Policy Premium Laws in America

POLICY PREMIUM LAWS IN AMERICA

CAL-STATE EXAMS

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TABLE OF CONTENTS

POLICY PREMIUM LAWS IN AMERICA

LESSON ONE — GROSS PREMIUMS

Background - Basic Considerations and Requirements - Factors and Assumptions for Life Insurance Premiums - Gross Premiums for Participating Policies - Assumptions.

LESSON TWO — PREMIUMS AND RESERVES

Life Insurance - Level Premium Reserves - Reserves Based on Non-level Valuation Premiums - Effect on Reserves of Changes in Assumptions - Other Reserves and Related Considerations - Individual Health Insurance - Net Premiums - Reserves - Other Claims Reserves - Verification of Claims Assumptions - Gross Premiums for Noncancelable Policies - Basic Elements Affecting Premiums - Substandard Premiums - Practical Problems in Rate Making.

LESSON THREE — GROUP PREMIUMS, EXPERIENCE RATING AND RESERVES

Initial Group Premium Rates - Renewal Rating of Group Insurance - Rating of Transfer Cases - Dividends and Retrospective Rate Credits - Group Reserves.

LESSON FOUR — NECESSITY AND AMOUNT OF PREMIUM PAYMENTS

Definition and Nature of Premium Obligations - Liability for Premiums — Right of Insurer to Premiums - Necessity of the First Premium Payment - Validity of the Contract in the Absence of Premium Payment - Delivery or Nondelivery - Sufficiency of Acts to Constitute a Contract - Loss Prior to Premium Payment - Payment During the Lifetime or Good Health of the Insured - Amount of the Premium — As a Matter of Contract. Amount of the Premium — In the Event of Cancellation - Amount of the Premium — Interest on Premiums - Rebates from Premiums - Timeliness of premium Payments - Construction and Enforcement of Policy Provisions - Prepayments — Other Than Annual Payments - Necessity of Premium Payments Before a Loss Occurs - Grace Periods - Computation of the Grace Period - Effect of Death or Loss Within the Grace Period - Extension of Time for Payment.

LESSON FIVE — FORFEITURE FOR NON-PAYMENT PREMIUM PAYMENTS

Construction of Forfeiture Provisions - Default As Condition of Forfeiture - Parties Affected by Forfeiture - Payment or Nonpayment of Interest - Statutory Provisions Against Forfeiture - Necessity of Notice to Effect a Forfeiture - Necessity of Notice in the Manner Specified - Circumstances Under Which Notice is Not Necessary - Notice of Resulting Forfeiture - Failure to Pay Premium Finance Companies - Notice of Interest or Installment Payments — Place of Payment - Necessity of Demand - Application of Credits to Prevent Forfeiture - Duty of Insurer to Apply Credits to Prevent a Forfeiture - Advance Interest — Bonuses or Rebates - Losses or Offsets — Previous Overpayments of Assessments - Credits from Other Policies - Cash Surrender or Loan Values - Dividends or Profits. Payment and Liability Upon Notes and Checks - Notes or Checks As Constituting Payment of Premium - Act of Agent As Binding on the Insurer - Liability on Notes Given in Payment.

CHAPTER QUIZZES

LESSON ONE: GROSS PREMIUMS

BACKGROUND

Competition among life insurance companies has increased steadily since World War II. Not only have many new companies been formed, but established companies have tended to become more aggressive in their marketing activities. This intensely competitive atmosphere has resulted in more frequent changes in premium scales and in the introduction of new plans of insurance.

During the early part of this period, mortality improved substantially and the rate of yield obtained by life insurance companies on investments climbed steadily. These changes allowed frequent reductions in life insurance prices despite the tendency of expenses to increase. A steady rise in the average size of policies issued also helped to offset increasing expenses. The wide use of computers has permitted premium scales to be adjusted more rapidly and more sophisticated methods to be used in their calculation.

The trend of life insurance prices in the future is, however, unclear. Mortality seems to have stabilized somewhat and it is the opinion of many that interest rates on new investments have peaked. Since expenses are increasing relatively rapidly, future adjustments in premium rates may very well be upward.

BASIC CONSIDERATIONS AND REQUIREMENTS

Adequacy. Adequacy is the most important requirement of a gross premium scale since the adequacy, or inadequacy, of a company's premiums will determine the ultimate solvency of the company.

For a defined block of business on the average, the total premiums collected and the investment income earned should at least equal the total of benefits and expenses paid. Theoretically, the final test of adequacy cannot be made until the last policy in the block has been discharged from the accounts of the company.

Since premiums are fixed at issue, it is necessary to apply adequacy tests at the time a gross premium scale is established.

Most actuaries agree that each and every premium rate of a scale should be sufficient to pass the adequacy test. Occasionally, it is possible to justify some premium rates that are not adequate, according to the strict definition of the word. As an example, short-term juvenile endowments may not be able to bear their theoretical share of expenses and still be attractive to the potential buyer. Since this is generally considered desirable business (as it may lead to future sales) and since sales tend to be limited, premiums that cover a lesser share of expenses might be justified. This amounts to an arbitrary adjustment in the distribution of expenses so that other business bears more than its theoretical share.

Equity. Equity in a premium scale is primarily for the benefit of the policyowner. For practical reasons, it is impossible to achieve theoretically complete equity, but some degree of equity is required to reflect the value to the policyowner of the benefits guaranteed by his or her policy. There usually is more refinement in the premium classes for individual life insurance than for health insurance, group insurance or social insurance. Premiums for individual life insurance policies generally vary by plan, age, sex, and size.

Legal Limitations. Gross premiums charged by a company must not be in conflict with any law. Wisconsin limits gross premiums directly by specifying in the law the maximum premium that may be charged. The laws of other states may specify limitations which require subjective judgment. As an example, Section 213(10) of the New York Insurance Law provides that a company shall not issue life insurance or annuity contracts which do not appear to be self- supporting on reasonable assumptions as to interest, mortality, and expense.

Other legal requirements which do not limit gross premiums directly may influence premium levels for practical reasons. States have deficiency reserve statutes which require companies to establish additional reserves for those policies with gross premiums less than the net valuation premiums. These additional reserves result in a surplus strain which, for some companies, will have the effect of requiring some premium rates to be pegged above their true level.

Minimum cash value statutes in some instances may require cash values which are greater than the asset shares. The result is that premiums must be increased to offset the additional benefits payable upon withdrawal.

Competition and Company Objectives. Competitiveness is a requirement of a gross premium scale to the extent that, if a company is to experience reasonable growth, its premium rates cannot be too much higher than the corresponding rates of other companies. Beyond this, the degree to which competition will further affect a company's premium rates will depend upon the results of an analysis of company growth or profit objectives.

In this discussion of the effect of competition on gross premiums, it should not be concluded that a company's rates must be equal to or less than those of other companies. In the first place, this may be impossible in view of the requirement of adequacy. Second, competitive premiums are not always necessary. Personal relationships, service, and company image often are more important than low premiums. Also, some companies operate primarily in a local or specialized market in which there is little or no competition and in which the cost of providing insurance may very well be higher than in other markets.

A company may prefer to sell particular plans of insurance such as term insurance, or to particular age groups. Consequently, its premiums may be relatively low for these plans or ages. Differences probably reflect the degree of competition in the individual market, or markets, in which the company wishes to sell, or they may reflect the company's ability, or inability, to invest assets at suitable rates of yield.

Competition among insurance companies applies to agents as well as policyowners. A company may believe that relatively high commissions will attract good agents, and this additional commission expense, of course, would be reflected in its gross premiums. However, commissions are subject to state regulation.

FACTORS AND ASSUMPTIONS FOR LIFE INSURANCE PREMIUMS

The primary factors involved in the calculation and testing of gross premiums are mortality, interest, withdrawal, and expenses. Because the selection of assumptions for these factors can be so important to the future of a company, the actuary must approach the task with a great deal of caution. It sometimes is implied that gross premiums are directly related to net valuation premiums. There are, in fact, only indirect relationships. Deficiency reserve requirements might have the effect of making some gross premiums equal to the net valuation premiums. In addition, cash values which are directly related to gross premiums are related effectively to the reserve basis through the application of the Standard Valuation Law and the Standard Nonforfeiture Law.

Mortality. The long-term trend in rates of mortality experienced by companies