B.1 Sales Inducements

Question 1

Forms of Sales Inducements

Answer 1

Initial bonus interest
Day one bonus
Dollar cost averaging
Persistency Bonus

SI are similar to DAC and should be expensed into income over time

Question 2

SOP 03-1 Definition of Sales Inducement

Answer 2

1. Incremental to amounts credited to other contracts without sales inducements
2. Higher than contract’s expected credited rates after the inducement
3. Amount will be recognized in the benefit reserve over contract’s lifetime

items subject to FAS 133 are not SI

Question 3

Type 1, 2, 3 Sales Inducements

Answer 3

type 1: immediate

• bonuses credited in year 1
• paid up front, Establish SIA
• SIA is a part of liability
• SI explicitly defined at inception of contract

type 2: Persistency bonuses

• occurs in the future, requires a SIL

type 3: Enhanced Credit Rates beyond year 1

Question 4

How to calculate Sales inducement Liability (SIL)

Answer 4

Using AV as the amortization basis:

SIL ratio = PV(bonus) / PV (AV); both PV at t = 0
SIL = PV(bonus at t) - SILratio * PV(AV at t)

SIL accrues as a level % of BOY AV

BenRes = AV + SIL