IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area
A Mumbai-based life insurer sees its persistency fall sharply after it pays high first-year commissions to agents who sell endowment plans. Policies lapse within 24 months and the insurer cannot recover its acquisition costs. Which description best identifies the main life insurance practice challenge shown here?
The challenge is misaligned distribution incentives. High first-year commissions encourage mis-selling and early lapses, so the insurer loses policies before recovering acquisition costs. The other options describe longevity, reinsurance, hedging or over-reserving issues, none of which the scenario describes.
- AMisaligned distribution incentives leading to poor persistency and unrecovered acquisition expensesCorrect
- BExcess capital arising from over-reserving on annuity business
- CLongevity risk arising from improving pensioner mortality
- DReinsurance counterparty default on catastrophe claims
- Basis risk from hedging equity guarantees with futures
Explanation
Early lapses mean that the up-front acquisition costs funded by the insurer are not recouped through later premiums. This is an incentive and persistency problem. The other options describe different risks that are not indicated by the facts.
Did you get it right without looking?
One question tells you little. A timed set on Issues and challenges in each main practice area shows your real accuracy, how long you take and where you lose marks.
More Issues and challenges in each main practice area questions
- Many Indian actuaries are now working in areas such as enterprise risk management, data science, climate risk and banking, outside tradition…
- A unit-linked insurer in India guarantees a minimum maturity value on a fund invested largely in equities. Markets fall sharply, and the fun…
- An actuary at a Pune consultancy is asked by a client, a large manufacturer, to estimate the financial impact of climate-related physical an…
- A Mumbai-based health insurer wants to use data from customers' wearable fitness devices to offer discounted premiums. The appointed actuary…
- A health insurer's actuary finds that a long-standing hospital partner has been routinely billing higher for insured patients than for self-…
- A large Indian manufacturer runs a defined benefit gratuity and pension scheme. Its finance director notes that falling long-term government…