AN EXCESS SPREAD APPROACH TO NONPARTICIPATING INSURANCE PRODUCTS
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In the past two decades many North American life insurance companies
have sold primarily nonparticipating and investment-oriented products such
as single-premium deferred annuities (SPDAs), universal life, single-pre-
mium immediate annuities, single-premium whole life, flexible-premium
annuities, guaranteed investment contracts, and pension plan termination
annuity contracts. Actuaries have sought to measure the true economic prof-
itability of these products by comparing the market value of the offsetting
asset portfolios with the market value of the liabilities. The difficulty of this
approach is identifying a cred~le market value of the liabilities.
The excess spread approach introduced in this paper addresses this prob-
lem by measuring expected profitability in terms of a spread between the
earnings rate on the assets and the rate required to be earned on the assets
to satisfy the liabilities. For many insurance products, an important part of
the liability cost is the value of interest rate options embedded in the policies.
The excess spread approach incorporates an option-pricing technique that is
flexible enough to allow actuaries to study the effect of policyholder (and
insurance company) behavior patterns in different interest rate environments.
In addition to ongoing profitability analysis, the excess spread approach can
be used in product pricing and design and in risk analysis.
The SPDA is chosen to demonstrate the technique because it provides the
best example of the flexibility of the technique and the importance of be-
havior modeling. The SPDA involves an option of the policyholder--the
surrender option--and an option of the insurance company--the ability to
reset credited rates.
Added: March, 17th 2010
File size: 1.43mb
Tags: nonparticipating insurance products, single premium deferred annuities, liabilities
This document establishes a conceptual framework for a standard for the valuation of reserves for life insurance policies under a principle-based approach (Approach) as defined below for the products ...