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S. HAMILTON LECKIE
INTRODUCTION
THE purpose of this paper is to outline the development and current
status of variable annuities and variable life insurance in the United
States of America. The author was fortunate in being granted a
Fellowship by the Winston Churchill Memorial Trust which enabled
him to travel extensively in North America for two months in the
summer of 1971. It is pointed out that this paper is the result of a
large number of impressions formed by the author and has no claim
to be a comprehensive treatise on the subjects. However, it is hoped
that the paper will be of real interest to actuaries and others in the
United Kingdom.
Part I of the paper deals with variable annuities, Part II with
variable life insurance, and Part III with the special problem of
providing minimum death benefit guarantees and maturity value
guarantees for these variable products. Variable annuities are much
more established in the United States than in this country, but
variable life insurance is just in the process of being developed.
Mention will be made of the broader issues as well as of actuarial
matters.
Background information
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are licensed in only a few states. Agents, that is the salesmen, must
become licensed by examination before selling insurance in any
state. The state insurance departments lay down minimum cash
surrender value and valuation bases and also in some cases, the
terms of the policy contract.
The taxation authority in the U.S. is the Internal Revenue Service
(I.R.S.) which operates on a federal basis. However, some of the
states also charge a tax of up to 3% on the premium income derived
from business written in that state.
Life offices may operate their own mutual funds (U.S. equivalent
of unit trusts) and any company writing variable annuities or mutual
fund business is also regulated by the Securities and Exchange
Commission (S.E.C.). This federal body regulates anything deemed
to be a 'security'. Conventional fixed dollar life insurance and
annuities are not regulated as securities, but variable annuities are
so regulated and the position of variable life insurance is not yet
settled. The purpose of the S.E.C. is to protect the small investor
by, for example, demanding minimum standards of disclosure and
by fixing maximum amounts of commission. The S.E.C. is not always
easy to contend with and inconsistencies arise in the S.E.C.'s dealings
with different companies and from year to year. However, the S.E.C.
does seem to be a necessary part of financial life in the U.S.
In general, a U.S. company which is considering introducing a
new type of policy must expend much time and effort on the regulatory implications. Only once these constraints have been satisfied
can the company start to think of the purely actuarial matters such
as setting premium rates. Another major difference is that American
actuaries are more marketing minded than their British counterparts
and the proprietary companies seem to be more profit-conscious.
PART I. THE VARIABLE ANNUITY
Development and regulation
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There are four main types of variable annuity in the United States:
1. Group variable annuities, used for pension business.
2. Variable annuities available only to self-employed persons
(called H.R. 10 or Keogh plans after the legislation introducing
the favourable tax treatment of these plans).
3. 'Tax sheltered' variable annuities for school teachers.
4. Individual non-qualified variable annuities which are available
to the public.
In general, the first 3 categories of contract are 'qualified' by the
I.R.S. and therefore the company pays no tax on the separate
account backing this type of business. However, non-qualified
separate accounts are subject to tax on long-term capital gains.
Hence at least 2 separate accounts are desirable if not essential for
a company writing both qualified and non-qualified business.
Many pension plans in the U.S. are of the money purchase type
and there are no regulatory restrictions on the relationship between
the amount of the pension and final salary. Consequently most
group variable annuities are simply a collection of individual policies
with premiums being received in bulk. H.R. 10 and tax sheltered
annuities form very attractive business to insurers since there is
B
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tax relief available to the policyholder and the average policy size
is large. Some companies specialize in this highly competitive market.
The individual variable annuity market is not yet fully developed.
Here the insurance companies run into direct competition with
mutual funds and other savings media and at the same time the
agent's commission is much less than for life insurance. On the
other hand individual variable annuity contracts are not at a disadvantage as they are in the U.K. compared with life insurance in
that neither life insurance nor annuity premiums attract tax relief.
Many companies have been somewhat disappointed in their efforts
to sell individual variable annuities.
A fixed part of an individual non-qualified annuity is regarded
as return of capital and this 'excludable amount' is tax-free in the
hands of the recipient. As in the U.K., the method of taxation results
in the net benefits under a variable annuity fluctuating less than the
gross benefits. If the benefit under a variable annuity is less than the
excludable amount in any year, the excess can be respread over
future years to increase the tax-free element.
Each of these classes of variable annuity is, of course, available
in fixed dollar form and many companies stress the idea of a balanced
annuity in which part of each premium, not necessarily constant,
is applied to a fixed dollar policy. The balanced annuity provides
some guarantee of dollar amount and protects the benefits in a
period of deflation. Also the volatility of the annuity benefits is
lessened but at the cost of a reduction in the equity participation.
At the vesting date there is often an option to change the composition
of the balanced annuity. It is also usual to guarantee that at least
the premiums received to date will be returned in the event of death
during the deferred period.
Interest rates are currently high in the United States and so the
initial benefit on an immediate variable annuity compares unfavourably with the return on a fixed dollar annuity. As in the U.K., few
immediate variable annuities have been sold. However, the policyholder is not given the full benefit of the high interest rates in the
premium basis for a deferred fixed dollar annuity and so the variable
annuity becomes more attractive the longer the deferred period.
Premium basis
Interest. No interest assumption is, of course, made for the
accumulation period. During the annuity period it is not necessary
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higher than for fixed dollar annuities because of extra costs, (a)
arising from the handling of the separate account and in the daily
evaluation of unit prices, (b) incurred because of the amount of
regulation and the need to issue a prospectus, and (c) owing to
clerical staff being unfamiliar with the variable contract. Notwithstanding these facts, the expense loadings are often taken the same
as for fixed dollar annuities, thus achieving consistency at the
expense of equity. It should be remembered that the S.E.C. will not
approve a contract if the loadings are too high. Sales charges, which
include commission, are limited by the S.E.C. to the equivalent of a
level annual charge of 9%, but many offices pay less commission
than the maximum. American actuaries are not so concerned with
inflation of costs as in Britain and many believe that increased
efficiency and automation will offset the effect of higher salaries and
costs; some U.S. companies have actually reduced the per policy
renewal expenses in the last 10 years.
The mortality and expense guarantees during the deferred period
are usually paid for by an annual charge on the assets. The risk to
the company under these guarantees depends on the amount of the
assets at vesting and so the risk can be matched if the reserve for
the guarantees is allowed to accumulate within the separate amount.
Lapses. Premium bases in the U.S. usually include assumptions
as to lapses. The assumptions are fixed with regard to each office's
own experience and account may be taken of the loss (or profit) to
the company in the event of withdrawal in each policy year. No
lapse assumptions are, of course, made for annuities after vesting.
Profit. In general, American offices do not expect to make any
profits from mortality and also expenses are running higher than
charged for. However, a percentage charge is always made on the
assets for investment management expenses and usually for the
guarantees, and a 1% annual charge on large funds can yield a
significant amount. Few companies, if any, have yet reached the
point where expenses are being paid for by the direct loading plus
the asset charge. The profit to the company is expected to come from
the annual charge, and as the assets build up, the charge should
help offset any inflationary increases in renewal expenses.
The U.S. approach to premium rates is highly sophisticated, at
least in the large companies. Once the basic assumptions have been
made specimen rates can be calculated (this may be regarded as the
microscopic approach, i.e. individual lives are considered in the
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and so on.
Then the reserve on the valuation basis is
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companies have not met their initial expectations, but partly this
has been the result of recent uncertainties in the stock market; in
fact in May of 1971 redemptions of U.S. mutual funds exceeded sales
for the first time. Another difficulty is that some of the older agents
have been reluctant to sell variable annuities after a lifetime of
promoting the 'security' of fixed dollar benefits. One principle that
has been clearly demonstrated is that for any office to succeed in
selling variable annuities it is essential first to sell the idea to the
sales force.
PART II. VARIABLE LIFE INSURANCE
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where
(2)
where
and
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If we let
and
then
Using this relationship to connect successive sums assured gives the
desired property that the reserve per dollar of actual face amount
at the end of each policy year for the fixed premium variable benefit
policy is exactly the same as for a corresponding fixed benefit policy,
i.e. reserve after t years = Ft(,Vx).
This result is verified using a prospective valuation method in the
Appendix. The theory can be easily applied to other forms of insurance. Furthermore, the formula can be extended to policies under
which the premiums vary in any specified manner, or where the
death benefit under the corresponding fixed benefit policy varies in
any given manner. Note that for a paid-up policy, Y, is unity, and
so Ft = F t - 1 Z t ,
i.e. the change in the sum assured depends only on the Z factor.
There is an alternative approach using unit principles.
Let u0 = unit value of separate account at the commencement of
the policy,
UT = unit value of separate account at the end of the t'th policy
year.
If the unit values are adjusted to reflect the actual investment
earnings of the separate account over the A.I.R. then
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Since
this reduces to
(4)
i.e.
Also
i.e.
The significance of the Y and Z factors in the basic equation
Ft=Ft-1YtZt
can now be expressed as
(a) the role of the Y factor is to adjust the number of units of
sum assured (and hence the sum assured itself) at the beginning
of the t'th policy year to reflect the fact that a fixed premium of
Px is payable at that time,
(b) the role of the Z factor is to adjust the sum assured so as to
reflect the change in the unit value over the t'th policy year.
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which the reserve per unit of sum assured, as in the case of the Dutch
policy, is the same as for a corresponding fixed dollar policy.
3. Fairbanks
This is a policy under which a portion of the premium is used to
purchase fixed dollar one year term insurance equal to the excess
of the initial sum assured over the amount of reduced paid-up
insurance purchased by the reserve on a corresponding fixed dollar
policy and the balance of the premium is used to purchase variable
paid-up insurance.
4. Walker
This is the counterpart of the Fairbanks design where the oneyear term insurance is variable rather than fixed.
5. Cooper
This is a 'buy term and invest the difference' policy under which a
portion of the premium is used to purchase fixed dollar one-year
term insurance equal to the excess of the initial sum assured over
the reserve on a corresponding fixed dollar policy and the balance
of the premium is put on deposit in the separate account.
6. Booth
This is the counterpart of the Cooper design where the one-year
term insurance is variable rather than fixed.
A ctuarial formulae
Let
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4. Walker
5. Cooper
6. Booth
Reserves
1. Dutch
2. Nylic
3. Fairbanks
4. Walker
5. Cooper
6. Booth
There is, of course, no 'correct' design. Each alternative has different
characteristics and places different relative emphasis on increasing
death benefits compared with increasing cash values. Also the extra
benefits can be made fixed or they can remain variable. Some designs
are much more volatile than others. The Nylic design, for example,
will give a much greater increase in the early years in death benefits
for a given favourable investment return in the separate account
than the Walker design, but the converse is true if the separate
account investment return is inferior to the A.I.R.
Regulation
Variable life insurance has to date not been issued in the U.S. and
the principal reason for this is that the regulatory requirements have
not been determined. Traditional life insurance policies are subject
to regulation and variable life insurance will be regulated also. The
major issues are 'by whom' and 'to what extent' and these problems
are still being resolved.
During 1970 the American Life Convention and the Life Insurance
Association of America, whose member offices transact over 99%
of U.S. life insurance business, set up a joint committee to formulate
a united approach to variable life insurance regulation. In October
of 1970 this committee made an informal submission to the Securities
and Exchange Commission on behalf of the life insurance industry.
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annuities have had no noticeable effect on the economy, although the predictions on the impact of variable life are altogether on a much larger scale. Almost certainly, variable life
will have some effect on the economy, but the magnitude of
the effect can only be guessed at. In the event it may be that
the investment patterns of the life insurance companies will
change so gradually that any effect on investment patterns
will not be detrimental.
In general, it may be said that most of the arguments against variable
life insurance are made out of concern for the industry as a whole.
However, each individual office will make its decision on whether
or not to introduce variable life on the basis of its own interests.
Current situation
The current position is that at least three of the large U.S. companies are well advanced in their plans to market variable life insurance. Almost every other company is following developments avidly
without proceeding too far before the outcome of the negotiations
with the S.E.C. An excellent review of the development of variable
life insurance is given in Variable Life Insurance: Current Issues and
Developments (6). The three designs of variable life which will
certainly be sold are the Nylic design, the Dutch design and the
Walker design. One company has had its policy documents for the
Nylic and Dutch designs approved by several of the state insurance
departments.
It is interesting to compare the three main designs. Most companies
are assuming that fixed premiums are a prerequisite of variable life
insurance but this may not be true. The Dutch design is the only
one with variable premiums and this has several interesting consequences. If the separate account performs well, then the policyholder will be required to pay a larger premium and if the account
performs badly then a smaller premium will be asked for. This may
have a beneficial effect on lapses, but the design contravenes the
idea of price cost averaging. From the company viewpoint, favourable investment performance will result in a larger expense loading
being received, and vice versa. The variable premium design will
also affect the cost of the minimum death benefit guarantee.
The Nylic design is more volatile than the Walker design and so
good investment performance will be more obviously reflected in
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the sum assured. However, since the sum assured under the Nylic
design depends on both the Y and Z factors, it is possible for the
Z factor to be greater than unity but the sum assured to decrease
over the period of one year. It may be difficult to explain to the policyholder why his sum assured has decreased while the separate account
earnings were greater than the A.I.R. The Walker design is akin to a
participating policy in which dividends are declared in paid-up form,
the main difference being that negative paid-up additions are inevitable in some years.
The pricing of variable life insurance cannot be finalized until it is
known whether the S.E.C. plans to regulate, particularly with regard
to commission. However, it is anticipated that variable life premiums
will be marginally dearer than for comparable fixed benefit policies.
The A.I.R. is likely to be 3% and variable life policies offered by the
mutual companies will probably be participating in the mortality
and expense elements.
Mortality assumptions will be the same as for fixed benefit
policies. However, one difference with variable life is that favourable
investment performance increases the amount at risk. Consequently,
it may be necessary to use more severe underwriting standards.
Reinsurance presents a particular problem since the amounts at
risk cannot be pre-determined and have the potential of increasing
greatly. The expenses of variable life will be higher than normal
because of the development costs and the increased running costs
of the separate account. To operate variable life successfully, it will
be almost essential to be highly computerized, which may not be
easy for small companies. Again, the profitability to the company
of variable life will depend mainly on the asset charge.
The development of variable life insurance is currently in a most
interesting phase. No further steps can be taken to issue the first
policy until the negotiations with the S.E.C. are resolved, but most
offices are taking advantage of the hiatus to examine every aspect of
variable life, even if no commitment has been made to proceed with
the development of it.
The marketing impact of variable life can only be guessed at. Every
shade of opinion can be found, from high hopes that this will be the
greatest innovation for decades, to predictions of dismal failure. One
of the principal unknowns is the extent to which sales of variable life
will represent a real increase in new business rather than just a
switch from conventional life insurance. Since the initial sum assured
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With both types of guarantee the twin problems are the calculation
of premiums and the determination of suitable reserves. Traditionally, actuaries have always considered mean values in their assumptions, but with these types of guarantee, it is necessary to consider
the whole range of possible outcomes of investment performance
and attach probabilities to each value. The questions of premiums
and reserves may be considered from three different viewpoints.
Theory
It is quite safe to say that not nearly enough theoretical work has
been done on the nature of these guarantees, which provide some
highly intriguing problems. The techniques which are appropriate
such as mathematical statistics, risk theory and computer simulation,
are not generally familiar to most actuaries.
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Regulation
The only concern of the regulatory authorities is to ensure solvency
for any company offering these guarantees.
Office practice
The viewpoint of the offices writing these guarantees is that premiums should be adequate but competitive. Reserves also should
be adequate, but at the same time the company does not want to
over-reserve or have violent fluctuations in the amount of its reserves.
It should be borne in mind that the reserve for these guarantees
will form only a very small part of the liability of most offices.
Premiums for minimum death benefit guarantee
1. The simplest approach to calculating premiums for the minimum death benefit guarantee under a variable annuity is to assume
that the separate account unit values will grow at a constant rate of,
say, 5% per annum. The value of the units attaching to any policy
is thus known for each policy year and the excess of the gross premiums over this value is the estimated liability to the company on
death. The cost of the benefit can be calculated for any age at entry
and single or annual premiums obtained. The premium is usually
expressed as a percentage of the office premium. This method takes
no account of fluctuations in the unit value, but is certainly very
convenient. However, the method is useless for variable life insurance,
since an assumed rate of growth higher than the A.I.R. implies that
no payments would be made under the guarantee.
2. Perhaps the commonest method by which the premiums for the
guarantee have been calculated for variable annuities is using a
historical approach. A representative ordinary share index over a
long period of time is chosen and adjusted as appropriate to reflect
the inclusion of net reinvested income, capital gains tax and the
charge against the assets. The net allocation to the separate account
under any policy is then assumed to be invested at these prices and
similarly the value of the policy in every subsequent year can be
found. For each year of entry, a series can be formed of the amount
which the company would have paid out under the guarantee. Hence
net premiums can be calculated for each year of commencement.
The office premium can be taken as the average of the historical
net premiums plus a contingency loading. Alternatively a premium
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can be chosen on the basis that it would have been adequate in, say,
90% of all commencement years in the past.
3. A more sophisticated method is to apply computer simulation
to obtain series of stock market prices. Simulation may be defined
as a process which gives possible outcomes of an event by applying
given data in a random manner. Using as data the changes which have
occurred from year to year or from month to month in an adjusted
ordinary share index, the value of an investment after a period of
time can be simulated any number of times and a frequency distribution built up. A series can then be obtained of the amount
payable under the guarantee and the benefit costed as before. This
method is appealing from a theoretical viewpoint and may be
regarded as producing a premium free from the irregularities of
actual history. Most U.S. companies are intending to use simulation
in pricing the minimum death benefit guarantee for variable life
insurance.
An alternative approach to simulation has recently been put
forward by Bailey (7). The approach is one of enumeration rather
than simulation and does not involve the generation of random
numbers. Bailey uses a computer program named 'Dice' which
calculates the complete frequency distribution of the expected sums
of the faces which turn up when any finite number of dice are rolled;
each die can have any number of faces, each die can have any
amount on any of the faces and each die can be biased in any way.
By using the historical changes of a stock market index, a complete
frequency distribution of the value of an investment of 1, either made
once only or systematically, can be obtained using this statistical
technique.
4. It is possible to calculate the premiums for a minimum death
benefit guarantee by representing stock market fluctuations as a
mathematical function and applying risk theory. Kahn (8) has
recently suggested that stock market price changes may be approximately represented by a log-normal curve. In his paper Kahn compares the single premiums for the minimum death benefit guarantee
under a paid-up whole life policy obtained by simulation and by
this analytic method. The advantages of the analytic approach are
that it provides more precise measurements of the fluctuations of
the stock market and that it is less expensive than simulation.
It is salutary to examine the nature of the assumption made with
the last three methods. The performance of a general stock index
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over perhaps the past 50 years is being used to estimate the performance of a particular separate account over the next 50 years. A
comparison may be made with the early insurance companies which
had to use population mortality statistics when setting premium
rates. Fortunately at that time mortality was generally improving
and the offices could exercise selection over the lives to be insured.
It would seem to be highly improbable that the factors which
determine investment returns will produce, over the next 50 years,
results bearing the same characteristics as in the past. However, the
first stage is certainly to examine past history, and this can only be
done by looking at a suitable general index. The next step should
be to adjust the distribution of investment results so as to fit in
with the expected characteristics and the investment philosophy of
any particular separate account. For example a property fund is
generally regarded as being much less volatile than an equity fund,
although this may not be true if the fund is concentrated in comparatively few individual properties. However, it will be very many
years before anything other than one of the standard stock indices
can be considered suitable.
Premiums for maturity value guarantee
1. To estimate the value of the net allocations to a separate
account in n years' time, an average growth rate could be chosen
and the net allocations accumulated at this rate. However, this
approach is totally inadequate since any reasonable growth rate
will result in an estimated maturity value higher than the guarantee, implying that there is no liability. What is required is the
distribution of possible maturity values, not just the mean.
2. As with the minimum death benefit guarantee, an historical
approach is possible. Using a general stock index, adjusted as necessary, it is straightforward to calculate the maturity value for a policy
of any term which commenced in any past year. Hence the amount,
if any, which the company would have had to have paid out can be
calculated. The average of these amounts can be divided by xn to
give the average net annual premium. Since the nature of these
guarantees is not yet fully understood, it is prudent to include a
large contingency loading in the office premium.
It is sometimes said that a maturity value guarantee is purely a
financial risk, whereas a minimum death benefit guarantee combines
financial and mortality risks. This is not really true, since the
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and these are the net change factors after allowing for charges of
1 % per annum against the assets. The gross change factors
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are compared with the lowest historical result, the 10th percentile,
the 20th percentile and the median values. Fn is consistently more
conservative than the 20th percentile and at durations 1-2 and
over 20 is more conservative than even the 10th percentile.
Hickman recognizes the disadvantages of both retrospective and
prospective approaches; the former fails in that no account is taken
of the current investment situation or of the future benefits whereas
the latter produces reserves which depend on the unit value at the
date of valuation and which can therefore fluctuate considerably.
An average reserve is suggested which moves one-fifth of the way
from the accumulation of the previous reserve towards the new
prospective reserve, thus smoothing out the fluctuations to some
extent. However, even with this modification the prospective method
would historically have resulted in fluctuations in the reserve greater
than the fluctuations in the claims arising under the guarantee.
Reserves for maturity value guarantee
This is a more difficult problem than the reserves for the minimum
death benefit guarantee since the entire liability to the office is
unknown until the very end of the contract. With a non-profit
endowment policy, the insurer knows that he must pay out, say,
1,000 at the end of the term. The two end-points of the reserve curve
are known and only the precise shape of the curve remains to be
determined by the actuary. However, with a maturity value guarantee,
only the starting point is fixed and the ultimate liability may be zero
or it may be several hundred pounds. A colourful analogy may be
drawn with a guided missile aiming at a target. With a conventional
endowment policy the target is fixed. With the maturity value guarantee under a variable policy the target is moving and the question
immediately arises to what extent should the course of the missile
be corrected for every movement of the target. It would seem that
soon after launching there is no need for the missile to follow
every movement of the target, but as the target is approached then
it becomes progressively more important for the missile to reflect
faithfully every movement.
1. An accumulation of the premiums charged for the guarantee
is the simplest reserve method. The premiums would be accumulated
outside the separate account, preferably in fixed interest securities
redeemable at the maturity date. On average if the experience corresponds to that expected, then the reserves will be sufficient. However,
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the significant point about the guarantee is that in most years the
company will have nil liability on the maturing policies, but in some
years this amount will be entirely inadequate. To introduce a margin,
the premium accumulated would be larger than the premium charged
for the guarantee.
2. A possible approach to the reserves is to consider a prospective
method. The actual value of the units attaching to any policy is
known at the valuation date. Using simulation or an enumerative
or an analytic method, it is possible to obtain the probability density
function of the value of the existing units at the maturity of the
policy, and similarly the probability density functions of the value
at maturity of each of the future premiums can be found. By combining these p.d.f.s and integrating the area under the left-hand tail
of the curve bounded by the abscissa and the amount of the maturity
value guarantee, the expected cost to the insurer can be found. This
amount can then be discounted using mortality and interest and the
value of the future premiums for the guarantee deducted to leave the
reserve required at the valuation date for the guarantee.
This method is attractive from a theoretical viewpoint, but is
probably impracticable. However, the method has the advantage that
the value of the units actually purchased at the time of valuation
assumes an ever-increasing importance as maturity approaches. The
reserve basis could be made as conservative as is required for
prudence by lowering the mean or increasing the standard deviation
of the probability density functions.
3. A radically different approach has been suggested by Benjamin
in the U.K. (12). Benjamin argues that the correct way to study
maturity value guarantee is to consider what reserves the insurer
must hold in order to stay solvent. More precisely, he considers
what initial reserves should be set up so that the insurer will have
less than a postulated probability, 2%, of becoming insolvent. The
initial reserves produced with this approach are predictably very
high; for example the initial reserve required could be as high as
25% of the present value of the gross premiums for the entire contract
and the question which immediately arises is where is this money
to come from. If premiums are increased drastically, then the
guarantee would not be attractive from the policyholder's point of
view. Alternatively, if surplus is held back to set up these high
reserves, then the policyholder should make a contribution for the
security he is receiving from these reserves. Although the company
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The reserve bases laid down by the U.S. state insurance departments for minimum death benefit guarantees under variable annuities
are at present being formulated. The state of Maryland has an
unfortunate requirement that a reserve of 2% of the total of all
gross premiums received should be held irrespective of the value of
the units. In other states the reserve basis is as yet not settled. No
state appears to have specific regulations on maturity value guarantees.
The Canadian Department of Insurance has issued two series of
'Guidelines' to life offices in respect of equity linked insurance and
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annuity contracts with guaranteed benefits. The first set of 'Guidelines' was issued in 1970 and contained a rather crude approach to
the reserve problem. A minimum reserve of at least 10% of the
guaranteed maturity values was to be held for contracts maturing
within one year, even if the value of the units held were twice the
guaranteed maturity value; on the other hand, no minimum was
specified for maturities in two years' time, regardless of the current
value of the units.
The revised set of 'Guidelines', dated June 1971, lays down that,
1. The guarantee shall not exceed the sum of the gross premiums
paid to the date of maturity.
2. The term of a contract with maturity value guarantee shall
not be less than ten years.
3. Amounts payable on surrender of a contract shall not be
guaranteed.
4. Where a minimum death benefit guarantee is greater than the
amount held for the contract in the separate account, the company
shall ascertain the amount at risk and provide in accordance with
a method and bases filed with the Superintendent of Insurance
for an appropriate reserve in the life insurance fund.
5. For contracts with maturity value guarantee, a 'risk premium' calculated in accordance with a method and bases filed
with the Superintendent, shall be charged and allocated to a
'security reserve' within the life insurance fund. The amount of
the security reserve at the end of any year shall not be less than the
excess of (a) over (b), both with respect to the aggregate of
contracts maturing within the following ten years, where,
(a) is a special reserve calculated using the formula
108
S. HAMILTON LECKIE
109
6.
7.
8.
9.
basic actuarial theory for fixed premium variable benefit life insurance.
T.S.A. XXI, 343.
Proceedings of the National Conference on Variable Life Insurance. Variable
Life Insurance: Current Issues and Developments. Published by the Insurance
Department, University of Pennsylvania (1971).
BAILEY, W. A. 'Frequency distributions of stock market price indexes'.
Presented at the Society of Actuaries, Seattle meeting, May 1971.
KAHN, P. M. (1971) 'Projections of variable life insurance operations'.
T.S.A. XXIII, 335.
TURNER, S. H. (1969). 'Asset value guarantees under equity-based products'.
T.S.A. XXI, 459.
110
S. HAMILTON LECKIE
(6)
and
111
(7)
112
S. HAMILTON LECKIE
From equations (6) and (7), we see that this expression reduces to
Thus if equation (5) is true for t = n, it is true for t = n\. But we
have proved that the result is true for t = wxl. Hence by
induction the result is true for all t.