other than your intelligence, you must cite that source. This assignment is worth 50 points as noted below. Your response to this assignment must be delivered in hard copy (not emailed) to my office NLT 5pm on Monday September 30, 2019. Write legibly. If I have a hard time reading it, I won’t give you credit for the answer.

Calculate the premium to be paid by each policy owner for a one-year term (YRT) policy based upon the following facts.

  1. You expect the policy to be bought by 500,000 male policy owner/insureds and 500,000 female policy owner/insureds.
  2. Sex and age are the only underwriting criteria.
  3. Each policy has a $200,000 death benefit.
  4. Administrative expenses are $5,000,000.
  5. All premiums are paid on the first day of the year. This means that you need to include a discount rate in your calculations. Assume that it is 0.0096.
  6. All death will occur on the last day of the year.
  7. This is entirely unrealistic, but assume that all of the policy owners were born on September 15, 1994 and are 25 years old.
  8. Go to www.ssa.gov/OACT/STATS/table4c6.html. Find the Death Probability for your insureds. Use that chart to determine the “M” (of MIX-P) for your pool of insureds.

Questions:

  1. (Ten points) How many total deaths do you expect during the year? Show me your calculations.
    1. How many Males?
  2. (Five points) What premium must you charge each policy owner to cover the pure mortality costs? Show your calculations.
    • a.Male insureds:
    • Female insureds:
  3. Assume you think that there was a high probability that your actual death experience could deviate higher or lower from your expected experience by 1%.
    1. (Five points) What would you do? Explain why.
    2. (Five points) What would you do if you thought the probability of a 1% deviation was very low? Explain why.
  4. (Five points) Taking all of the above into consideration, what premium would you charge each insured? Note that there is no “right” answer to this question. But there is a “right” way to get to the answer you choose. Show me your calculations so I can determine whether you did it the right way.
  5. (Five points) Included in the above are factors for each of the MIX-P non-guaranteed elements except Persistency.
    1. What is persistency?
    2. Should persistency factor into your premium calculations?
  6. (Five points) Now assume that you expect to have $5,000,000 in investment income during the year these policies are in force. Note, again, that there is no single “right“ answer to this question. There are a range of possible answers. But you must have a logical reason for the answer you choose.
    1. How does that expectation affect your premium calculations?
  7. In your text and in the lecture outlines, it is explained what is meant by “renewability” and ”convertibility.”
    1. (Five points) If your policy includes both of these two provisions. Would that affect the premium you charge when the policy is first issued?
    2. (Five points) Explain why or why not.
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