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IS THE INTEREST-ADJUSTED INDEX SUITABLE FOR LIFE INSURANCE REPLACEMENT COST DISCLOSURE

Albert L. Auxier
The Journal of Insurance Issues and Practices
Vol. 2, No. 2 (WINTER 1978-79), pp. 88-100
Stable URL: http://www.jstor.org/stable/41943420
Page Count: 13
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
IS THE INTEREST-ADJUSTED INDEX SUITABLE FOR LIFE INSURANCE REPLACEMENT COST DISCLOSURE
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Abstract

The purpose of this research was to ascertain if the interest-adjusted method is suitable for use in a mandated replacement life insurance cost disclosure system. The IA method's suitability for this purpose was tested by determining if its replacement decisions were sensitive to the interest rate assumption employed in the method. The method's replacement decisions, in fact, generally were sensitive to this assumption. For this reason, the IA method appears to be unsuitable for regulatory replacement cost disclosure purposes, except in the limited case where the replacing policy is of the same generic type as the inforce policy and the inforce policy has not been held long. Only in this limited replacement situation are the new and old policy comparisons not so dissimilar as to render cost comparisons unreliable. Thus, the best hope to rid the industry of the replacement problem appears to be to achieve effective price competition among new (as opposed to inforce ) policies. This may require standaridizing such policy benefits as dividends and cash values for each age, face amount, and generic type of policy.

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