Marketing for Actuaries (LIMRA) - Chapter VII - APPENDIX I - MATHEMATICS OF COST COMPARISON APPROACHES
Int-Adj Cost Index
Actuaries Index (Canada)
- 1/s(n|)*[sum([t]P(x)*(1+i)^(n-t+1)) - sum([t]D(x)(1+i)^(n-t)) - [n]CV(x)]
- P - prem, D - Div
- originally 4% in US, 5% in Canada, now 5% in both
- if i=0, Net Cost Index is result
- NAIC model REg Int Adj Payment index - same formula in book, but use 0 for yield
Linton Yield Approach
Internal Rate of Return
- solves for a level effective int rate or yield
- compares a level prem policy to a term adn invest such that investement @ solved for rate = nth yer cash value
Basic Differences Among Cost-Comparison Methods
- commonly used w/ "leveraged" COLI policies
- only appropriate for sophisticated buyers
- Actuaries' Index is a "group-average" type adn other methods are "event-specific"
- "group average" - average cost to a group of PO
- main objection to "group avg" - employs probabilitys that represetn avg and therefore not applicable to many of the buyers who rely on the result
- main objection to "event specific" - likelihood of chosen event occurring is rather small
Copyright © 2004 Steve Welander.
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