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Old 09-05-2009, 05:25 PM
independent1019 independent1019 is offline
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Question self-support test and lapse-support test

Hi,

I am very confused about what exact are "self-support test" and "lapse-support test" that company must comply to meet NAIC Life Insurance Illustration Model Regulation.

“Self-supporting illustration” means an illustration of a policy form for which it can
be demonstrated that, when using experience assumptions underlying the disciplined
current scale, for all illustrated points in time on or after the fifteenth policy
anniversary or the twentieth policy anniversary for second-or-later-to-die policies (or
upon policy expiration if sooner), the accumulated value of all policy cash flows
equals or exceeds the total policy owner value available. For this purpose, policy
owner value will include cash surrender values and any other illustrated benefit
amounts available at the policy owner’s election.


“Lapse-supported illustration” means an illustration of a policy form failing the test
of self-supporting as defined in this regulation, under a modified persistency rate
assumption using persistency rates underlying the disciplined current scale for the
first five (5) years and 100 percent policy persistency thereafter.




Can someone help me to understand them better with normal english please? Thanks
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Old 09-06-2009, 05:16 PM
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coverdale coverdale is offline
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What reading is this from? Is it part of the Canadian Syllabus too?
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Old 09-06-2009, 07:08 PM
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jraven jraven is offline
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Quote:
Originally Posted by coverdale View Post
What reading is this from? Is it part of the Canadian Syllabus too?
It's part of the U.S. Life Insurance Illustration Model Regulation, so I'd assume not. (I haven't checked, though. I checked, it's ILA-D804-09, and it's not part of the Canadian readings.)

Anyway, as far as I know to pass the self-support test the policy must eventually (15 or 20 years in) be ... self-supported. The accumulated value of policy cash flows (premiums, interest, assorted expense and benefit costs, withdrawals, surrender charges, etc) -- all under the assumptions of the current disciplined scale -- should be sufficient to cover the cash value (well, "total policy owner value available", so maybe it's account value?).

The point being that most insurance policies aren't self-supporting initially (e.g. because the early expense charges aren't sufficient to cover the acquisition costs) and need to borrow funds from elsewhere in the business; however eventually they will be self-supporting -- otherwise the company shouldn't even be selling the product (because they're going to lose money on it). So since no insurance company is going to sell a policy that they don't believe is eventually self-supporting it would be disingenuous for them to provide a non-self-supporting illustration.

The "not lapse supported" test takes this one step further and limits the assumptions you can make about lapses. Since the cash value is generally less than the account value for many years after issue (thanks to surrender charges), lapsing policies can be used to support persisting policies. However this can make the product's performance inordinately sensitive to actual lapse experience. To prevent companies from making overly generous assumptions about lapses to improve their illustrations, the model reg requires illustrations to be self-supporting even if there are no lapses after the fifth year. [Note that lapses during the first few years are unlikely to benefit the company anyway, since they probably haven't recovered acquisition costs by that point. So using the current disciplined scale lapse rates during the first five years could very well be worse than setting all lapse rates to zero.]

At least, that's my understanding of it. (And if I'm wrong I'd love to be corrected before exam day...)
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Last edited by jraven; 09-06-2009 at 11:40 PM.. Reason: Tweaking.
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