A.1 Indexed UL

Question 1

IUL credit calculations methodology

Answer 1

IUL = same as UL except interest is credited based on an index

indexing methods:

1. annual reset method = annual gain in the index from beginning to end of policy year
2. Point to Point method = same as annual reset but evaluation period can be multiple years
3. high Water Mark = based on the highest occurring index value over the participation period

• Participation rates = proportion of change in the underlying index that is reflected in the determination of the additional credited IR
• Participation rate can be capped to limit how much final index gain can be credited
• index performance is floored = gtd credited IR

formula for index credit rate:
i = min(Cap, participation rate * index gain - Margin)

Question 2

calculate successive IUL funds and excess index credits

Answer 2

excess index credit occurs when the index credit rate is greater than the gtd interest credit

IFV = prior IFV + GP - EC - COI + gtd Int credit + Excess index credit - partial wd

CSV = max(0, IFV - SC)

Question 3

AG 36 and importance for IUL stat valuation

Answer 3

Challenge with IUL: no fixed gtd rate. the gtd rate is the gtd interest + the excess index credit. this is variable based on index performance

AG 36 provides 3 ways to determine “implied gtd rate” (IGR) for use in UL CRVM and projecting gtd benefits

Question 4

3 methods for determining implied gtd rates under AG 36

Answer 4

if “hedged as required” criteria is met:
- type 1 = implied gtd rate method

if HaR is not met:

• If IGR after first term <= valuation IR and;
• Each index based benefit term <= 1 year
• type 2a: CRVM with updated average market value

else:
type 2: CRVM with updated market value

Hedged as required:

1. options bought by insurer are consistent with the contract
2. amounts used to hedge equity risk must substantially cover FV or reserve
3. company must have:
   - specific plan for hedging risks associated with interim DBs
   - monitor effectiveness of hedging strategy
   - max tolerance for measuring differences between expected performance of hedge and actual results of hedge

Question 5

Method to calculate IGR under IGRM

Answer 5

type 1 - implied gtd rate method
1. at issue: calc IGR for the initial participation period
IGR = gtd rate + opt cost * (1+ Val Rate)
- opt cost = current market value of option cost of the index
2. at issue: calculate IGR for future participation periods as:
IGR = gtd rate + opt cost * (1 + val rate)
- opt cost = historical moving average of option on indexed FV
- pg 91: formula for opt cost moving average calc