Introduction

• The introduction of this book discusses basic contract types as well as basic accounting principles used in the life insurance industry. Term life, whole life, variable life and universal life insurance are briefly described. A discussion of life insurance riders (modifications to the base policy contract) are discussed. Both immediate and deferred annuities are introduced.
  
  

Product Development and Pricing

• Products need to be developed and priced properly for the insurer to profit. The marketing division of the company drives product development and determines what the market will bear in terms of cost to deliver the product to market. Premiums are calculated according to insurance costs and any amounts required to be collected to meet state reserve requirements. The mortality, interest and expense functions of policies are discussed.
  
  

Calculation of Policy Values

• This section deals primarily with non-forfeiture benefits of life and annuity contracts, accounting principles inherent in life insurance, reserve requirements and dividends and other non-guaranteed elements of life and annuity contracts. This section addresses the tricky subject of universal life insurance. Because universal life does not have fixed mortality expense charges, actuaries must devise a different method to calculate reserves. The concept of a "guaranteed maturity premium" is introduced. This premium is the lump sum amount required to fund all the policy's guaranteed insurance costs as well as all other expenses of the policy.
  
  

Profit Testing

• Life insurance companies must profit, or there is no incentive to sell the product. Therefore, the insurance company uses profit testing to ensure the product is profitable. The insurer tests the product under various interest-rate assumptions. The cash reserves of the company must grow at the predicted levels to make sure that the company has enough money to pay for the death benefit or to pay for annuity payments when claims are processed.
  
  

Regulation Issues

• Life insurance companies must comply with state laws on cash reserves and accounting policies. Insurance costs are set at a government-regulated maximum level. Insurers must ensure that all policies designed and sold meet the state's requirements and that the insurer has a certain minimum amount of reserves available to pay claims if and when they arise.
  
  

Other Topics

• The final section of this book deals primarily with the expense accounting done for life insurance actuaries. Actuaries are professional mathematicians. Actuaries that work for life insurance companies are instrumental in designing life insurance and annuity policies. These individuals must know how to allocate investment income and factor in lapse rates (the rate at which policyholders voluntarily terminate their policies). Actuaries also must factor in all the other expenses, such as operating expenses and life insurance agent commissions, and must abide by government regulations in terms of reporting the valuation of the life insurance company's insurance portfolio.