Valuation of Life Insurance Liabilities - Chapter 6

Valuation of Life Insurance Liabilities - Chapter 6 - VALUATION OF VARIABLE PRODUCTS

Overview

Variable products - policies whose cash values matched by assets held in sep account of the LIC
CRVM adn CARVM are prospective methods
variable products don't have future guarantees
Variable Life Ins Model Reg - 1983 - w/ actuarial principles that recognize variable nature of benefits proivided and any mortality guarantees
similar to VA Model Reg
Reserve methodology dependent upon product type

Flexible Premium and Bybrid Variable Life

Flexible Premium Variable life aka VUL
main diff between VUL and UL - accum fund - VUL - bears investment risk since tied to fund
Hybrid Products - scheduled premium concept is used
if VUL products fully front-end loaded, CV is generally deemed to be sufficient reserve
if FY loads > renewal year loads by more than EA_CRVM, CV as reserve is questionable
if back-end loaded, typically use UL Model Reg type reserve with one of following for i
- if has fixed-acct option, long term guar rate in teh fixed acct
- valuation rate less some (or all) of contractual asset-based charges
- 4% (rate specified in tax law)
- rate credited to policy loans
SEC adn Model Reg require asses in Sep Acct >= acct value
Stat Vx on back-end loaded can be < account val to reflect SC
suplus in sep acct >= sum VUL EA credits taken
Additional reserve req'd if product has GMDB

Fixed Premium Variable Life

Typically FEL
DB adjusted to reflect performance in one of two ways
- NY Life Design
  - DB = Orig Face * Actual CV / hypothetical tabular CV
  - hypothetical CV calced using AIR (assumed int rate)
  - GMDB = orig face
  - reserves = trad reserves fro policy if @ current DB, IA, dur
- Equitable Design
  - net investemnt earning > AIR used to purchase PUA @ NSP using AIR
  - negative buys negative PUAs
  - if PUA balance < 0, negatives carried forward againt future PUAs, but DB never drops below initial face
  - reserve base as if traditional
  - PUAs like normal PUAs
  - additional reserves for GMDB risk

Single Premium Variable Life

Flexible Single Premium
- marketed as single premium, but PO can make additional prem payments
- reserved as if VUL
Fixed Single Premium
- GMDB w/ gross premiums based on AIR
- can be of Equitable or NY Life method or may use UL-type mechanics to generate CVs
- reserved identical to regular permanent contracts of same type
Tax law changes in 1988 have virtually eliminated teh market for these

Variable Annuities

FEL - CV is good and sufficient reserve (in general)
BEL - subject to debate - same methods as proposed for VUL
SA surplus s/b >= excess of acct value over reserves

GMDB Reserves: Flexible PRemium Life Products

Variable Life Model Reg requires reserves if product has GMDB
GMDB reserve carried on general acct
different calcs for fixed premium and flexible premium VL contracts
- flexible premium - GMDB only for grace period when funds insufficient to support deductions to maintain coverage infoce
term cost of GMDB assuming immediate 1/3 drop in current value of SA assets followed by net investment return = i_valn

GMDB Reserves: Fixed Premium Life Products

GMDB typically DB never less than orig face
V_GMDB(x) = max(OYT & AA Level reserve)
OYT Reserve - term cost of GMDB covering 1 full year assuming immediate 1/3 drop inSA assets value followed by investment return = AIR
AA Level Reserve = "residue" of prior years AA level reserve +/- current "payment"
- can not be < 0
- "residue" = prior year's AA level reserve increase @ i_valn - tabular mort for GMDB / tabular probability of survival
- "payment" = (A_GMDB(x+t) - A_SADB(x+t) - residue)/adue(x+t:n|)
- SADB = sep acct DB calced using actuary chosen i (but <= max valn rate)
for VUL - GMDB = OYT reserves except measure over GMDB period instead of 1 year

GMDB Reserves: Annuity Products

Method 1 - OYT cost of the shortfall w/ or w/o 1/3 drop
Method 2 - allocate an annual contribution (% of acct value, vary by dur) to GMDB Vx
- any DB in excess of basic reserves deducted from GMDB reserve fund

Copyright © 2004 Steve Welander.
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