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### 9 Cards in this Set

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 The Cumulative Antiselection effect is more common in HI and DI than in LI, because:  ph’s know their claims probability  elective nature  higher lapse rates  b/c of short-term contracts Problems with the Classical Loss Ratio  LR deterioriates  LR projections judgment-based  LR’s distorted by: Seasonality; Reserving method  Upward Rate Spiral:  failure to notice an LR trend  Inflation weights later claim costs more  premiums must be raised  Antiselective lapses  claim costs rise  premiums must be raised again  But: Advantages of LR:  single, simple number  widely accepted  used by regulators Problems with Classical Select-and-Ultimate Reserving Methods  account for UW wear-off, but not for antiselective lapses THE GOALS OF CAST THEORY  To mathematically predict antiselective lapses  e.g. on a specific premium increase  To calculate a “Durational Antiselection Reserve”, that stabilizes LR  To determine a better initial premium  To keep LR as a single, simple number THE CAST MODEL  The CAST model is a stochastic model that follows a cohort of lives beginning at Time 0. Assumptions and Parameters:  two types of lives, “Active Healthy” and “Impaired”.  Perfect UW means all lives begin Healthy.  Transition probability of healthyimpaired.  net of recoveries  Impaired claim costs > Healthy claim costs  Impaired lapse rate < Healthy lapse rate  Deaths are lapses  Interest and Inflation are ignored. See numerical example and mathematical notation in chapter notes The Effects of a Premium Increase The CAST model successfully predicts the following: 1. a one-time increase in lapsation. 2. higher cost per remaining policy 3. Lapses release some reserves, 4. but remaining reserves must be raised 5. LR increases. CAST Theory Differs from Classic Select-and-Ultimate Theory in that:  There is no “ultimate”  two sets of lives: healthy and impaired.  includes antiselective lapses as well as UW wearoff.  CAST LR’s increase exponentially; classical’s more level  recommends larger net terminal reserves.  recommends a higher initial premium Problems with the CAST Model Nonrealities  constant select-and-ultimate multiplier  Interest and inflation are ignored. Implementation Problems  Regulators’ conversion would be difficult  Pay-as-you-go systems are more favored  higher initial premiums make a company uncompetitive, whether it is “correct” or not.  How would the “Durational Antiselection Reserve” be taxed? Accounting? Recommendations for Implementing the CAST Model:  a YRT pricing approach  make HI into a health form of Universal Life  nonstandard renewal actions may be req’d  develop computer systems to track loss by duration. (See numerical examples in chapter notes.) Done.