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Developing A New Crediting Method

Developing A New Crediting Method. Jeff Hanschmann. Why Develop a New Crediting Method?. Feedback and planned enhancements Options for customers Simplicity Innovation. Common Crediting Methods. Annual Point-to-Point Difference between ending and beginning annual values

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Developing A New Crediting Method

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  1. Developing A New Crediting Method Jeff Hanschmann

  2. Why Develop a New Crediting Method? • Feedback and planned enhancements • Options for customers • Simplicity • Innovation

  3. Common Crediting Methods • Annual Point-to-Point • Difference between ending and beginning annual values • Buy a call, sell a call. • Monthly Average* • Difference between average and beginning annual value • Geometric Asian option • Monthly Sum • Sum of monthly returns • Monthly cap (1%)

  4. Other Crediting Methods • Rainbow Method* • Weighted average of best performing indices • ING, American General • Trigger Method* • Brand new to life insurance industry (Why hasn’t any company come out with it before?) • Common in FIA industry

  5. Rainbow and Asian Option • Index Correlation risk (for blended indexes) • Cholesky Decomposition • In a loose, metaphorical sense, as the matrix analogue of taking the square root of a number • The Cholesky decomposition is commonly used in the Monte Carlo method for simulating systems with multiple correlated variables: The covariance matrix is decomposed, to give the lower-triangular L. Applying this to a vector of uncorrelated samples, u, produces a sample vector Lu with the covariance properties of the system being modeled. • Excel Sheets**

  6. New Trigger Method * 13% * * 10% *

  7. Illustration Rates - Assumes annual participation rate of 100% - Can be subjective…

  8. Illustrations • What initial cap are we able to provide? • Why do we need to blend current and long term if we statically hedge? • Avoid fluctuating caps! • Estimate bank “mark-up”

  9. Challenges • What’s the story? • Growing vs. stable market • No more 0% returns than APP • Hedging • Static vs. Dynamic hedge • What are advantages and disadvantages? • High Tracking error when delta hedged daily (10,000 sims)* • IT costs • Implementation costs are high • Down to last indexing space • Modification will increase costs

  10. Implementation Process • Product Development partners with… • Concepts (June 2011) • MMPI (Market Research) • Design • CRM (Assumptions and risk evaluation) • Hedging and AIM • Requirements • Marketing (Marketing plan) • IT (Product validation plan) • Implementation (Jan. 2012) • Operations • Suitability • Distribution (Training) • Filing

  11. Q/A • Thank you!

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