CAA CAA Life & Health Insurance Principles 1 — Questions and Answers
Question 1: What is 'term life insurance' in the context of US life insurance products?
- Permanent insurance that builds cash value over time
- Pure death benefit coverage for a specified period with no cash value accumulation (Correct answer)
- An annuity that pays income for life
- A policy that covers medical expenses during hospitalization
Correct answer: Pure death benefit coverage for a specified period with no cash value accumulation
Term life insurance provides a death benefit only during a specified coverage period and does not accumulate cash value, making it the simplest and typically least expensive form of life insurance.
Question 2: What actuarial concept does the 'net premium' represent in life insurance pricing?
- The gross premium minus the insurer's profit margin
- The premium calculated to cover expected mortality and interest costs only, without expense loadings (Correct answer)
- The premium charged to the policyholder after tax deductions
- The reinsurance premium ceded to a third party
Correct answer: The premium calculated to cover expected mortality and interest costs only, without expense loadings
The net premium is the portion of the premium designed solely to fund expected policy benefits, calculated using mortality and interest assumptions without expense loadings.
Question 3: What is the 'mortality table' used for in life insurance actuarial calculations?
- Tracking the investment returns of insurance company portfolios
- Providing probabilities of death at each age, used to price and reserve life insurance products (Correct answer)
- Listing the names of deceased policyholders for claims processing
- Calculating the tax liability of life insurance companies
Correct answer: Providing probabilities of death at each age, used to price and reserve life insurance products
A mortality table provides age-specific probabilities of death that actuaries use to calculate expected claim costs, premium rates, and policy reserves for life insurance products.
Question 4: Which US regulatory framework requires life insurers to hold minimum reserves for individual life policies?
- Generally Accepted Accounting Principles (GAAP)
- Statutory Accounting Principles (SAP) under NAIC model laws (Correct answer)
- International Financial Reporting Standards (IFRS 17)
- Federal Reserve Regulation W
Correct answer: Statutory Accounting Principles (SAP) under NAIC model laws
US life insurers must hold statutory reserves under NAIC model laws, which apply Statutory Accounting Principles designed to ensure policyholder protection and solvency.
Question 5: What does 'adverse selection' mean in health insurance underwriting?
- The insurer selecting only the healthiest applicants
- The tendency for individuals with higher health risks to be more likely to purchase insurance, skewing the risk pool (Correct answer)
- A regulatory penalty for unfair underwriting practices
- An actuary choosing conservative assumptions
Correct answer: The tendency for individuals with higher health risks to be more likely to purchase insurance, skewing the risk pool
Adverse selection occurs when people with higher-than-average health risks disproportionately seek insurance, causing the actual risk pool to be worse than expected if ignored in pricing.
Question 6: In US employer-sponsored group health insurance, what is the purpose of 'experience rating'?
- Rating a group based on its own historical claims experience to reflect its actual risk profile (Correct answer)
- Using the national average health cost to price all groups uniformly
- Adjusting premiums based solely on the age of the group's employees
- Setting premiums based on the insurer's investment experience
Correct answer: Rating a group based on its own historical claims experience to reflect its actual risk profile
Experience rating adjusts a group's premium based on its own historical claims data, so that groups with good (or poor) claims experience pay premiums reflecting their actual risk.
CAA CAA Life & Health Insurance Principles 1
What is 'term life insurance' in the context of US life insurance products?