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)