Actuarial Aspects of Product Development
IC-92 treats product development as an actuarial process rather than a marketing one. The exam tests whether you can move from a benefit design to a defensible premium, reserve and profit signature, and explain how assumptions, regulation and risk interact.
The development cycle
Idea generation → feasibility → design and pricing → internal sign-off and regulatory filing → launch → periodic review. At each stage the actuary quantifies risk: benefit eligibility, exclusions, underwriting limits, and the cash-flow effect of guarantees and options.
Building the actuarial basis
Mortality or morbidity table (in India the IALM 2012-14 table is common), discount rate, expenses split into initial/renewal/termination, lapse and surrender rates, inflation, tax, reinsurance and required capital. Assumptions must be internally consistent: a high discount rate cannot sit alongside a conservative investment strategy.
Pricing and profit testing
Gross premium covers PV(benefits) + PV(expenses) + PV(profit). Profit testing projects per-policy cash flows to produce a profit signature, then reports NPV at the risk discount rate, IRR, break-even year and capital strain, followed by sensitivity and scenario tests.
Worked example
One-year term, sum assured 1,000,000, q = 0.002, i = 6%, expenses 20% of premium plus 500 per policy at outset, no profit loading. PV of claim = 1,000,000 × 0.002 / 1.06 = 1,886.79. P = 1,886.79 + 0.20P + 500 → 0.80P = 2,386.79 → P = 2,983.49. The 20% is a loading on premium, so it appears on both sides of the equation; you solve for P rather than adding 20% to the claim cost.
Traps
- Quoting net premium as the answer when expenses are given.
- Discounting the death benefit from year-end when it is paid at the moment of death.
- Using the pricing basis as the valuation basis for reserves, which are normally more prudent.
- Assuming lapses only reduce costs; they also cut premium income and spread fixed expenses over fewer policies.
- Leaving the cost of holding solvency capital out of the profit test.