B.1 Payout Annuities

Question 1

sources of payout annuities

Answer 1

• Settlement of options embedded in life insurance/deferred annuities
• SPIA
• fund a structured settlement
• fund state lottery prizes

Question 2

classifying payout annuities

FAS 97 LP vs FAS 91

Answer 2

use FAS 97 LP for payout annuities with significantly high mortality risk.
ex: life contingent payments are a significant portion of total PV benefits

no significant mortality risk = FAS 91

significant = >5 or 10%of all payments

Question 3

FAS 91 Constant yield method

payout annuity profit

Answer 3

r1 = implicit credit rate
r2 = net GAAP liability

1. solve for r1 such that t=0 PV(ben+Exp) = Premium
   BenRes = PVfuture Ben @ r1
   Maint Exp Rsv = PV future exp @ r1

2. solve for a break-even rate r2 such that:
initial PV(benExp) = Premium = Comm - AcqExp

Net GAAP Liab = PV(BenExp) @ r2

Implied DAC = BenRes + Maint Exp Rsv - Net GAAP Liab

Question 4

FAS 97 LP approach for payout annuities

Answer 4

• initial premium paid = revenue under FAS 60
• acq expenses are capitalized and amortized over the premium paying period
• Reserves = best estimates wit PADs

Excess premium over acquisition expenses and initial reserves is capitalized and deferred:
DPL = Premium - acq exp - BenRsv - ExpRsv; @ t=0
DPL% = DPL(t=0) / BenRsv (t=0)

DPL(t) = DPL% * BenRsv (t)