PAK Study Manual Dynamic Hedging Policyholder Behavior

PAK Study Manual
Life Pricing (LP) Exam
Fall 2014 Edition
MCEV
Regulation
GMXBs
Taxation
Reinsurance
Product Features
Policyholder Behavior
Pricing Considerations
Experience Assumptions
Life Insurance
Dynamic Hedging
Product Design
Underwriting
Premium
Dividend
Benefits
7702
PAK Study Manual
for LP Fall 2014
PRODUCT FEATURES
Purposes
Features
PAK
Study Manual
PAK
Exam Aid
PAK
Flash Cards
PAK
Test Aid
PAK Study
Manual Package
Study
Summaries
X
X
Study
Relevant Past Questions (List)
X
X
Study
100+ Practice Questions
X
X
Study
10 Mock Questions
X
X
Study
Suggested Schedule (Detailed)
X
X
Study
Email Support
X
X
Practice
Mock Questions
X
X
Practice
Syllabus Questions
X
X
Practice
Past Questions (Sorted PDFs)
X
X
Review
Flash Cards
X
X
Review
Electronic Condensed Summary
X
X
Evaluation
Bonus
Mock Exam
Bonus materials
X
X
X
1
PAK STUDY MANUAL
1. Summary*
The PAK Study Manual covers the entire Life Pricing (LP) syllabus. Not only does it give
you the detailed explanations on conceptual, calculation, and exam materials, but it also
fills in the gaps among the topics that are not covered in the source readings. It helps
you better understand and master the confusing logics and difficult materials.
In addition, it links the similar topics across readings together and connects them to the
syllabus so that you can see the whole picture of this exam.
2. Relevant Past LP/CSP/DP SOA Exam Questions (List)
For each reading, we compose a list of relevant past exam questions (if any) so that you
can locate the questions quickly and practice them immediately. This saves your time on
searching what materials are relevant to this exam.
3. 100+ Practice Questions
One key point to pass this exam is to "practice" (Practice makes perfect!). Due to this
reason, we include many practice questions in each reading (100+ in total) to refresh the
materials just learnt and to strengthen your knowledge. More practice will be available
in the PAK Exam Aid. The release date of these practice questions is on 7/15.
4. Mock Exam Questions*
The mock exam questions mimic the same difficulty level of the real exam questions. 10
mock exam questions and solutions are included in the PAK Study Manual to challenge
your understandings. More practice will be available in the PAK Exam Aid.
5. Suggested Study Schedule (Detailed)
The syllabus is huge. It is very easy to lose track on your study. A clearly defined study
schedule and some useful tips are included to help you better manage your schedule.
6. Email Support
Get questions? Please send me an email
“Thanks Eddy for doing an awesome job. The seminar and materials really helped
me stay on top of my study schedule and kept me going. ” By Ryan S. K. - Canada
Read the whole story
PAK FLASH CARDS
DO YOU KNOW?
The PAK Study Manual and
related aids are updated EVERY
exam sitting.
You will see the most updated
materials, examples, and explanations to help you master the
concepts and pass this exam in
the first attempt.
1. Flash Cards*
 Summarize the key points (with mnemonics) (PDF version is also available)
 400 cards (800 slides) are available
 Work best for any big-screen cellular phone or mp3 player (e.g. iPhone, HTC,
Android, Nook, etc)
2. Bonus Material: Electronic Condensed Summary
 Summarize the key points in outline format
 Quickly refresh all the important topics in the readings
*The PAK Study Manual and the PAK Flash Cards are
also available in hard copy format. Please send us an
email (services@pakstudymanual.com) for more details.
2
PAK EXAM AID
1. 30 Mock Exam Questions and Solutions
The mock exam questions mimic the same difficulty level of the real exam questions.
30 mock exam questions and solutions are included to challenge your understandings.
DO YOU KNOW?
2. 30+ Syllabus Questions
Many examples are covered in this syllabus. Exam creators sometimes choose them
and alter the numbers to create a new exam question. Therefore, we consolidate the
key examples and provide detailed solutions to get you well-prepared for that.
You can find the most updated
information about the PAK
Study Manual and related aids
under the “Announcement”
section on the front page of the
PAK website.
3. Past SOA Exam Questions (from All FSA Tracks) Relevant to This Exam
This set not only includes the past exam questions from the LP/CSP/DP exams, but
also includes the past exam questions from all the other FSA exam tracks (e.g. FETE,
APM, AFE, ERM, etc). It helps you better understand how the materials were tested
and gets you familiar with the SOA exam question style.
PAK TEST AID
1. Mock Exam

This set of mock exam is different from those mock questions available in the
PAK Exam Aid. You can write down your answers and send them to us. We will
give you detailed feedbacks on how to improve your exam score
“PAK is the best study aid I've ever used . ” By Mavis Shang - Toronto
Read the whole story
RELEASE SCHEDULE
Purposes
Features
PAK
Study Manual
PAK
Exam Aid
PAK
Flash Cards
PAK
Test Aid
PAK Study
Manual Package
Study
Summaries
5/20
5/20
Study
Relevant Past Questions (List)
5/20
5/20
Study
100+ Practice Questions
7/15
7/15
Study
10 Mock Questions
5/20
5/20
Study
Suggested Schedule (Detailed)
5/20
5/20
Study
Email Support
Anytime
Anytime
Practice
Mock Questions
9/1
9/1
Practice
Syllabus Questions
9/1
9/1
Practice
Past Questions (Sorted PDFs)
7/15
7/15
Review
Flash Cards
5/20
5/20
Review
Electronic Condensed Summary
5/20
5/20
Evaluation Mock Exam
Bonus
Bonus materials
9/1
9/1
To Be Announced
3
PAK STUDY MANUAL PACKAGE
1.
2.
3.
4.
5.
PAK Study Manual
PAK Exam Aid
PAK Flash Cards
PAK Test Aid
Bonus materials
(Release on 5/20)
(Release on 7/15 and 9/1)
(Release on 5/20)
(Release on 9/1)
SAMPLES?
You can find more samples on the PAK website.
IMPORTANT NOTES
1.
Once you make a purchase (please use your work email address), we will send you a
confirmation email within 1 business days Once the files are available, we will send
them to you through email. Please make sure that you put the correct email address
when you purchase the PAK products. If you do not receive the confirmation
email, please send us an email.
2.
Please check your “junk” mailbox. Sometimes, my email is blocked.
WHERE TO PURCHASE PAK PRODUCTS
The PAK products are available at Actex, Actuarial Bookstore, and SlideRule Books.
COMMENTS FROM THE PAST CANDIDATES
You can find more comments from the past candidates here: PAK Testimonials.
MORE INFORMATION
DO YOU KNOW?
If you are not sure which exam
track to take, or how it can advance your career, you can send
an email to Francis or Eddy and
discuss your situation with
them. They will share their work
experience with you so that you
can make your decision informatively.
4
Want more information? Please contact us at francis.yung@pakstudymanual.com or
eddy.chan@pakstudymanual.com or visit www.pakstudymanual.com
PAK Study Manual for LP Fall 2014
Frequent Answer Questions
Do You Need to Read the Source Readings?
Unlike the preliminary exams, reading the source readings (textbooks, SOA study notes, and online readings) is a
must in the FSA exams. PAK Study Manual can help you understand the materials faster and memorize them
quickly so that in the time-limited environment, you can be well-prepared for the exam.
How Much Time is Needed to Study for This Exam?
This varies by person. Usually it will take one 350-400 hours to study for a FSA exam (5-hour). Please expect to
spend the same amount of time for the LP exam.
Study Schedule
From the date the SOA release the new syllabus to the exam date, there are around 4 months to study. How to
plan your study schedule?
T=2.5 months
T=0
Read the Source Readings
T=3.5 months
Review Again
T=4 months
Practice
Read the Source Readings
Assume you take the LP exam in this exam sitting. In general, it will take one 2 to 2.5 months to finish them. To
study more efficiently, I highly suggest you following the steps below:
Step 1: Define Your Own Study Schedule
- Use the suggested study schedule as a reference
- Prepare your own study schedule (Target 20-30 pages @weekday and 50-60 pages @weekend)
- Expect to read the whole syllabus and the past exams 2 or 3 times before the exam
Step 2: Read the Source Readings Together with the PAK Study Manual
- Write down your notes in the study manual
- Highlight all the key points there
(Will be used for memorization later)
- Label any calculations that you will go over again later
- Go over the related past exam questions once you finish that reading
Step 3: Read the SOA Past Papers
- Read them once you finish your first-round of readings (use the PAK Exam Aid)
- Understand how the topics were tested and how the questions were answered
Review Again
After completing the three steps above, you probably have a general idea about how the exam looks like. Now
you should review the source readings again but this time focus more on the key topics, clarify the confusing
concepts/calculations, think of what can be tested and read them carefully (use my mock exam questions)
Practice
The last month is the most critical month. Here are the steps:
- Practice the past exams and my mock questions to identify what you still do not know
- Go back to the readings and find your answers (or send me an email if you need help)
- Start memorizing the key points
(use the PAK Memorization Aid)
- Use the PAK Test Aid to test your knowledge
(Send me your answers and I will give you detailed
feedbacks on how to improve your score in the exams)
More Information
We will explain how to prepare for this exam in much more details in the PAK Study Manual.
Any Questions?
We know you probably have a lot of questions in your mind regarding the exam or choosing study aids. Please
feel free to contact us at francis.yung@pakstudymanual.com or eddy.chan@pakstudymanual.com
© 2014 PAK Study Manual
1
SOA LP Exam (Study Manual)
PAK Study Manual for LP Fall 2014
Online Reading: Predictive Modeling for Life Insurance (by Deloitte)
Key Points
Key Points in This Reading
1) Understand what predictive modeling is
2) Understand how to use predictive modeling in life insurance
3) Understand how to build a predictive model
SAMPLE
The Rise of "Analytic" Decision Making
What is Predictive Modeling?
- It is defined as the analysis of large data sets to make inferences or identify meaningful relationships and the
use of these relationships to better predict future events
Example: Credit Scoring
Uses of Credit Scoring
1. Determine interest rates for home loans
2. Price risks (by A&H insurers)
3. Serves as a proxy for non-observable variables (not captured by traditional insurance rating dimensions)
4. Improve business processes that require human experience
Other Examples
- Claims management, fraud detection, premium audit, target marketing, cross-selling, and agency recruiting
Current State of Life Insurance Predictive Modeling
Current State of Life Insurance Predictive Modeling
- Life insurers had not been actively using statistical algorithms to improve decision
- But now, the concept of predictive modeling is growing in life insurance
Focus: Underwriting Process
- This article focuses on underwriting process
- It is costly and time consuming to underwrite each applicant
Improvements to the Underwriting Process
1. Simplify process for smaller face amounts
2. Refine underwriting requirements
3. Streamline data processing
Prerequisites for Predictive Model
1. A clearly defined target variable
2. Availability of data set
3. A large number of observations
4. An application to translate model results into business actions
© 2014 PAK Study Manual
2
SOA LP Exam (Study Manual)
PAK Study Manual for LP Fall 2014
Differences between Life Underwriting and Auto Underwriting
Auto Insurer
Target Variable
Claims over six-month contract
-
Can change rate at policy renewals
Life Insurer
Mortality experience over life of product
(10, 20+ years)
-
Modeling Data
Frequency of Loss
Contribution of risk factors may change
over time, so it is not enough to analyze
mortality over short period of time
Price is set since issue
Underwriting requirements supplemented by third-party data
Approximately 10 percent of drivers make Fewer than 1 first year death per 1,000
claims annually
new policies issued
-
Build robust models using loss data from
most recent experience
-
Business Action
Need long history but hard to get
Not all data is in electronic format
Contents of older data may be different
from data gathered today
Underwriting Decision
NOTE: Model scores are not highly dependent upon any one but should be viewed holistically.
Model Underwriting Decisions
- Due to the above challenges that Life Insurers face, they started to model underwriting decisions
o Group policyholders into discrete underwriting classes (i.e. Standard, Preferred, Super-Preferred)
o Galton’s example: When the risks are segmented sufficiently, insurers are able to adequately price for the
aggregate mortality risk of each class
Credit: Predictive Modeling for Life Insurance p.9
Advantages of Modeling Underwriting Decisions
1. In generous supply
2. Contain a lot of information and expert judgment
3. Do not require long “development” periods
4. Significant improvement on current practice
NOTE: Predictive Model is not used to make underwriting decision but to screen applications and suggest
whether additional requirements are needed before making an offer.
© 2014 PAK Study Manual
3
SOA LP Exam (Study Manual)
PAK Study Manual for LP Fall 2014
Competitive Advantage of using Predictive Modeling
Competitive Advantages of using Predictive Modeling
Section
Description
- The underwriting process can be made faster, more economical, more efficient, more consistent,
Life
and less costly
Underwriting
Marketing
-
Inforce
Management
-
Generate opportunities for meaningful improvements in efficiency and productivity
Streamline for more straightforward risk and free up underwriter’s time for analysis of complex risks
Do not need to order traditional requirements at time an application is taken
Selling life insurance by identifying potential customers
Segment risks to target less to those who will later be declined, thus an applicant pool with more
healthy lives
Serve more specific sales campaigns (i.e. cross-marketing)
Target specific products to the markets for which they were designed (i.e. provide incentives for
insured to maintain healthy lifestyle – target to people who have that lifestyle already
Provide more insight to emerging mortality experience
Inform changes to nonguaranteed policy features
Help insurers know where to focus efforts to retain policyholders and identify which customers are
most likely to leave
Guide both direct writers and reinsurers in block transactions
Improve efficiency of agent recruiting (i.e. find customers with similar profile as the existing
successful field inforce)
Challenges
1. Hard to provide reasons in cases where the best rates are not offered
2. Obtain a score threshold to determine which cases can be issued immediately and which cases required
further underwriting tests
Building a Predictive Model
Building a Predictive Model
1. Data
2. Modeling Process
3. Monitoring Results
#1. Data
Requirements
Traditional
underwriting
requirements
Description
-
Non-traditional
underwriting
requirements
-
Data Sources
Available within the first two days after an
application is submitted
Transmitted electronically in a machine
readable format
Are ordered for all medically underwritten
applicants
Based on marketing application and consumer
credit data
Use without personally identifiable information
© 2014 PAK Study Manual
4
-
Application Data
MIB
MVR
Electronic Rx Profile
Others such as blood and urine analysis,
EKG’s, medical records and exam
Equifax
Axiom
SOA LP Exam (Study Manual)
PAK Study Manual for LP Fall 2014
#2. Modeling Process
- Collect and organize all the data
o 18 months is the good amount of time to see material changes in modeling data
Data Preparation
Variable
Generation
Exploratory Data
Analysis
Variable
Transformation
Partitioning Model
Set for Model
Build
Description
-
Process of creating synthetic variables from raw data – assign a name and data format to every
field of data
Analyze distributional properties of each variable (i.e. min, max, mean, etc.)
Univariate review to examine relationship with the target variable – include variables that are
highly correlated with the target, well-populated, and sufficiently distributed
Group excessive categorical values
Replace missing values with neutral or best estimate
Cap extreme values or outliers or transform a variable to a logarithmic scale
Capture trends by transforming variables from text to numeric
Data set is divided into three parts: 1) Train – used to build the model, 2) Validation – used to
adjust the initial model, and 3) Test – used to assess the results when modeling is completed
After data sets are partitioned, use stepwise regression to find few variables with the strongest
relationship to the target
Identify equation of predictive variables that has the strongest statistical relationship with the
target variable
Use decision tree to extract useful information out of the modeling data
NOTE: Predictive models, unlike financial models, are built on the train and validation data set that hold up well
for the test data.
#3. Monitoring Results
- Since model is built from static sample, need to monitor the dynamic of new applicants that may result in antiselection
- Avoid anti-selection
o Use third party marketing data
• Cannot be manipulated by applicant
• Based upon trends captured over time
• Model does not rely on one field
o Maintain some unpredictability so applicants will be allowed to forgo additional requirements
o Randomly select applicants for traditional underwriting
Legal and Ethical Concerns
Legal and Ethical Concerns
- Raised concern and resulted in the Fair Credit Reporting Act (FCRA) of 1970
o Consumer protections are maintained around access and transparency
o Marketing sets are not subject to the FCRA
-
Commercial use of personal marketing data is not new
o Acceptable for property and casualty insurance underwriting but require additional care on life insurance
(i.e. no matter what the predictive powers may be, any variable that is deemed to create a legal risk
should be excluded)
-
Model takes positive actions but not adverse actions
© 2014 PAK Study Manual
5
SOA LP Exam (Study Manual)
PAK Study Manual for LP Fall 2014
The Future of Life Insurance Predictive Modeling
The Future of Life Insurance Predictive Modeling
- Due to improvements of technology, banking and credit card industries are well known pioneers. Insurance
has lagged but has gained a lot of momentum recently
Predictive
Modeling
Increase
Competition
Lower
Premiums
Reduce Costs
Increase
Access to
Insurance
Healthier
Lifestyles
Practice Questions
1. Identify the pre-requisites for predictive model.
Prerequisites for Predictive Model
1. A clearly defined target variable
2. Availability of data set
3. A large number of observations
4. An application to translate model results into business actions
2. Outline the process of building a predictive model.
Building a Predictive Model
1. Data collection
2. Modeling process
3. Monitor results
3. List the advantages of modeling underwriting decisions.
Advantages of Modeling Underwriting Decisions
1. In generous supply
2. Contain a lot of information and expert judgment
3. Do not require long “development” periods
4. Significant improvement on current practice
© 2014 PAK Study Manual
6
SOA LP Exam (Study Manual)