III IC-27 flashcards
III IC-27 · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Net premium reserve
- Prospective reserve computed with gross benefits valued against net premiums only, excluding expense loads. It uses valuation mortality and interest and represents the statutory minimum liability for the policy.
- Gross premium reserve
- Reserve based on actual gross premiums and all future expenses, benefits, and margins. Because expense loads are recognized, it usually differs from the net premium reserve and reflects expected profitability.
- Prospective reserve
- Present value of future benefits minus present value of future net premiums at the valuation date. It looks forward and equals the amount needed today to fund remaining obligations.
- Retrospective reserve
- Accumulated value of past net premiums minus accumulated cost of insurance, with interest. It looks backward and matches the prospective reserve only when actual experience equals valuation assumptions.
- Recursive reserve formula
- Next reserve equals prior reserve plus net premium, accumulated at interest, minus the expected death benefit cost: (V + P)(1+i) − q(F − V). It links reserves across durations.
- Full preliminary term
- Modified reserve method that treats the first year as one-year term insurance, so the first-year reserve is zero and renewal reserves are higher. It defers acquisition cost recovery.
- CRVM
- Commissioners Reserve Valuation Method, a statutory minimum reserve standard. It allows a modified reserve with a first-year expense allowance and a specified deferral period, typically 20 years.
- Terminal reserve
- Reserve at the final duration of coverage. It equals zero for term policies and equals the face amount at the limiting age for whole life when mortality reaches 100%.
- Cash surrender value
- Amount paid to a policyowner on surrender, equal to the reserve less surrender charges, subject to statutory nonforfeiture minimums. It is not identical to the reserve.
- Nonforfeiture minimum
- Statutory floor on cash values and nonforfeiture benefits, using prescribed mortality (e.g., CSO) and a minimum interest rate such as 3%. It protects policyowners who lapse or surrender.
- DAC asset
- Deferred acquisition cost, capitalized and amortized against future gross profits under GAAP. Statutory accounting expenses acquisition costs immediately, producing surplus strain at issue.
- Surplus strain
- Reduction in statutory surplus at issue because first-year acquisition costs and reserve increases exceed first-year premium income. It reverses over the policy lifetime.
- Valuation mortality table
- Prescribed mortality basis for reserves, such as CSO tables, which may differ from pricing mortality. It is conservative and set by regulation rather than by company experience.
- Valuation interest rate
- Interest assumption used to discount reserves, set by regulation within a maximum. A higher valuation rate lowers reserves; a lower rate raises them.
- Reserve adequacy test
- Test that reserves plus future gross premiums cover future benefits and expenses. If not, a premium deficiency reserve is established, recognizing an expected loss immediately.
- Premium deficiency reserve
- Liability recognized when expected future losses on a block exceed existing reserves. It is recorded immediately rather than spread over the remaining policy life.
- Asset-liability matching
- Aligning asset duration and cash flows with reserve and benefit obligations. Mismatch creates interest rate risk, since rising rates lower asset values but also affect reserve discounting.
- Duration gap
- Difference between asset duration and liability duration. A positive gap means liabilities are less rate-sensitive, so rising rates can improve surplus while falling rates hurt it.
- Spread income
- Difference between earned investment yield and credited rate to policyholders. It is a primary profit source for interest-sensitive and universal life products.
- Mortality margin
- Difference between actual mortality and pricing mortality, expressed as a percentage of expected claims. Favorable mortality (actual below expected) increases profit for the insurer.
- Expense margin
- Difference between actual and assumed expenses, including per-policy and premium-based loads. Favorable expense experience increases profitability and surplus.
- Lapse margin
- Effect of actual surrenders and lapses versus pricing assumptions. Lapses can help or hurt depending on whether reserves are positive and acquisition costs are recovered.
- Profit signature
- Pattern of expected profits by policy year used in pricing. It shows when acquisition costs are recovered and when profits emerge over the policy lifetime.
- Internal rate of return
- Discount rate that makes the present value of the profit signature equal zero. It is compared with a hurdle rate to judge pricing adequacy.
- Break-even year
- Policy duration at which cumulative profits become positive. It indicates how long the insurer must hold the policy to recover acquisition costs.
- Risk-based capital
- Regulatory capital requirement tied to asset, insurance, interest rate, and business risk. Higher risk categories require more capital, and the ratio measures solvency strength.
- Statutory accounting
- Conservative regulatory accounting that expenses acquisition costs immediately and values reserves on prescribed bases. It emphasizes solvency over reported earnings.
- GAAP accounting
- Financial reporting that matches costs with revenues, capitalizing acquisition costs and recognizing profits over the policy period. It differs from statutory surplus reporting.
- Separate account
- Account holding assets for variable products where investment risk passes to the policyholder. Assets are segregated and generally not subject to general creditor claims.
- Guaranteed minimum death benefit
- Contractual floor on death benefit for variable or indexed products. It creates a liability and capital requirement because the insurer bears downside risk.
- Universal life cost of insurance
- Monthly mortality charge based on net amount at risk and current mortality rates. It reduces the account value and is separate from expense and surrender charges.
- Net amount at risk
- Face amount minus reserve or account value. It is the amount the insurer must pay beyond funds already held, and it drives the cost of insurance charge.