AcSEC October 23, 2001 Meeting

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AcSECOctober 23, 2001 Meeting

• DAC on Internal Replacements
• Long-Duration Insurance Products

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Fixed Annuities

• Main profit source is spread between rate earned
  and rate credited
• Surrender charges protect against early
  withdrawals
• Guaranteed minimum crediting rates current
  crediting rates declared periodically
• Minimum annuity purchase rates guaranteed

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Fixed AnnuitiesMarket Value Adjusted Annuities

• MVAs provide for a return of principal plus a
  fixed rate of return if held to maturity (book
  value) or a market adjusted value if
  surrendered prior to maturity
• Product design intended to mitigate
  disintermediation risk to insurer
• Insurer bears credit risk and interest rate basis
  risk except at surrender

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Fixed AnnuitiesTwo-Tiered Annuity Features

• Liquid fund (surrender for cash)
• Upfront load
• Interest typically credited at or near guaranteed
  rates
• Income fund (annuitization benefits)
• Credited rate higher than rate credited to liquid
  fund
• Annuity purchase rate ranges from guaranteed rate
  to current rate

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Variable Annuities

• Separate Account performance determines account
  balance
• Main profit component is Mortality Expense Fees
  
• Surrender charges protect against early
  withdrawals

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Variable Annuities Minimum Guaranteed Death
Benefits

• Variable annuity that guarantees a minimum return
  upon death
• Various design options
• Return of premium
• Return of premium plus an investment guarantee
  (ratchet, roll-up)

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Variable Annuities Guaranteed Minimum Income
Benefit

• Includes an additional fixed dollar minimum
  income guarantee defined at issue, derived by an
  accumulation of premiums and some type of
  settlement option rate
• Income at annuitization is greater of guarantee
  or what the account value or cash surrender value
  can purchase at better of current settlement
  option or guaranteed settlement option rates

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Variable Annuities Guaranteed Minimum
Accumulation Benefit

• Fixed dollar minimum balance or fixed minimum
  return defined at issue
• Available for withdrawal at defined date or dates

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Variable Annuities Dollar Cost Averaging

• Annuity deposit is held in the general account
  with periodic transfers to separate account
• Dollar cost averaging period is typically 6
  months to one year
• Bonus-type interest may be paid on the general
  account balance

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Equity-Indexed Annuity

• An annuity with a minimum guarantee plus an
  investment return based on an underlying equity
  index
• May have caps and floors on index participation
  rate
• Participation designs include point-to-point,
  ratchet, high-water-mark

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Immediate Fixed Annuity

• Annuity payments generally start within 1-2
  months although longer delay is possible
• Annuity payment amounts are specified may be
  fixed for term or adjusted periodically
• May be life contingent, period certain, life
  contingent with period certain
• Main profit source is spread between rate earned
  and rate implicit in annuity purchase rate
• Typically no surrender provision

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Immediate Variable Annuity

• Payout varies with performance of separate
  account
• Payout - defined of units
• Payout - agreed units separate account net
  asset value
• Insurer has mortality risk but not investment risk

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Low Premium ProductsTerm

• Death benefit no significant investment
  feature
• 1, 5, 10, 20 year term
• Reg XXX has limited availability of terms greater
  than 20 years

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High Premium ProductsWhole Life

• Fixed premium
• Fixed face
• Non-transparent costs

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High Premium ProductsParticipating Whole Life

• Fixed premium generally higher than on a
  non-participating contract
• Annual policyholder dividend reduces the
  contracts effective net cost
• Fixed face
• Non-transparent costs

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High Premium ProductsUniversal Life

• Flexible premium
• Adjustable face
• Transparent costs

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High Premium Products Variable Life, Variable
Universal Life

• Separate account
• Variable cash value returns
• Adjustable face
• Transparent costs