Integrated Project

Impact of AG-49 on IUL Product

2015 Summer

Group 2David Zomber Lihua Nie

Columbia University | Actuarial Science Program

Table of Contents

INTRODUCTION............................................................................................................................................3

BACKGROUND.......................................................................................................................................................3

CONCERNS AND OBJECTIVES....................................................................................................................................3

IUL PRODUCT...............................................................................................................................................4

FEATURES............................................................................................................................................................4

NEW REGULATION AG-49.............................................................................................................................5

FEATURES OF THE NEW REGULATION.........................................................................................................................5

ASSUMPTIONS AND TOOLS..........................................................................................................................6

ASSUMPTIONS......................................................................................................................................................6

CAP RATE CALCULATOR...........................................................................................................................................6

ACCOUNT VALUE CALCULATOR.................................................................................................................................7

ECONOMIC GENERATOR..........................................................................................................................................8

ILLUSTRATION ANALYSIS..............................................................................................................................8

CASE I.................................................................................................................................................................8

CASE II..............................................................................................................................................................14

ECONOMIC SIMULATION ANALYSIS............................................................................................................18

CASH VALUE COMPARISON...................................................................................................................................18

IRR ANALYSIS.....................................................................................................................................................20

SCENARIO ANALYSIS.............................................................................................................................................21

SUMMARY..................................................................................................................................................21

IMPACT OF ILLUSTRATION.....................................................................................................................................21

WARNINGS BASED ON ECONOMIC SIMULATION........................................................................................................22

REASONS COMPANIES MAY RESIST NEW CHANGES.....................................................................................................22

PREDICTION........................................................................................................................................................22

PROJECT MILESTONES................................................................................................................................23

REFERENCES...............................................................................................................................................23

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IntroductionBackground

Over the last ten years, a number of life insurance companies have introduced a new product to the market

called Indexed Universal Life. In addition to the features of a typical Universal Life policy, which includes a

death benefit as well as a cash account which one can borrow from or use as a retirement savings account, it

also contains an indexed account. The indexed account is credited interest based on the performance of a

particular index, for example the S&P 500, but has a floor which prevents it from losing money if the index

underperforms. The money isn’t actually invested in the market, which keeps the cash value of the account

safe; however, the account can still earn significantly higher rates than a typical bond portfolio would get

because of its relationship to the particular index.

In recent years, this particular form of life insurance, called an IUL, has become increasingly popular, and

companies have begun to offer all sorts of IUL products with numerous different features and varying levels

of rates. Many companies have their own calculations for what the expected rates should be. In 2014, after

several life insurance companies raised concerns that some of the rates being offered were unrealistically

high and the products would never meet consumer expectations, it was suggested that some sort of

regulation be instituted to protect consumers and provide a more standardized system of calculating the

rates. In April 2015, after considerable deliberation, the Life Actuarial Task Force decided upon Regulation

AG-49 as the new standard, which must be followed in IUL Illustrations.

Concerns and objectives

With the adoption of AG-49, our clients’ concern is that it may influence the return of IUL product. For potential consumers, the illustration plays an important role in explaining how this product may perform. With a predictable lower illustrated rate, the cash value of the account at the terminal will definitely go down as well. Although we may expect that companies will redesign their products after this new regulation, we are still not sure how they may change these products.

Objectives of our project included:

Understanding the influence of this new regulation on the IUL product Estimating the influence of this new regulation on IUL product Predicting the trend of new IUL products after this new regulation

IUL Product

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Features

IUL is a variant of the Universal Life product. It has all of the same features as Universal Life such as:

Whole life insurance policy + cash value of investment

The IUL product is a combination of two products: a whole life insurance policy and an investment account. By holding a UL product, the policyholder will benefit from the death benefit and an increasing investment account.

Not a real investment –” Tax Advantage”

The IUL product has an investment account, but this account does not directly invest money into equity market. Instead, insurance companies use different financial derivatives to set limits of money they need to pay policyholder. There is no real investment in the market and all involved investment vehicles are bonds and options. That is where the tax advantage feature comes from. Benefitting from the lower tax charge of bonds and deferred tax when no withdrawals occur, cash accumulation value in the investment account would increase faster than in the other account, which is treated as an equity account.

Additionally, there are some unique features of IUL. Such as:

Interest credited on specific index

Policyholder has options to choose which type of index they would like to set as their target index. The variety of options can satisfy policyholder’s willingness to allocate their investment based on a rational expectation of equity market.

Principal protection

IUL products set a floor for its investment account. For every year, aside from the required fee charges for the insurance company, the investment account cannot have a credited interest rate lower than the stated floor rate. Most often, the floor rate is 0%, so the account cannot lose money, but some companies offer products with 1% - 2% as the floor rate. This is actually a principal protection feature for this product.

Flexible choice of premium based on financial capability

For each year, policyholders can adjust the premium they would like to pay based on their current financial capability. This helps to meet their financial needs while continuing to support an investment account. Since there is no penalty for uneven payment, flexibility of premium payment is definitely a good feature for policyholders.

Owning to all these advantages described here, IUL products have become an ideal choice for many people. However, after this new regulation, some of these good features may become less appealing.

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New Regulation AG-49

This new regulation was enacted by the LATF in April in response to numerous criticisms of current industry practices. One complaint by members of the industry was that often companies offering what seems to be the same exact product illustrate differing rates. The reason for this is that every company has its own system of calculating the future expectation of the S&P based on its historical performance. This can be very confusing for consumers who are trying to compare products. Another complaint came primarily from companies who offer other life insurance products and not IULs that the rates being illustrated for IULs are too unrealistic and will lead to consumer disappointment that will hurt the entire life insurance industry. After much deliberation, AG-49 was agreed upon as a first step in regulating the IUL product.

Features of the new regulation

Only for illustration purposes

This regulation does not directly influence the pricing of IUL product. However, it is reasonable to believe that to make it appealing for potential customers, the pricing will be adjusted to meet this new regulation with a better performance in illustration.

Follow a specific methodology to calculate the illustration rate

In the appendix, the detailed methodology is explained in the original file from the National Association of Insurance. In all cases, this new regulation asks all insurance companies to follow the same standard rule to calculate their illustration rates. This means, under this new regulation, the cash value of accounts in different products are more comparable, since it removes the effects of varying illustrated rates and is a better representation of cost and other charges from insurance companies.

A Benchmark Index Account on the S&P 500, has 100% participation rate, 0% floor, and uses an annual point-to-point strategy

This is a specific requirement for the definition “Benchmark Index Account”. All products with the Benchmark Index Account must follow the requirements here.

Use the average of 25-year period backward for 65 years

This is the specific year requirement for benchmark index account to calculate the illustration rate. Considering that the S&P 500 has been used as an index from the beginning of 1950, this rule asks to use the whole life-span record for the new calculation. According to the data, this would generally lead to a decrease in the illustration rate for all companies given the same cap rate.

A company, which does not offer a Benchmark Index Account, should use actuarial judgment to determine an appropriate rate for that account

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This is the only way for actuaries to manipulate the illustration rate. Except the Benchmark Index Account, which is specifically defined with a method to calculate its illustration rate, other accounts are still allowed to have illustration rates based on actuarial judgment. There is a way to get a better illustration rate through setting up an index account other than the Benchmark Index Account.

Assumptions and ToolsAssumptionsTo simplify our project and focus solely on the illustration rate, we set up some assumptions here:

For all products’ calculations, the policyholder’s information is listed here:o Gender: Maleo Age: 45o Health Status: Healthy

Level Premium: $10,000 per year for 20 Years Standard setting with new regulation:

o Index Type: S&P 500 o Credit Method: Annual Point-to-Point

Death benefito Type: Whole life insuranceo Payment type: Annual premiumso Face amount: $500,000o Mortality rate is provided by mentors

Surrender charge is included using a fixed schedule Interest rate is set to be 4% for all of our products No withdrawals from the account in the 20-year period

Cap rate calculatorThe cap rate is the greatest credit rate a policyholder can receive from the indexed account each year. For the insurance company, this cap rate sets the upper limit of the cost to the policyholder. Combined with the floor rate, they work as a collar strategy.

The objective of getting a proper cap rate is to lock the profit margin at the beginning of each term. In this way, however the index price changes, the insurance company will be out of exposure based on this change.

As mentioned, an insurance company uses option combinations to set up limits for the product. The following chart shows how the option budget works for insurance company.

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FIGURE 1

The transactions involved in this chart are:

Long a call at Strike price K1, represented with the yellow dot line. Short a call at Strike price K2, represented with the green cut line.

With the combination of these two call options, the actual profit is locked in as shown by the red curve. Therefore, the insurance company can set up the cap rate with its own option budget.

In our calculator, we first use the data from proxy products to imply the target spread every company sets for its IUL product. Then, based on the target spread, we recalculate a new cap rate with the same illustrated rate before new regulation. With the higher new cap rate, the option budget will increase. The change from the previous option budget to the higher one is the new set of charges to the policyholder on an annual basis.

Account value calculator

This calculator is used to compute the account value.

Basically, the formula used in the account value calculator is:

∑k=t−12

t

(AV k−1+P−L−AC−COI−CAV )

12× (1+CR )−SR=AV t

where

AV = account value;

P = premium;

L = load;

AC = account monthly cost;

Short a call at K2

Long a call at K1

Cap Level for our product

Profit

Strike

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COI1 = cost of insurance;

CAV = charges based on account value;

CR = interest credited rate;

SR = surrender charge

Economic generator

Assumptions:

For the historical method, we assume that history will occur in the future. Therefore, it is representative to choose a historical period to simulate the future.

For the lognormal method, the daily return is a random variable. It follows a normal distribution, where the mean equals the long-term mean of daily return, and the variance equals the square of long-term daily volatility. Here we use the daily returns from 1959 Jan 1st to 2014 Dec 31st.

Number of paths for simulation: 100 To make products comparable, we use the same S&P 500 Index return for all products. The starting price in our simulation is 2103.84. This is the closing adjusted price of 2015 July 31st.

By combining this economic generator and account value calculator together, we are able to calculate the cash value of products in any circumstance provided sufficient parameters.

Illustration Analysis

From here, we are going to use all these tools and models described above to analyze the IUL product. Since the new regulation is for illustration purposes, we will have a detailed analysis from the illustration perspective.

Case I

In order to properly analyze the impact that AG-49 will have on the current industry’s products, we took seven of the top-selling IUL products and compared the change in the illustrated rate which will result from the regulation as well as the change in cash surrender value (CSV) which is dependent primarily on the crediting rate. It is important to reiterate that this change is only in the illustrated rate. The actual crediting rate that the policyholder receives is not impacted at all by the regulation only by the true performance of the corresponding index and the parameters of the policy such as the cap rate, participation rate, and the floor.

The products used in our analysis are modeled after real industry products with each one being a Benchmark Index Account as defined by the regulation having a cap, a 0% floor, 100% participation rate, an annual point-to-point crediting strategy, and using the S&P alone as the index. However, the caps of these products do

1 Cost of insurance charges for the death benefit. The calculation based on the use of an internal mortality table.

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vary, and each one has its own unique combination of fees and a different illustrated rate that it offers its customers. It would seem reasonable that measuring the impact on these products would be fairly representative of the impact on the industry as a whole.

Here is a list of the seven products used in our analysis:

Product Cap Current Illustrated Rate Monthly Fee Premium Load

A 10% 7% 7.50 5.95%

B 12% 8% 7.50 5.9%

C 13% 8.2% 5.00 6%

D 13% 8.44% 5.00 5.5%

E 12% 7.90% 10.00 6%

F 11% 6.69% 7.50 5%

G 13% 8.08% 20.00 10% in year 1, 6% in years 2+

TABLE 1

To measure the affect that the regulation has on the CSV, we first had to calculate what the new illustrated rate will be for these products once the regulation takes effect. Using the parameters of the Benchmark Index Account, the new illustrated rate was calculated with the 25 year averages of the 65 years of the S&P as required by the regulation with the only variable being the cap rate. We also measured the percentage decrease in the illustrated rate. As is evident from the chart below, generally, the higher the rate, the greater the decrease.

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1 2 3 4 5 6 70.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

7.00%

8.00% 8.20% 8.44%7.90%

6.69%

8.08%

6.01%

6.87%7.25% 7.25%

6.87%6.45%

7.25%

0.99% 1.13% 0.95% 1.19% 1.03%

0.24%0.83%

Maximum Illustrated Rate

Current Rates New Regulation Rates Impact of AG-49

FIGURE 2

We then applied the new rate to the AV calculator given to us by one of our clients, which was described above and is what companies use to calculate the CSV based on a number of parameters. Several of the parameters we kept constant for all of our products such as the amount of the death benefit for which we used $500,000 and an assumed interest rate of 4% used to calculate the whole life insurance death benefit. In our original analysis, we also assumed that we are dealing with a healthy male age 45 paying $10,000 per year into the account for 20 years until he retires, but we tested other scenarios as well as will be shown below. Figure 3 shows the comparison of the original products’ CSV with what the new CSV would be under the regulation:

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1 2 3 4 5 6 70

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

10.97%

12.56%

10.71%

13.25%

11.51%

2.78%

9.40%

Cash accumulation for 45 year-old with $10,000 premium

Pre AG-49 Post AG-49Impact of AG-49 in Amount Impact of AG-49 in Percentage

FIGURE 3

One interesting note which comes out from this chart is the change in the rankings of these products which is shown in the following table.

Product Pre AG 49

Post AG 49 Changes

A 6 7 -

B 3 4 -

C 2 2

D 1 1

E 4 5 -

F 7 6 +

G 5 3 +

TABLE 2

Products C and D, which were ranked the highest because of a high cap rate that resulted in a higher illustrated rate and a higher CSV, are still ranked the highest. However, Product F jumped ahead of Product A,

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because whereas prior to the regulation Product A seems to be a much better deal than Product F offering a higher illustration rate despite the lower cap; after the regulation Product A with its lower cap than Product F will be forced to illustrate at a lower rate. This is one of the purposes of the regulation, to act as an “equalizer” not allowing companies to illustrate what might be considered unreasonably high rates relative to the cap. Product G also jumped up because its rate was also low in comparison to other products even though it had a high cap. From the rankings we see that while all products in the IUL industry are being affected by the regulation to an extent, within the industry the products that seem to be the “best deals” are being impacted the most.

We then tested different premiums amounts to see if the impact is equal across all levels. While the differences are indeed very slight, it is interesting to note that the greatest difference in all the products is at $10,000, with $5,000 and $20,000 being virtually the same.

Product Premium

$5,000 $10,000 $20,000

A -10.85% -10.97% -10.86%

B -12.45% -12.56% -12.44%

C -10.61% -10.71% -10.60%

D -13.13% -13.25% -13.12%

E -11.40% -11.51% -11.40%

F -2.75% -2.78% -2.75%

G -9.32% -9.40% -9.31%

TABLE 3

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We also compared different ages to see the impact across age groups:

Product Age

45 50

A -10.97% -8.14%

B -12.56% -9.31%

C -10.71% -7.91%

D -13.25% -9.81%

E -11.51% -8.52%

F -2.78% -2.04%

G -9.40% -6.92%

TABLE 4

Clearly, an older policyholder will not be affected nearly as much as a younger one because the more time the account has to accumulate the greater the impact of the lower rate.

The next step of our analysis was to see whether other factors such as the monthly fees and the premium load which also affect the CSV can be decreased as a way to minimize the impact of the regulation. In other words, can a company counter the effect of a lower illustrated rate by decreasing the fees thereby increasing the CSV? Obviously, companies probably won’t want to do this because it would decrease their profit margin in these products. Nonetheless, it is evident from the next table that even if a company chose to do this, it would not help very much.

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Product With regular premium load and fees With 5% load and no fees

A -10.97% -8.80%

B -12.56% -10.50%

C -10.71% -8.83%

D -13.25% -12.01%

E -11.51% -8.94%

F -2.78% -1.66%

G -9.40% -4.82%

TABLE 5

Even after removing the fees, and lowering the load to 5%, which is the lowest found in the industry, the effect of the regulation is still pretty significant for most of these products. Only for product G, which charges much higher fees than the other products. do we see a decrease of almost 50% in the impact of the regulation by lowering the fees. For most products, the fees do not have a great impact on the CSV relative to the crediting rate, and this is shown in the following chart.

6% 7% 8% 9% 10%$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

0% load, 0 fees 5% load, 0 fees 5% load, $7.50 fee

FIGURE 4

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From the chart, it is clear that the additional fee, represented by the gray bar, has a very small impact on the CSV. The 5% load has a larger impact, but still not quite as much as even a 1% change in the rate. There is no question that the crediting rate is the most important factor in the CSV, so the only way to counter the effect of the regulation is to find a way that companies can increase the illustrated rate.

Case II

Until now, we have only been discussing the impact that the regulation will have on the existing products in the market; however, it is likely that companies will try to adjust their products in order to improve their illustrations. One possibility would be to raise the cap of the products to a level which would enable them to illustrate the same rates as before even according to the regulation. The regulation does not limit the amount of the cap; it only creates a methodology which a company must follow to calculate its illustrated rate given whatever cap the company is using. The amount that a company must raise its cap to achieve a certain rate can be calculated using the methodology of the regulation as to how to measure the history of the S&P. The next step is to use the cap calculator mentioned above to figure out how much a company needs to increase its option budget in order to actually implement this strategy. We can then add an additional annual asset based fee to the policy to cover this cost. Doing so for each of the products listed above and then calculating the CSV, what we get is as follows:

Product Pre AG-49 Cap

Maximum Illustrated Rate

Pre AG-49 CSV Post AG-49 Cap

Post AG-49 CSV

% Decrease

A 10% 7.00% $336,977.15

12.35% $322,682.11

4.24%

B 12% 8.00% $379,778.60

15.20% $364,261.02

4.09%

C 13% 8.20% $389,974.80

15.85% $378,898.02

2.84%

D 13% 8.44% $404,060.38

16.68% $390,981.65

3.24%

E 12% 7.90% $373,306.47

14.89% $360,414.29

3.45%

F 11% 6.69% $329,015.33

11.57% $325,281.54

1.13%

G 13% 8.08% $373,528.76

15.46% $363,903.72

2.58%

TABLE 6

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A B C D E F G0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Pre AG-49 CSV Post AG-49 CSV % Decrease

FIGURE 5

The first four columns of Table 6 show the original products with their caps, illustrated rates, and CSV’s. The fifth column shows the new cap which will be required to uphold the same illustrated rate as before once the regulation takes effect. The sixth column is the new CSV which is lower than the original because of the additional fee which must be added to the account. In the last column we see the percentage decrease in the new product as compared to the old product. If we compare this decrease to the percentage decrease that the regulation creates if we don’t adjust the product, we see that this decrease is significantly less severe. The explanation would seem to be based on what was shown above that additional fees generally do not impact the overall value of the account as much as the change in rate does. Therefore, retaining the original rate, but adding on a fee to cover the cost of the higher cap should be a reasonable option to keep the product comparable to what it was before according to this analysis.

The following chart shows clearly how much closer the new product is to the pre-regulation product as compared to the post-regulation product.

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A B C D E F$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Pre AG-49 Post AG-49 with lower illustrate ratePost AG-49 With Account Charges Change in Percentage of Post w/ lower rateChange in Percentage of Post w/ CAV

FIGURE 6

Another way to measure the advantage of this approach is by looking at the IRR of the different products in each scenario. The following charts show the various IRR’s and how much closer this new product is to the original product, as compared to the post-regulation product.

IRR summary A B C D E F

Pre AG-49 IRR 4.71% 5.82% 6.06% 6.38% 5.66% 4.49%

Post AG-49 w/ lower rate

3.62% 4.57% 5.02% 5.08% 4.52% 4.22%

Post AG-49 w/ CAV 4.31% 5.43% 5.77% 6.00% 5.38% 4.27%

TABLE 7

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A B C D E F0%

1%

2%

3%

4%

5%

6%

7%

Post AG-49 with lower illustrate ratePost AG-49 with Account ChargesPre IRR

FIGURE 7

Based on the analysis of this data, it would seem that raising the cap with an additional fee should be a viable option for many companies to minimize the effect of the regulation and make their products marketable again.

Economic Simulation Analysis

In this section, we are going to analyze based on the economic simulation data. Rather than illustration analysis, economic simulation analysis emphasizes the influence from the real market. Considering the profit for insurance company, this analysis plays an important role.

Cash Value Comparison

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A B C D E F $-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

Illustrate Pre Illustrate Post Simulate Pre Simulate Post

FIGURE 8

This figure compares the effect of new regulation under illustration analysis and economic simulation analysis. We can conclude a general idea that, for all products, the cash value of the product decrease under illustration analysis, but they increase under simulation analysis.

The effect of the new cap rate can explain the difference between the two types of analysis. For the illustration analysis, once you set up the cap rate, the illustrated rate used to calculate cash account value remains constant. However, in the economic simulation analysis, the annual return of the S&P 500 changes all the time. This causes the credited rate for the cash account to change. With a dynamic mechanism, the analysis of products will not be the same as under the still world.

Another interesting observation is showed in the following table.

Product Illustrate Pre Illustrate Post Simulate Pre Simulate Post

A 5 5 6 6

B 3 3 3 3

C 2 2 2 2

D 1 1 1 1

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E 4 4 4 4

F 6 6 5 5

TABLE 8

Although the impact under these analyses are different, the rankings of these products never change under both measurements. This is really an interesting observation, and it implies that although the cash value changes under different measurement, the attractiveness of products does not change. Another point we can make here is that the illustration measurement is very conservative compared to the economic simulation.

IRR Analysis

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%Change in IRR

A B C D E F G

FIGURE 9

Figure 9 shows the change of internal rate of return between pre- and post- AG-49 under the economic simulation analysis. The horizon axis is the change of rate at a stated percentile for each product. We can clearly conclude an increase trend for most of these products. There is only one exception. Product F is more stable in change compared with other products. This could be attributed to the low illustration rate before the new regulation. From the perspective of insurance companies, product F is a good product. With a less volatile change in all percentiles, it is easier to predict and balance the product.

Therefore, from this figure, most of these products have a big change from the past. This may suggest that redesigning these products is required.

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Scenario Analysis

To perform the simulation better, we also did a scenario analysis based on a positive, neutral, and negative expectation of the S&P 500 return.

If S&P returns go beyond expectation: up 10% If they meet expectation: stay the same If they go below expectation: down 10%

A B C D E F G0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Down 10% Up 10% Original

FIGURE 10

This figure shows how the unanticipated change in S&P 500 index may impact the internal rate of return. Basically, the upward and downward volatility of the return will lead to a similar percentage. But the downward change is slightly greater than that of the upward side.

SummaryImpact of Illustration

Owning to the new regulation, the calculation of the illustrated rate is now require to follow a specific standard. If insurance companies directly accept the new regulation without adjusting fees and rates, a lower illustration rate and a lower illustrated cash value of each policy is predictable to be on the market.

Consumers may purchase policies other than IUL products if the cash value in IUL is no longer attractive. However, for potential consumers who only consider IUL products, this new regulation has an industrial level influence. This means that the rankings for IUL products do not change significantly when comparing the pre-

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and post-regulation products. Therefore, the impact on illustration is limited without considering the competition from other similar products.

Warnings based on Economic Simulation

The conclusion drawn from economic simulation analysis shows that, although an increase in the cap rate could maintain the current illustration rate, it also increases the cash account value. This leads to a higher internal rate of return for IUL products and may curtail the profits to meet the increasing credits. Also, from the observation of cash value simulation distribution, the increase in cash value is not even. So it is hard to calculate the proper reserve under the new situation.

Actuaries also need to consider the expectation of S&P 500 and its influence on the actual cash value. Although the product is based on the return of index, consumers may mistakenly believe that the illustration provided by the insurance company will be a good estimate of the future account value. Therefore, a reminder of positive and especially negative scenarios is necessary.

Reasons companies may resist a new charge on account

In our redesign approach, we added a charge on account value annually. Usually companies try to resist doing so in reality. The reasons can be from two perspectives.

On one hand, a sticky charge may be more welcomed by consumers. It is easy to understand that nobody likes more charges from his/her account. With an account based on the same index, policyholders always prefer a lower fee.

On the other hand, a new charge on account value is for the extra exposure after increasing the cap rate. Insurance company prefers to have a more predictable and balanced cash flow rather than a volatile and uncertain exposure. The new product will make companies more dependent on high returns which, even if expected, make companies feel like they are exposing themselves to greater risk.

From perspectives of both insurance company and policyholder, a new charge is unrecommendable.

Prediction

Based on all the analyses above, we suggest that companies may redesign the products with some new costs rather than simply adjust parameters.

Probable tactics may include: increase monthly cost, increase premium load, and adjust the cost of insurance while keeping a high cap rate

Not suggestive tactics: increase participation rate alone, increase cap rate and charge more

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Project Milestones

Statement of Intent Project Charter Excel Calculator for:

o Historical Illustrate Rateo Cap Rate Convertero Economic Simulation Generator

Analysis on:o Illustration Perspectiveo Economic Simulation Perspective

Summary and Prediction

ReferencesActuarial Guideline [YY] The application of the life illustrations model regulation to polices with index-based interest, adopted by the Life Actuarial (A) Task Force, 4/16/2015

Wink’s Sales & Market Report 1st Quarter, 2015

Summary of Indexed UL Illustrations Model Regulation (Actuarial Guideline YY), Lion Street, 2015

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