A. With a profit margin of 24.94% and an IRR of 49.03%, which are far higher than the
stated goals of 9% and 12%, a reduction in premium would be justified.
B. Given the results on the Output Summary tab, setting the per-unit premium
proportional to issue age is appropriate. Profit margin is consistent across the four age
bands, and an insulated bond portfolio reduces the impact of interest rate on an
individual age band.
Results by gender indicate that varying rates by gender would allow for more accurate
pricing. At the current premium rates, the model projects profits for both genders.
However, if premiums are reduced to target a profit margin of 9%, the company would be
well below that target on female policyholders. A gender factor could be applied to target
the same profit margin for both genders.
C. Sensitivity test results were as follows:
Maintenance Expense per 1000 of Salary
Asset Earned Rate
The least critical of the three assumptions is maintenance expense. Maintenance
expenses are relatively predictable, and it would take a significant change to internal
business processes to increase or decrease those expenses by 40% of the current rate.
Incidence is the most critical because of its impact on IRR. While the impacts to profit
margin were similar at the tested levels of incidence and asset earned rate, IRR was more
sensitive to changes in incidence than asset earned rate. Both assumptions are uncertain
in the future and critical to the pricing of this product.
IA – page 9