Actuarial Outpost
Go Back   Actuarial Outpost > Exams - Please Limit Discussion to Exam-Related Topics > SoA > Individual Life and Annuities Track > Life Pricing Exam
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Life Pricing Exam Old Individual Life & Annuities Design and Pricing Forum

Thread Tools Search this Thread Display Modes
Old 09-05-2009, 05:25 PM
independent1019 independent1019 is offline
Join Date: Feb 2007
Posts: 528
Question self-support test and lapse-support test


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
Jealousy always work the opposite way.
Reply With Quote
Old 09-06-2009, 05:16 PM
coverdale's Avatar
coverdale coverdale is offline
Join Date: Jun 2007
Location: Canada
Studying for Nothing!
Posts: 340

What reading is this from? Is it part of the Canadian Syllabus too?
Reply With Quote
Old 09-06-2009, 07:08 PM
jraven's Avatar
jraven jraven is offline
Join Date: Aug 2007
Location: New Hampshire
Studying for nothing!
College: Penn State
Posts: 1,305

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...)
The Poisson distribution wasn't named after a fish -- it was named after a man ... who was named after a fish.

Last edited by jraven; 09-06-2009 at 11:40 PM.. Reason: Tweaking.
Reply With Quote

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

All times are GMT -4. The time now is 01:58 PM.

Powered by vBulletin®
Copyright ©2000 - 2018, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.18700 seconds with 9 queries