Life Insurance Company Operations
Domain 3: Life Insurance Company Operations
Operations questions test how underwriting, claims, actuarial, reinsurance, finance, and technology fit together, and where a handoff or assumption can create a loss.
Core functions
- Underwriting. Classify risk using the application, paramedical exam, attending physician statement, MIB codes, prescription databases, motor vehicle records, and financial underwriting. Outcomes: preferred, standard, substandard (table rating), postponement, decline.
- Claims. Proof of death, beneficiary identification, contestability period (typically two years), suicide exclusion, misstatement of age or sex adjustment, and interest on proceeds.
- Reinsurance. Yearly renewable term, coinsurance, and modified coinsurance; retention limits; the reinsurer reimburses ceded amounts.
- Actuarial. Mortality tables, reserve valuation, experience studies, and pricing assumptions for mortality, interest, lapse, and expenses.
- Finance. Statutory accounting is conservative and solvency-focused; GAAP matches revenue and expense for earnings; asset-liability management supports guarantees.
- Technology. Policy administration, straight-through processing, and data quality drive service cost and accuracy.
Worked example
Face amount $2,000,000; retention $500,000; YRT ceded $1,500,000. Annual YRT rate $2 per $1,000 ceded = $3,000 reinsurance premium. The insured dies. The insurer pays the beneficiary $2,000,000 and collects $1,500,000 from the reinsurer, leaving a $500,000 retained loss before premiums. Under 75% coinsurance, the reinsurer would also share premiums and reserves, not just claims.
Traps
- Thinking contestability voids a policy for any misstatement; the standard is material misstatement and the period is limited.
- Confusing MIB codes with full medical records.
- Assuming reinsurance transfers all risk; the retention stays with the ceding company.
- Mixing statutory and GAAP treatment of acquisition costs.