A.1 Indexed Deferred Annuities

Question 1

Indexed Deferred Annuities: GMAV and indexed fund value

Answer 1

GMAV = gtd min AV, based on gtd IR credited to a portion of premium payments

Indexed Deferred Annuities provide PHs with:

1. GMAV
2. an opportunity to receive a portion of growth from an index

Question 2

Contract features that govern index credits

Answer 2

Same as Indexed UL

• participation period - term which index gains are calculated
• index method = annual reset, PTP, high water mark
• participation % - % of index gain credited
• participation cap - limit of index credits
• participation floor - min index credit (IFV fund value)
• Participation margin = rate subtracted from the index gain

IFV = prior IFV + considerations - EC + gtd int credit + excess index credit - partial wd
CSV = IFV - SC

gtd index credit = gtd rate * (prior IFV + considerations - EC)

excess index credit = i * IFV - gtd interest credit
i = min (Cap, part rate * index gain - margin)

Question 3

AG 35: 3 methods to calculate CARVM for Indexed annuitites

Answer 3

Type 1. Enhanced discount intrinsic method (EDIM)
- HaR criteria is met
- EDIM only requires 1 CARVM calculation done at issue
- after issue the reserve is based on 2 components that do not require updated MV of CARVM calcs
- EDIM reserve = Fixed component + equity component
Steps:
1. at issue; fixed component = CARVM determined via type 2 method
2. on valuation dates; determine intermediate values of the fixed component by solving for an IR that would accumulate the initial value to the ending value
3. on valuation dates; calculate the equity component = discount intrinsic value of the options
- calc the intrinsic value of a call option
- discount that value from the end of the term back to the val date using a Plan type C valuation IR
Equity component = (call option intrinsic value) * (# of options) / (1+i)^n-t

Type 2a. CARVM with updated market values

• HaR criteria not met
  1. Determine the MV of call option at each duration where indexed benefit is available
  2. project MV of call options through their expiration date
  3. future gtd benefit = gtd floor + call option MV
  4. do CARVM using (3)

Type 2b. MV reserve method

• HaR criteria not met
  1. determine ending index level that would produce a benefit equal to the sum of:
• Gtd value
• value of call option required to fully hedge the index benefit
  2. calculate the implied compound IR to get from the current index level and the index at the end of the term
  3. calculate future annuity benefits using projected index levels
  4. do CARVM using step 3

Question 4

HaR criteria

Answer 4

an AA must certify quarterly that HaR criteria is met:

1. options bought by insurer are consistent with the contract (index, averaging feature, option type, strike, term)
2. amounts used to hedge risk must substantially cover the greater of (FV, reserve)
3. Company must have:
   - plan for hedging risks from DB and early surrenders,
   - ability to monitor effectiveness of hedging strategy
   - stated max tolerance for performance of hedge

Hedging policy provided by the company:

1. Description of responsibilities
2. Description of risks
3. Description of hedging instruments
   - liquidity risk
   - credit risk
   - market risk
   - pricing risk
   - legal risk
   - operations risk