LPM Fall 2024/Spring 2025 Exam Paper (PDF)

LPM – Section A – Fall 2024 & Spring 2025 1 / 133 Describe possible face amount and premium patterns for term insurance. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance ‚ Face amount patterns – level, decreasing, incre...

LPM – Section A – Fall 2024 & Spring 2025 1 / 133 Describe possible face amount and premium patterns for term insurance. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance ‚ Face amount patterns – level, decreasing, increasing ‚ Premium patterns – level, modified, increasing ‚ Premium schedules – attained age, select, S&U LPM – Section A – Fall 2024 & Spring 2025 1 / 133 LPM – Section A – Fall 2024 & Spring 2025 2 / 133 Describe term product development challenges and possible solutions. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance ‚ Attained age vs. S&U scales § Attained age: simpler, but may not be competitive at all ages § S&U: more competitive, but mortality may worsen in the future ‚ Decreasing term may mean increasing relative premium § Offer limited-pay premiums § Decreasing premium scales § Floor DB § Use OYT premiums LPM – Section A – Fall 2024 & Spring 2025 2 / 133 LPM – Section A – Fall 2024 & Spring 2025 3 / 133 List special types of term insurance. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance 1. Par term § Higher persistency, but expensive (not popular) 2. Indeterminate (non-guaranteed) premium term § Allows for aggressive pricing but may cause anti-selection 3. Joint life term 4. Second-to-die term 5. Hybrid term 6. Deposit term LPM – Section A – Fall 2024 & Spring 2025 3 / 133 LPM – Section A – Fall 2024 & Spring 2025 4 / 133 Describe factors that cause variations in premiums. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance ‚ Size – premiums per 1000 Ó as issue face Ò § Reflects decreasing average costs ‚ Risk class § Higher premiums for smokers than non-smokers § Lower premiums for select risks ‚ Gender – M/F/U ‚ Lapse-supported design – higher actual lapse rates = higher profits ‚ Cross-subsidization – price some cells more aggressively than others LPM – Section A – Fall 2024 & Spring 2025 4 / 133 LPM – Section A – Fall 2024 & Spring 2025 5 / 133 List and describe riders that can be added to term policies. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance Term Riders – base, spouse, child, OYT Non-Term Riders 1. Waiver of Premium (WOP) – waives premium on qualified disability 2. Return of Premium (ROP) 3. Accelerated Death Benefit (ADB) – accelerates DB on terminal illness 4. Guaranteed Insurability – purchase more coverage without underwriting 5. Other ADB riders – triggered by the following: § Chronic illness (6 ADLs) § Critical illness – heart attack, stroke, cancer, and coronary bypass 6. Disability – pays monthly income as a % of the original face 7. Long-term care (LTC) – pays LTC benefits independent of original DB LPM – Section A – Fall 2024 & Spring 2025 5 / 133 LPM – Section A – Fall 2024 & Spring 2025 6 / 133 Describe pricing considerations for term insurance. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance 1. Mortality (very important assumption) § Mortality Ó as policy size Ò § Aggregate term mortality ă aggregate WL § High face term mortality ą high face WL § Other considerations: improvement, anti-selection, credibility at old ages 2. Persistency (lapse) (anti-selection, premium slope) § High early lapses affect acquisition costs recovery § Low ultimate lapses hurt lapse supported designs 3. Underwriting – shifting to AUW and predictive analytics 4. Compensation (varies a lot, can affect persistency) 5. Expense and inflation (overhead allocation, high profit sensitivity) 6. Legal and regulatory issues (stat reserves, coverage length, marketing, certifications) LPM – Section A – Fall 2024 & Spring 2025 6 / 133 LPM – Section A – Fall 2024 & Spring 2025 7 / 133 List and briefly describe at least 4 common term profit objectives © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance PV(Profits) 1. Profit Margin = PV(Premiums) Net Income 2. ROE = Equity (can be discounted or undiscounted) 3. IRR = discount rate such that PV(Profits) = 0 First Year Income 4. Surplus strain = First Year Premium 5. Break-even year (BEY) = year when accumulated assets ě reserves LPM – Section A – Fall 2024 & Spring 2025 7 / 133 LPM – Section A – Fall 2024 & Spring 2025 8 / 133 List 3 ways that a company could charge for conversion options. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance 1. Charge only policyholders who exercise option 2. Charge only policyholders who want the option available 3. Charge everyone LPM – Section A – Fall 2024 & Spring 2025 8 / 133 LPM – Section A – Fall 2024 & Spring 2025 9 / 133 List pricing assumptions for conversions. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance ‚ Proportion of insureds expected to elect the option ‚ Percentage of coverage available to be exercised ‚ Lapse assumption (low following conversion) ‚ Mortality – usually high when election rate is low (also anti-selection) LPM – Section A – Fall 2024 & Spring 2025 9 / 133 LPM – Section A – Fall 2024 & Spring 2025 10 / 133 What is the formula for determining the extra mortality cost of conversions? © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance PV at age x of the extra mortality cost of a policy converted at policy year r : Ax ,r “ r px ˆ ex ,r ˆ Kx ,r ˆ v r where: 8 ÿ ` ˘ K x ,r “ pt ´1 px `r qpv t q qxC`r `t ´1 ´ qxS`r `t ´1 AR x `r `t t “1 q C “ mortality rate for converted WL policy q S “ mortality rate for standard WL policy AR “ amount at risk each year ex ,r “ probability a policy converts in duration r r “ duration since policy issue t “ duration since conversion date LPM – Section A – Fall 2024 & Spring 2025 10 / 133 LPM – Section A – Fall 2024 & Spring 2025 11 / 133 What is the cost of conversions per unit issued? © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 1 – Term Insurance Cost of conversions in year t per unit issued is the sum of: 1. The cost of expected conversions in year t ˆ ˙ˆ ˙ Option Handling Expense Units Electing Option “ Reserve Credits ` Avg Units Issued Per Policy Radix 2. The cumulative cost for years prior to t ÿ ˆ Units Electing Options ˙ “ ˆ % of Face Converted ˆ Option Charge Radix Radix = total number of units issued LPM – Section A – Fall 2024 & Spring 2025 11 / 133 LPM – Section A – Fall 2024 & Spring 2025 12 / 133 Describe characteristics of whole life insurance. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 2 – Whole Life WL is a type of permanent life insurance ‚ Guarantees coverage for life if premiums are paid ‚ Offers tabular CSV ‚ Can be participating (pays dividends) § Dividend options: cash, apply to premiums, PUAs/OYT ‚ WL premium patterns: 1. Ordinary level premium payable for life (most common) 2. Indeterminate premium 3. Limited payment LPM – Section A – Fall 2024 & Spring 2025 12 / 133 LPM – Section A – Fall 2024 & Spring 2025 13 / 133 Describe pricing considerations for whole life. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 2 – Whole Life Mortality (significant risk) ‚ Lack of premium flexibility + very long coverage periods Persistency (Lapse) ‚ May affect other assumptions like mortality and expense ‚ 2012 SOA WL persistency study: § Lapse rates have been declining § Lapses increase in poor economic conditions § Smaller policies lapse more in early years § Male lapses « female lapses § Stricter underwriting = lower early lapses Underwriting – trending toward AUW like term LPM – Section A – Fall 2024 & Spring 2025 13 / 133 LPM – Section A – Fall 2024 & Spring 2025 14 / 133 List characteristics of UL (as many as you can). © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 2 – Universal Life 1. Cash value: CVt “ pCVt ´1 ` Premt ´ Chargest qp1 ` r q 2. Credited rates – guaranteed minimum, portfolio vs. new money § Key risk: spread compression if interest rates fall 3. Mortality charges – guaranteed max, attained age vs. S&U 4. Surrender charges common 5. Expenses (front-end loads, fixed charges) 6. DB options (face or face + CV) 7. Face amount may be changed after issue 8. Premiums can be flexible 9. Partial withdrawals allowed 10. Policy loans allowed (with lower credited rate) 11. Riders (similar to term) 12. Persistency bonuses LPM – Section A – Fall 2024 & Spring 2025 14 / 133 LPM – Section A – Fall 2024 & Spring 2025 15 / 133 Describe the fixed premium UL product design. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 2 – Universal Life ‚ A.k.a. “interest-sensitive WL” ‚ Premium is fixed like a permanent product ‚ CV = max[Guaranteed CV, Net Accumulation Value] ‚ Vanishing premium design is most popular LPM – Section A – Fall 2024 & Spring 2025 15 / 133 LPM – Section A – Fall 2024 & Spring 2025 16 / 133 With regard to universal life with secondary guarantees, briefly describe: 1. The 2 main designs 2. Reserve implications © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 2 – Universal Life Minimum no-lapse premium (MNLP) – most basic ULSG design ‚ SG is based on whether cumulative minimum premiums have been paid ‚ MNLP premiums generate little or no CSV Shadow account design – policy will stay in force if the shadow account ą 0 ‚ Shadow account has its own set of charges/credits (SA ‰ CSV!) Reserve Implications: Model Regulation 830 (“XXX”) and AG 38 (“AXXX”) ‚ AXXX greatly increased ULSG reserves ‚ Insurers needed reserve relief from financing (lead to AG 48) ‚ VM-20 should replace XXX and AXXX and result in simpler ULSG designs LPM – Section A – Fall 2024 & Spring 2025 16 / 133 LPM – Section A – Fall 2024 & Spring 2025 17 / 133 Describe how index-based interest is typically credited on an indexed universal life policy. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 2 – Universal Life “ ‰ Index Crediting Rate “ max minpIndex Change ˆ Participation Rate, Capq, Floor Common methods for calculating the index change: 1. Point-to-point – based on index change between two points Index at End of Segment Index Change “ ´1 Index at Beginning of Segment 2. Averaging – annual index change is based on average monthly index level 1 ř12 12 m“1 Indexm Index Change “ ´1 BOY Index LPM – Section A – Fall 2024 & Spring 2025 17 / 133 LPM – Section A – Fall 2024 & Spring 2025 18 / 133 List advantages and disadvantages of fixed premium UL. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 2 – Universal Life ‚ Advantages of FPUL: 1. More similar to WL 2. Pays higher commission to agents 3. Better persistency ‚ Disadvantages of FPUL: 1. Lack flexibility 2. Administrative complexity 3. Vanishing premiums don’t always vanish LPM – Section A – Fall 2024 & Spring 2025 18 / 133 LPM – Section A – Fall 2024 & Spring 2025 19 / 133 List pricing considerations for UL. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 2 – Universal Life ‚ Flexibility creates challenges (changing DBs, partial withdrawals, etc) ‚ Scenario testing is important ‚ UL sources of profit 1. Interest Earned – Interest Credited 2. Cost of Insurance Charges – DBs Paid 3. Expenses: Expense Charges + Surrender Charges – (Expenses + Commissions) ‚ Asset/liability analysis (interest rate risk) LPM – Section A – Fall 2024 & Spring 2025 19 / 133 LPM – Section A – Fall 2024 & Spring 2025 20 / 133 How does variable UL compare to UL? © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 4 – Variable Life Insurance VUL is SIMILAR to UL: VUL is DIFFERENT from UL: ‚ Premiums can be flexible or fixed ‚ Premiums invested in separate ‚ DB types: face only or face plus CV account asset ‚ Changes in DB allowed ‚ CSVs vary with separate account ‚ Similar monthly charges (mortality, performance riders) ‚ No guaranteed cash values ‚ Similar commissions ‚ Sales loads more limited by regulation ‚ Treatment of policy loans LPM – Section A – Fall 2024 & Spring 2025 20 / 133 LPM – Section A – Fall 2024 & Spring 2025 21 / 133 How does fixed premium variable life differ from WL? © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 4 – Variable Life Insurance ‚ CSVs are uncertain, vary with separate account ‚ No guaranteed minimum ‚ DBs vary by intervals (monthly or yearly) LPM – Section A – Fall 2024 & Spring 2025 21 / 133 LPM – Section A – Fall 2024 & Spring 2025 22 / 133 Describe the Equitable design. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 4 – Variable Life Insurance ‚ Most popular in U.S. ‚ Gross premiums are fixed ‚ Excess/negative performance to buys positive/negative paid-up additions ‚ As long as S.A. outperforms AIR, DB will continue rising LPM – Section A – Fall 2024 & Spring 2025 22 / 133 LPM – Section A – Fall 2024 & Spring 2025 23 / 133 What are the characteristics of survivorship insurance? © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 5 – Survivorship Insurance 1. Joint and survivor – pays benefit on last insured’s death 2. Used for wealth preservation 3. High face amounts 4. Par WL design is common – dividends buy PUA/term LPM – Section A – Fall 2024 & Spring 2025 23 / 133 LPM – Section A – Fall 2024 & Spring 2025 24 / 133 List competitive measures in the survivorship market. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 5 – Survivorship Insurance Ways that policyholders compare products across companies... 1. Rate of return on death at specified duration 2. Minimum premium payable to fund benefits 3. Minimum premium to vanish in specified number of years 4. Minimum cash value needed to vanish premiums 5. Policyholders value DBs more than CSVs LPM – Section A – Fall 2024 & Spring 2025 24 / 133 LPM – Section A – Fall 2024 & Spring 2025 25 / 133 List and describe types of survivorship insurance riders. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 5 – Survivorship Insurance ‚ PUAs and term insurance riders (very common) ‚ Policy split rider § Allows joint policy to be split in the future § Few sold but very valuable to some ‚ Estate preservation rider § Increases DB to cover estate taxes ‚ First-to-die term rider (estate planning) § Pays a benefit when first person dies § Uses § Pay-up the policy after first death § Pay estate taxes on first death § Recover premiums paid before first death LPM – Section A – Fall 2024 & Spring 2025 25 / 133 LPM – Section A – Fall 2024 & Spring 2025 26 / 133 What’s the difference between single and dual status? © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 5 – Survivorship Insurance ‚ Single Status § Status = blend of a “one-alive and two-alive” status § Smoother CSVs and reserves ‚ Dual Status § 3 possibilities: 1. X and Y both alive 2. Only X alive 3. Only Y alive § CSVs and reserves jump after first death LPM – Section A – Fall 2024 & Spring 2025 26 / 133 LPM – Section A – Fall 2024 & Spring 2025 27 / 133 List factors affecting decision to use single or dual status. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 5 – Survivorship Insurance ‚ Perceived marketability ‚ Administrative feasibility ‚ Regulators’ attitudes ‚ Perceived risk profile ‚ Implications of increased dual-status term rider costs LPM – Section A – Fall 2024 & Spring 2025 27 / 133 LPM – Section A – Fall 2024 & Spring 2025 28 / 133 Describe 3 methods for calculating dual-life statuses. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 5 – Survivorship Insurance 1. Exact Age § First principles using mortality of exact ages § Cumbersome: calculation, storing, validating 2. Joint Equal Age § Example: (55, 52) « (53, 53) 3. Equivalent Single Age § Equates 2 ages to a single age § Overcharges in early years, then undercharges later LPM – Section A – Fall 2024 & Spring 2025 28 / 133 LPM – Section A – Fall 2024 & Spring 2025 29 / 133 Describe 3 substandard rating methods. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 5 – Survivorship Insurance 1. Age Rateup § Assigns a higher age to a substandard insured 2. Extra Premium § Increase premium for substandards 3. COI Multiple § Increase UL COI by a multiple LPM – Section A – Fall 2024 & Spring 2025 29 / 133 LPM – Section A – Fall 2024 & Spring 2025 30 / 133 List requirements for uninsurable lives. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 5 – Survivorship Insurance 1. Must not be terminally ill 2. Must undergo standalone underwriting 3. Must have have life expectancy of at least 1-2 years 4. Must not increase contagion factors 5. Must not be highly rated (Table D max) LPM – Section A – Fall 2024 & Spring 2025 30 / 133 LPM – Section A – Fall 2024 & Spring 2025 31 / 133 What are pricing considerations for survivorship insurance? © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 5 – Survivorship Insurance ‚ Mortality § Single life mortality of joint policyholders ‰ single life market § Underwriting – concessions, medical § Contagion risk § Socio-economic class of insured lives § Impact of very low lapses ‚ Persistency § Very low lapse rates common ‚ Expenses § Usually higher than single life business ‚ Reinsurance § Very important in pricing § Retention rates may be higher than other policies LPM – Section A – Fall 2024 & Spring 2025 31 / 133 LPM – Section A – Fall 2024 & Spring 2025 32 / 133 List and describe methods for determining extra mortality for substandard lives. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 6 – Substandard Life Insurance ‚ 2 approaches for increasing premium 1. Flat extra: extra amount per 1000 2. Table rating: multiple of standard mortality ‚ Methods for determining extra mortality 1. Numerical rating system (sum of credits and debits) § Arbitrary, may not properly evaluate risk 2. Advance in age 3. Lien method (increasing DB) 4. Return of premiums 5. Charge extra premiums and have different nonforfeiture values ‚ Methods for UL § Charge higher premium § Reduce coverage LPM – Section A – Fall 2024 & Spring 2025 32 / 133 LPM – Section A – Fall 2024 & Spring 2025 33 / 133 How can companies subdivide substandard business? © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 6 – Substandard Life Insurance 1. Male/female (e.g. setback) 2. Smoker/non-smoker (e.g. “forgive” classes for non-smoker) 3. By plan § If Substandard/Standard ratio high Ñ higher lapse, NT rates § Steeper slope Ñ higher sales LPM – Section A – Fall 2024 & Spring 2025 33 / 133 LPM – Section A – Fall 2024 & Spring 2025 34 / 133 Describe considerations for substandard business expenses. © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 6 – Substandard Life Insurance ‚ Allocation approaches 1. Allocate across all business 2. Allocate only to substandard 3. Some combination of 1 and 2 (most common) ‚ Premium taxes and commissions § Allocate directly to substandard ‚ Acquisition expenses § Higher than standard ‚ Maintenance expenses § Similar to standard LPM – Section A – Fall 2024 & Spring 2025 34 / 133 LPM – Section A – Fall 2024 & Spring 2025 35 / 133 Describe how the following with respect to substandard pricing. ‚ Not-taken and lapse rates ‚ Premium paying period ‚ Ratings expiration ‚ Cash value level compared to standard business ‚ How to assess profitability © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 6 – Substandard Life Insurance ‚ Not-taken and lapse rates higher than standard business ‚ Good practice to limit premium paying period ‚ Ratings may be removed later ‚ CSVs are slightly higher than standard ‚ Asset share tests – use to fit premiums to profit objectives LPM – Section A – Fall 2024 & Spring 2025 35 / 133 LPM – Section A – Fall 2024 & Spring 2025 36 / 133 What is the formula for calculating the extra substandard gross premium? © 2024 The Infinite Actuary, LLC Source: LPM-165: Ch. 6 – Substandard Life Insurance 1. Calculate a standard gross premium: AcqExp GP “ NPp1 ` ClaimCost%q ` ` OtherMaintExp ` GPp% Prem Expq a :x :n 2. Calculate the substandard GP (GPR ) using same formula § Use substandard (rated) mortality and expense assumptions 3. Extra substandard gross premium: GPR ´ GP LPM – Section A – Fall 2024 & Spring 2025 36 / 133 LPM – Section A – Fall 2024 & Spring 2025 37 / 133 Why is standalone LTCI is such a risky product? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Driven by more assumptions than most insurance products Long-duration, level premium product with steeply increasing benefits LTCI products are new; data truncated Data problems Little public data available Significant market changes Relies heavily on investment returns Insurance risk does not decline No CSV Policyholders have a “use it or lose it” mentality LPM – Section A – Fall 2024 & Spring 2025 37 / 133 LPM – Section A – Fall 2024 & Spring 2025 38 / 133 How is “risk” different than “uncertainty?” © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Uncertainty – Events with probability distributions that cannot be objectively measured Risk – Involves events with KNOWN probability distributions ‚ 3 types: process risk, parameter risk, and economic scenario risk ‚ Requires stochastic analysis LPM – Section A – Fall 2024 & Spring 2025 38 / 133 LPM – Section A – Fall 2024 & Spring 2025 39 / 133 What are the drivers of process risk? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI These drive the “width” of the 90% prediction interval... 1. Probability distributions that drive mortality, morbidity, and lapse 2. Benefits of the insurance contract 3. Number of policies 4. Demographics of the insured population 5. Length of the reporting period LPM – Section A – Fall 2024 & Spring 2025 39 / 133 LPM – Section A – Fall 2024 & Spring 2025 40 / 133 Describe and interpret a confidence interval for lapse rate process risk. © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Assume the lapse rate (p) is known to be Binomial Mean Lapses “ np a Standard Deviation “ σ “ npp1 ´ pq 90% confidence interval: Expected Lapses ˘ 1.64σ Interpretation: ‚ If actual lapses are within ˘1.64σ of expected, it is due to process variance LPM – Section A – Fall 2024 & Spring 2025 40 / 133 LPM – Section A – Fall 2024 & Spring 2025 41 / 133 Describe how to assess paid LTCI claims process risk. © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI 1. Simulate results and calculate mean and standard error (estimate of σ) 2. Calculate relative standard error (RSE) Standard Error RSE “ Expected Value of Claims 95th Percentile Claims Margin: PCM95 “ 1.64 ˆ RSE ‚ If actual claims ą PCM95 , they are beyond moderate ‚ Monitor PCM95 continuously over time ‚ Hypothesis testing: looking at PCM95 for a single period (e.g. month) § H0 : Best estimate is correct § Reject H0 if actual claims ą PCM95 ‚ Main point: assumption is good if ą PCM95 no more than 1 out of every 20 months LPM – Section A – Fall 2024 & Spring 2025 41 / 133 LPM – Section A – Fall 2024 & Spring 2025 42 / 133 Describe how to determine an incurred loss ratio for LTCI business and how it differs from paid claims analysis. © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Alternative to paid claims analysis Paid Claims + Change in Claims Reserve ILR “ Earned Premium Important differences with paid claims analysis: ‚ ILR is more volatile because it includes the change in claims reserve ‚ Claims reserves are very volatile ‚ A/E ratio for ILR may look high compared to A/E ratio for paid claims § A/E ratio = Actual ILR / Expected ILR LPM – Section A – Fall 2024 & Spring 2025 42 / 133 LPM – Section A – Fall 2024 & Spring 2025 43 / 133 Show how to measure the process risk of LTCI profit as well as its key drivers. © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Profit = Premium + InvInc ´ IncPolRes ´ IncClaimRes ´ Claims Profit can also be analyzed statistically (confidence intervals, etc.) ‚ Simulate results ñ calculate mean, variance, etc. Var(Profit) “ Var(Premium) ` Var(InvInc) ` Var(IncPolRes) ` Var(IncClaimRes) ` Var(Claims) ` Covariance Drivers of profit process risk ‚ Biggest driver (by far): claims reserve (83% of total in authors’ study) ‚ Premium and investment income have very low process variance LPM – Section A – Fall 2024 & Spring 2025 43 / 133 LPM – Section A – Fall 2024 & Spring 2025 44 / 133 How does the length of the reporting period affect process risk? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Process risk declines as the time period lengthens ‚ Monthly earnings volatility ą quarterly ą annual ‚ If a sample size increases by a factor of 4, the RSE decreases by 50% § Annual confidence interval width = 1/2 quarterly § Quarterly confidence interval width = 1/2 monthly LPM – Section A – Fall 2024 & Spring 2025 44 / 133 LPM – Section A – Fall 2024 & Spring 2025 45 / 133 Explain the nature of parameter risk and how it compares to process risk. © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Parameter risk is more serious than process risk ‚ Risk that assumption itself is wrong ‚ Parameter risk = 0 if assumption is fully credible ‚ Model misspecification may hide parameter risk Types of Parameter Risk 1. Sampling risk § Little LTC data for high ages § Underwriting changes, claims adjudication =ñ affect data quality and relevance § Censoring =ñ most policies have not reached old ages 2. Data bias—not trended properly LPM – Section A – Fall 2024 & Spring 2025 45 / 133 LPM – Section A – Fall 2024 & Spring 2025 46 / 133 How can lapse rate parameter risk be measured? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Lapse parameter risk is measured with the Beta distribution: α αβ Mean “ Variance “ α`β pα ` βq2 pα ` β ` 1q α “ number of lapses β “ policyholders who did not lapse LPM – Section A – Fall 2024 & Spring 2025 46 / 133 LPM – Section A – Fall 2024 & Spring 2025 47 / 133 How can parameter risk be captured in an LTCI pricing model, and how does it affect results? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Key Point: Adding parameter risk increases overall variance in results ‚ Authors generated claims data using a GLM ‚ Fit historical lapse data to the Beta distribution ‚ On each simulation, the model randomly 1. Chooses incidence rate table 2. Extrapolates incidence rates for old ages 3. Draws a lapse rate from Beta distribution LPM – Section A – Fall 2024 & Spring 2025 47 / 133 LPM – Section A – Fall 2024 & Spring 2025 48 / 133 How does investment risk affect LTCI results, and how does it impact product design? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Major source of risk for LTCI ‚ Nearly half of benefits are funded by investment returns ‚ Cannot be diversified across policies ‚ Mitigating interest rate risk § Short-term: can be mitigated (asset management) § Long-term: cannot be diversified away ‚ LTCI pricing and product design implications § Products will need large margins to absorb interest rate risk § Products can be designed to transfer more investment risk to policyholders § Example: inflation-indexed premiums LPM – Section A – Fall 2024 & Spring 2025 48 / 133 LPM – Section A – Fall 2024 & Spring 2025 49 / 133 Outline the process and 4 key risk measures for quantifying process, parameter, and investment risk in LTCI products. © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Basic Idea with Key Risk Measures 1. Run many simulations of LTCI product 2. Create a distribution of results (picture bell shaped curve) 3. Risk measures based on the standard deviation of various variables § LRM, PRM, SDLR, and SDLRsr all capture process and parameter risk § PRM and SDLRsr also capture interest rate risk § LRM and PRM are annual measures (look at by year) § SDLR and SDLRsr are PVs of future values Regardless of the risk measure... ‚ Higher expected values and standard deviations = more risk ‚ Can calculate 95th percentile of distribution ‚ Can do hypothesis testing LPM – Section A – Fall 2024 & Spring 2025 49 / 133 LPM – Section A – Fall 2024 & Spring 2025 50 / 133 How do you determine the loss ratio margin for a standalone LTCI product? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Random variable: loss ratio (LR): Incurred Claims LR “ Earned Premium 95th Percentile Loss-Ratio Margin (LRM95 ): LRM95 “ 1.64 ˆ sLR where sLR is the standard deviation of LR LPM – Section A – Fall 2024 & Spring 2025 50 / 133 LPM – Section A – Fall 2024 & Spring 2025 51 / 133 How do you determine the profit ratio margin for a standalone LTCI product? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Random variable: profit ratio (PR): Profit PR “ Earned Premium 95th Percentile Profit-Ratio Margin (PRM95 ): PRM95 “ 1.64 ˆ sPR where sPR is the standard deviation of PR LPM – Section A – Fall 2024 & Spring 2025 51 / 133 LPM – Section A – Fall 2024 & Spring 2025 52 / 133 What is the standard deviation of lifetime loss ratio for an LTCI product? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Random variable: lifetime loss ratio (LLR): PV(Claims) LLR “ PV(Premiums) SDLR = Standard deviation of the distribution of LLRs ‚ Discount at valuation rate (same for all scenarios) SDLRsr: Discount at short rate (varies by scenario) LPM – Section A – Fall 2024 & Spring 2025 52 / 133 LPM – Section A – Fall 2024 & Spring 2025 53 / 133 Describe how the following alternative LTCI product designs compare to a basic 5-year benefit period with 5% compound inflation. 1. 2-Year Benefit Period with 3% Simple Inflation 2. ROP Rider: Returns Premiums on Death 3. Life/LTC Combo Product 4. Inflation-Indexed Benefits and Premiums © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Basic product: 5-Year Benefit Period with 5% Compound Inflation 1. 2-Year Benefit Period with 3% Simple Inflation § Shorter benefit period = less risk § Less volatility in claims reserve 2. ROP Rider: Returns Premiums on Death § Increases interest rate risk: higher SDLRsr and PRM § Lowers LRM and SDLR: More scenarios where benefits occur (lowers variance) 3. Life/LTC Combo Product § More interest rate risk: higher SDLRsr § Substantially less benefit variance: creates a natural hedge § Lower LRM and SDLR § Similar PM most years 4. Inflation-Indexed Benefits and Premiums § Significantly less interest rate risk: Lower PM and SDLRsr § More benefit variance ignoring interest rate risk (higher SDLR) LPM – Section A – Fall 2024 & Spring 2025 53 / 133 LPM – Section A – Fall 2024 & Spring 2025 54 / 133 How does inflation indexing affect LTCI product risk? © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI Non-indexed products have much more interest rate risk ‚ Highest for DB and ROP – higher premiums Inflation indexing reduces insurer and policyholder risk ‚ Policyholder gets appropriate coverage ‚ Insurer gets constant premium ñ greatly reduces interest rate risk LPM – Section A – Fall 2024 & Spring 2025 54 / 133 LPM – Section A – Fall 2024 & Spring 2025 55 / 133 List the 5 steps for pricing LTCI recommended by the authors of “Understanding the Volatility of Experience and Pricing Assumptions in Long-Term Care Insurance.” © 2024 The Infinite Actuary, LLC Source: Understanding the Volatility... in LTCI 1. Define industry risk tolerance up front § Should be objective and consistent across companies § Example: companies will accept all process risk plus moderate parameter risk 2. Set annual performance expectations § Using key risk measures, develop prediction intervals, hypothesis tests 3. Monitor experience § Compare actual experience to criteria in step 2 4. Investigate assumptions (i.e. results of step 3) § Review ALL model assumptions 5. Re-price business § Update premiums if necessary based on results of step 4 § Example: results fall outside prediction interval 2 years in a row LPM – Section A – Fall 2024 & Spring 2025 55 / 133 LPM – Section A – Fall 2024 & Spring 2025 56 / 133 Describe the consumer perspective of long-term care insurance. © 2024 The Infinite Actuary, LLC Source: LTCI: The SOA Pricing Project ‚ LTC costs can be high and uncertain § Especially nursing home ‚ LTC buyers want to protect their assets § Median income = $87.5K § Most have liquid assets of $100K+ ‚ Early LTCI promised stability (level premiums) § That didn’t happen ‚ The lack of premium stability drove away consumers and agents LPM – Section A – Fall 2024 & Spring 2025 56 / 133 LPM – Section A – Fall 2024 & Spring 2025 57 / 133 Describe how insurers’ actions drove away agents from the LTCI market. © 2024 The Infinite Actuary, LLC Source: LTCI: The SOA Pricing Project ‚ Products dropped benefits policyholders most desired ‚ Agents didn’t have the patience to learn innovative products ‚ Tighter underwriting (agents like easy sales) ‚ Sex-distinct pricing, “which hits the target market the hardest” LPM – Section A – Fall 2024 & Spring 2025 57 / 133 LPM – Section A – Fall 2024 & Spring 2025 58 / 133 Describe the key findings in the SOA’s LTC pricing project study. © 2024 The Infinite Actuary, LLC Source: LTCI: The SOA Pricing Project ‚ New LTCI products are priced more accurately (and much higher) § Premiums are more than double 2000 levels § IRR is 25% now vs. 10% in 2000 ‚ New premiums include margins for adverse claims experience § LTC Model Reg now requires a minimum margin of 10% ‚ Higher margins reduce the probability and size of future rate increases § 10% probability now vs. 40% in 2000 § Average rate increase now is 10% compared to 34% in 2000 LPM – Section A – Fall 2024 & Spring 2025 58 / 133 LPM – Section A – Fall 2024 & Spring 2025 59 / 133 Describe how insurers’ company risks with respect to LTCI are likely to fall in the future. © 2024 The Infinite Actuary, LLC Source: LTCI: The SOA Pricing Project ‚ Pricing risks are now lower § Much more claims experience today than in the past ‚ Greater rate stability should increase profit and lower these risks: § Operational risk: less cost and risk with premium rate management § Regulatory risk: better relationships with regulators § Legal risk: less litigation from unhappy policyholders § Reputational risk: will undo the expectation of future rate increases LPM – Section A – Fall 2024 & Spring 2025 59 / 133 LPM – Section A – Fall 2024 & Spring 2025 60 / 133 Describe how key pricing assumptions for LTCI have changed compared to the original pricing in the LTCI market. © 2024 The Infinite Actuary, LLC Source: LTCI: The SOA Pricing Project ‚ Morbidity credibility is much higher, especially at older ages (70ˆ higher) § Expected ultimate claims are higher (as much as +45%) § Select periods are longer with lower select factors due to stricter underwriting ‚ Early LTCI products overestimated lapse rates and mortality rates § Voluntary ultimate lapse rates are nearing zero (0.7%) § Mortality continues to improve § Morbidity improvement should offset cost of mortality improvement ‚ Investment income rates are lower today (raises premiums) § Premiums must accumulate to fund reserves for future claims ‚ Expenses § Upfront commissions have increased, while renewal commissions have decreased § LTCI underwriting and claims processing is more expensive than life insurance § PV of policy admin costs as a % of premium has declined LPM – Section A – Fall 2024 & Spring 2025 60 / 133 LPM – Section A – Fall 2024 & Spring 2025 61 / 133 Describe how acceleration riders work and events that trigger benefit payments. © 2024 The Infinite Actuary, LLC Source: Life Insurance Acceleration Riders “Acceleration” means the insurer pays some portion of the face before death ‚ These are “living benefits” ‚ Policyholder must meet specific criteria for acceleration (trigger) Events that Trigger Accelerated Benefits Terminal Illness Ñ Life expectancy is less than 12 or 24 months Chronic Illness Ñ Unable to perform 2+ ADLs without assistance (e.g. bathing) Critical Illness Ñ Meet criteria for a critical illness (e.g. heart attack) LPM – Section A – Fall 2024 & Spring 2025 61 / 133 LPM – Section A – Fall 2024 & Spring 2025 62 / 133 Describe 3 common chronic illness benefit designs. © 2024 The Infinite Actuary, LLC Source: Life Insurance Acceleration Riders 1. Actuarial discounting of the face amount § Acceleration Benefit = actuarial PV of accelerated portion of face 2. Lien method § Lien = Acceleration benefit paid to policyholder § Policyholder continues to pay premium for full face amount § Death Benefit = Face – Lien 3. Chronic Illness Rider § Policyholder pays an explicit additional premium for the rider Chronic illness riders are designed to qualify for favorable tax treatment ‚ Goal: Keep benefits tax-free to policyholders LPM – Section A – Fall 2024 & Spring 2025 62 / 133 LPM – Section A – Fall 2024 & Spring 2025 63 / 133 Identify ways of controlling risk for chronic illness acceleration riders. © 2024 The Infinite Actuary, LLC Source: Life Insurance Acceleration Riders 1. Supplemental underwriting (screen for ADL loss, over-insureds) 2. Limit issue ages 3. Use a lien or actuarial discounting approach 4. Limit acceleration amount (annual and max) 5. Require certification for ADLs (licensed health care practitioner) 6. Exclude temporary losses of ADLs 7. List explicit exclusions in trigger criteria 8. Limit to a maximum table rating 9. Contestability rights should follow base policy 10. Limit max benefit to LESS than 100% of base DB LPM – Section A – Fall 2024 & Spring 2025 63 / 133 LPM – Section A – Fall 2024 & Spring 2025 64 / 133 Describe reinsurance participation for acceleration riders. © 2024 The Infinite Actuary, LLC Source: Life Insurance Acceleration Riders Terminal Illness Rider Reinsurance Participation ‚ Proportional to base policy participation Chronic Illness Rider Reinsurance Participation Permanent products Term products § High probability of ultimate claim § MUCH more uncertainty and risk § If chronically ill, lapse rate = „ 0% § A lot fewer ultimate death claims § Reinsurer participation may be: § Life expectancy may be ą term § Full § Term conversions: additional risk § Limited to a one-time payment § None at all LPM – Section A – Fall 2024 & Spring 2025 64 / 133 LPM – Section A – Fall 2024 & Spring 2025 65 / 133 Describe basic deferred annuity product design in terms of: ‚ Tax treatment ‚ Premium structure ‚ Charges ‚ Interest guarantees © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 1 – Fixed Deferred Annuities ‚ Tax treatment: Can be qualified or non-qualified ‚ SPDAs may have minimum required premiums (e.g. $5,000) ‚ Charges: FELs, periodic fees, surrender charges ‚ FPDAs may have surrender charges based on premiums paid ‚ Interest rates and guarantee periods § SPDAs: guarantee rate for 1–7 years § FPDAs: lower minimum guaranteed rates LPM – Section A – Fall 2024 & Spring 2025 65 / 133 LPM – Section A – Fall 2024 & Spring 2025 66 / 133 List and describe 4 specific types of deferred annuities. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 1 – Fixed Deferred Annuities 1. CD Annuities § SCs work like CDs § Penalty-free withdrawals 30–60 days after interest rate guarantee period (high lapses) § Pay low commissions 2. Market Value Adjusted (MVA) Annuities § Protects company from interest rate risk § Decreases AV as interest rates rise § Increases AV as interest rates fall 3. Two-Tiered Annuities § 2 account values § Annuitization account rate ą surrender account rate 4. Non-Surrenderable Annuities (“Personal GICS”) LPM – Section A – Fall 2024 & Spring 2025 66 / 133 LPM – Section A – Fall 2024 & Spring 2025 67 / 133 Give a formula for market value adjustments and describe each term as well as how it is used. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 1 – Fixed Deferred Annuities ˆ ˙n´t 1`a MVAt “ 1`b`c n “ length in years of current guarantee period t “ years since beginning of current guarantee period a “ current guaranteed rate b “ current rate being offered on similar product c “ constant factor from 0.000 to 0.005 If there is a surrender charge: Final CSVt “ AVt ˆ MVAt ˆ p1 ´ SC%t q LPM – Section A – Fall 2024 & Spring 2025 67 / 133 LPM – Section A – Fall 2024 & Spring 2025 68 / 133 List the primary features of deferred annuities. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 1 – Fixed Deferred Annuities 1. Bailout provisions 2. Penalty-free withdrawal provision § Waivers SC on portion of AV § May be a constant % or % of premiums paid § May be tied to persistency 3. Return of principal guarantee provisions 4. Death benefits (usually DB = AV) 5. Waiver of surrender charge on annuitization 6. Guaranteed settlement rates 7. Account value enhancement bonuses § Annuitization § Persistency § Large account value § Higher credited rate first year LPM – Section A – Fall 2024 & Spring 2025 68 / 133 LPM – Section A – Fall 2024 & Spring 2025 69 / 133 Describe bailout provisions for a deferred annuity. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 1 – Fixed Deferred Annuities ‚ No SCs if Credited Rate ă Bailout Rate ‚ Medical bailouts (popular with age 50+ market) ‚ Total cost of bailout = cost of the option + additional surplus ‚ Option Cost “ Avg Lost SC ˆ Excess Lapse Rate ˆ Probability of Trigger ‚ Higher reserves and capital LPM – Section A – Fall 2024 & Spring 2025 69 / 133 LPM – Section A – Fall 2024 & Spring 2025 70 / 133 What are interest rate considerations for deferred annuities? © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 1 – Fixed Deferred Annuities ‚ Interest Rate Risk (a.k.a. C-3 risk, disintermediation) ‚ Interest Spread “ Investment Earned Rate ´ Credited Rate ‚ Target Spread Components 1. Expenses (e.g. maintenance, commissions) 2. Product features (e.g. bailouts) 3. Risk charges (e.g. disintermediation) 4. Expected profit ‚ Crediting Strategies 1. Ignore competition (use a fixed spread) 2. Use competitor’s rate as a cap or floor 3. Use weighted average of #1 and competitor’s rate LPM – Section A – Fall 2024 & Spring 2025 70 / 133 LPM – Section A – Fall 2024 & Spring 2025 71 / 133 What are deferred annuity pricing assumptions? © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 1 – Fixed Deferred Annuities 1. Withdrawal (really important) § Affected by SCs, credited rates, distribution system, guarantees, policyholder characteristics 2. Partial Withdrawal Provisions 3. Mortality (less important) 4. Commissions and Marketing Expenses § Percent of premium § Affected by competitive pressures § Examples: SPDA 3–10%, FPDA 7% FY then 3% 5. Expenses (lower than life insurance) LPM – Section A – Fall 2024 & Spring 2025 71 / 133 LPM – Section A – Fall 2024 & Spring 2025 72 / 133 List deferred annuity profit and pricing considerations. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 1 – Fixed Deferred Annuities ‚ First-year strain sources: commissions, reserves, and required capital ‚ Pricing should consider multiple interest rate scenarios ‚ Profit objectives: profit margin, IRR, break-even year, GAAP ROE § Make decisions considering all 3 together § Low IRR and high profit margin = surplus strain ‚ Pricing horizon usually 10–20 years LPM – Section A – Fall 2024 & Spring 2025 72 / 133 LPM – Section A – Fall 2024 & Spring 2025 73 / 133 Describe the basic characteristics of variable annuities. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 2 – Variable Annuities ‚ Nearly all are SPDAs ‚ Passes C-3 risk to policyholder ‚ NO guaranteed minimum CSV on separate account funds ‚ Basic VA DB = full AV (waive SCs) ‚ Product charges § Similar to fixed annuities: FELs, SCs, periodic fees § Percent of asset charges: mortality, expense, profit, guarantee riders ‚ VA GMDBs and GLBs add substantial risk LPM – Section A – Fall 2024 & Spring 2025 73 / 133 LPM – Section A – Fall 2024 & Spring 2025 74 / 133 Describe common VA guarantees. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 2 – Variable Annuities 1. GMDBs: Guaranteed minimum death benefits = max(AV, GMDB) on death ř § Step-up: GMDB = highest AV on any past anniversary ´ Withdrawals since anniversary with highest AV § Roll-up: GMDBt “ GMDBt ´1 ˆ p1 ` r q ` Premiumst ´ Withdrawalst 2. Guaranteed living benefits (GLBs) – contractholder must be alive to exercise § GMIB: Guaranteed minimum income benefit § GMAB: Guaranteed minimum accumulation benefits § GMWB: Guaranteed minimum withdrawal benefits § GLWB: GMWB for life (most popular) LPM – Section A – Fall 2024 & Spring 2025 74 / 133 LPM – Section A – Fall 2024 & Spring 2025 75 / 133 Give formulas and methods for calculating VA unit fund values. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 2 – Variable Annuities Fund Value “ Units ˆ Unit Value Unitst “ Unitst ´1 ` Units Purchasedt ´ Units Withdrawnt Unit Valuet “ Unit Valuet ´1 ˆ NIFt 1. Open-Ended Separate Account Structure InvInct ` UCGt ` RCGt ´1 ´ Expt NIFt “ 1 ` ´ Daily Asset Charges AVt ´1 ` Annuity Reservest ´1 2. Unit Investment Trusts Ending Value of Shares – Beginning Value of Shares NIFt “ 1 ` AVt ´1 ` Annuity Reservest ´1 LPM – Section A – Fall 2024 & Spring 2025 75 / 133 LPM – Section A – Fall 2024 & Spring 2025 76 / 133 What is the formula for annuitizing a variable annuity into a monthly payment? © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 2 – Variable Annuities Account Value Pmt0 “ p12q 12 a :x NIFt Pmtt “ Pmtt ´1 ˆ p1 ` AIRq1{12 LPM – Section A – Fall 2024 & Spring 2025 76 / 133 LPM – Section A – Fall 2024 & Spring 2025 77 / 133 Describe some approaches companies have taken to make variable payouts less variable. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 2 – Variable Annuities 1. Convert each annual payment to a 1-year fixed annuity 2. Floor payment at 75% of the initial payment 3. Floor payment at 100% and track the actual payment separately § If actual payment ă floor, insurer “loans” the shortfall § “Loans” are repaid when actual payments ą floor § Any outstanding loan amount is usually forgiven on death LPM – Section A – Fall 2024 & Spring 2025 77 / 133 LPM – Section A – Fall 2024 & Spring 2025 78 / 133 List general pricing considerations for VAs without guarantees. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 2 – Variable Annuities 1. Lapse rates (affect asset charge income) § Dynamic lapse assumptions are critical 2. Premium persistency (difficult to estimate) 3. Average size (higher premium = higher profit) 4. Expenses (higher than fixed annuities) 5. Commissions (lower than life insurance) 6. Acquisition costs (recovery is subject to equity risk) LPM – Section A – Fall 2024 & Spring 2025 78 / 133 LPM – Section A – Fall 2024 & Spring 2025 79 / 133 List pricing considerations specifically for VA guarantees. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 2 – Variable Annuities ‚ GMDBs and GLBs require stochastic pricing ‚ Company must hold reserve for GMDBs and GLBs ‚ Pricing considerations to fund the cost of guarantees § Assumption for future fund allocations § Mean and variance of total returns § Mortality for GMDBs and GLWBs § GLB utilization (% electing and how much benefit elected) LPM – Section A – Fall 2024 & Spring 2025 79 / 133 LPM – Section A – Fall 2024 & Spring 2025 80 / 133 Describe characteristics of fixed indexed annuities. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 3 – Fixed Indexed Annuities FIA = fixed deferred annuity with a GMAV and index credit potential ‚ GMAV must be ě minimum SNL value Indexed Account Value (IAV) ‚ Credited interest is based on index growth (e.g. S&P 500) floored at zero ‚ Index credits are hedged with call options (or equivalents) LPM – Section A – Fall 2024 & Spring 2025 80 / 133 LPM – Section A – Fall 2024 & Spring 2025 81 / 133 Describe how interest is credited under the point-to-point design for fixed indexed annuities. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 3 – Fixed Indexed Annuities Point-to-Point (PTP) – based on index growth over a period Indext IndexGrowtht “ ´1 Indext ´1 With adjustments (from most common to least): $ &min pIndexGrowtht , Capq ’ with cap IndexCreditt “ PartRate ˆ IndexGrowtht with participation rate ’ % IndexGrowtht ´ Fee% with % of IAV fee A zero floor is common: final index credit cannot be negative LPM – Section A – Fall 2024 & Spring 2025 81 / 133 LPM – Section A – Fall 2024 & Spring 2025 82 / 133 Describe how interest is credited under the monthly sum cap design. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 3 – Fixed Indexed Annuities Average Monthly Sum – based on sum of monthly index growth during the year 12 ÿ Indexti ´ Indexti ´1 IndexGrowtht “ Indexti ´1 i “1 Monthly Sum Cap (common): 12 ˆ ˙ ÿ Indexti ´ Indexti ´1 IndexGrowtht “ min MonthlyCap, Indexti ´1 i “1 The MSC is typically not floored ‚ Down months will drag down the return (unlike PTP) LPM – Section A – Fall 2024 & Spring 2025 82 / 133 LPM – Section A – Fall 2024 & Spring 2025 83 / 133 List innovative or exotic return methods for fixed indexed annuities © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 3 – Fixed Indexed Annuities ‚ Binary Returns – e.g. index credit = 5% if index gains; else 0% ‚ High Water – based on the highest index level Max Index Level IndexGrowth “ Initial Index Level ‚ Index Choice – policyholder can choose their index (common) ‚ Fixed interest account option ‚ Fund transfers on anniversaries ‚ Purchase inducements – e.g. upfront bonuses or higher FY participation rates ‚ GMAB (a.k.a. “GMAV”) – guaranteed min value above SNL minimum ‚ GMWBs (cost less than VA GMWBs due to index credit floor) LPM – Section A – Fall 2024 & Spring 2025 83 / 133 LPM – Section A – Fall 2024 & Spring 2025 84 / 133 Describe how a fixed indexed annuity can be priced from a spread perspective and associated risks. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 3 – Fixed Indexed Annuities Spread “ Net Earned Rate ´ Pricing Spread ´ Hedging Budget ‚ Pricing spread covers anticipated expenses and profit ‚ Hedging budget = cost of options as a % of fund value ‚ Adjust caps, participation, etc. to ensure the option cost ď hedging budget Factors that put profitability at risk: ‚ Falling reinvestment rates ‚ High index credits – increases IAVs, leading to higher option costs ‚ Higher actual option costs in the future caused by: § Higher future equity volatility § Higher future risk-free rates § Anything else LPM – Section A – Fall 2024 & Spring 2025 84 / 133 LPM – Section A – Fall 2024 & Spring 2025 85 / 133 Describe static hedging for fixed indexed annuities. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 3 – Fixed Indexed Annuities Static Hedging – uses OTC call spread options ‚ Call spread price = Call Struck at Current Index ´ Call Struck at Cap Payofft “ maxp0, Indext ´ Lower Strikeq ´ maxp0, Indext ´ Upper Strikeq ‚ Funding ratio = % of IAV hedged by the options § Often ă 100% due to expected lapses § If actual lapses ą expected, insurer gains § If actual lapses ă expected, insurer loses profit LPM – Section A – Fall 2024 & Spring 2025 85 / 133 LPM – Section A – Fall 2024 & Spring 2025 86 / 133 Describe dynamic hedging for fixed indexed annuities. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 3 – Fixed Indexed Annuities Dynamic (Delta) Hedging – hold a portfolio that replicates the call spread option ‚ Delta = expected change in option value per unit change in index ‚ Main goal: hold Delta ˆ notional amount of index ‚ Must be rebalanced on a regular basis since Delta changes Disadvantages of dynamic hedging: ‚ Involves “buying high and selling low” ‚ No downside protection like static hedging provides LPM – Section A – Fall 2024 & Spring 2025 86 / 133 LPM – Section A – Fall 2024 & Spring 2025 87 / 133 Describe how the guaranteed minimum account value is funded for a fixed indexed annuity as well as key risks. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 3 – Fixed Indexed Annuities ‚ Funded with fixed interest bonds ‚ Key risks: § Bonds could default or lose value if interest rates rise § Insurer may have to sell bonds early at a loss to fund surrenders LPM – Section A – Fall 2024 & Spring 2025 87 / 133 LPM – Section A – Fall 2024 & Spring 2025 88 / 133 Briefly describe reserving considerations for fixed indexed annuities. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 3 – Fixed Indexed Annuities FIA statutory reserving is based on AG 33 and AG 35 ‚ AG 33 – prescribes CARVM for all fixed deferred annuities § Reserve = largest projected future CSV on a PV basis ‚ AG 35 – prescribes 4 AG 33-consistent methods specifically for FIAs § Type 1 method – HaR criteria must be met § Type 2 methods – HaR criteria do not have to be met § More complex and volatile than Type 1 LPM – Section A – Fall 2024 & Spring 2025 88 / 133 LPM – Section A – Fall 2024 & Spring 2025 89 / 133 List 5 types of income annuities. © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 4 – Income Annuities 1. Payment Certain (an ) 2. Specialty Markets § Structured settlements § Lottery winnings § Gift annuities § Reverse mortgages 3. Life Contingent § Life only (ax ) § Life with n years certain (an ` n| ax “ an ` n px v n ax `n ) § Unit refund (Refund = Cash Value – Total Payments Received) 4. Joint and Survivor (axy ) § Pays until death of last insured § Payment may change after first death 5. Variable Payment – adjust payment for investment performance LPM – Section A – Fall 2024 & Spring 2025 89 / 133 LPM – Section A – Fall 2024 & Spring 2025 90 / 133 What are pricing considerations for income annuities? © 2024 The Infinite Actuary, LLC Source: LPM-166: Ch. 4 – Income Annuities 1. Interest Rates (discount at spot rates) 2. Mortality (lower = higher PVFB) § Assume mortality improvement – e.g. 1% per year: qx `t ˆ p1 ´ 0.01qt § Substandard methods § Rated age (common) § Constant multiple § Constant extra deaths 3. Expenses: premium taxes, maintenance expenses, commissions 4. Regulatory costs: taxes, cost of capital 5. Surplus strain’s impact on profitability 6. Cash flow pattern varies greatly by product type LPM – Section A – Fall 2024 & Spring 2025 90 / 133 LPM – Section A – Fall 2024 & Spring 2025 91 / 133 Describe how fixed annuities are regulated. © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities Solvency is regulated by states (like life insurance) ‚ Assets held in general account ‚ Liquidation and rehabilitation state laws govern insolvencies ‚ Guaranty associations collect assessments from solvent insurers Sales Licensing (key theme: it’s tedious) ‚ Insurers must get approval in each state where DAs will be sold ‚ Agents must also get their own license § Written tests, licenses, continuing ed, etc. LPM – Section A – Fall 2024 & Spring 2025 91 / 133 LPM – Section A – Fall 2024 & Spring 2025 92 / 133 What role do guaranteed rates play in fixed annuity competition? © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities Key aspect compared by consumers: guaranteed rate ‚ Even a slightly higher guaranteed rate can be a huge competitive advantage ‚ Main competition: CDs and other deferred annuities ‚ Surrender charges reduce risk of early lapse ‚ Higher rating = competitive advantage ‚ Customers expect a fair crediting rate; else may complain LPM – Section A – Fall 2024 & Spring 2025 92 / 133 LPM – Section A – Fall 2024 & Spring 2025 93 / 133 Describe guarantees that VA sellers use to increase VA sales. © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities Companies offer GLB riders to increase VA sales 1. Guaranteed minimum accumulation benefits (GMABs) § Typical guarantee = premiums paid 2. Guaranteed minimum income benefits (GMIBs) § Guaranteed annuity payments as a % of a benefit base (artificial number) § GMIB assumptions tended to be very conservative 3. Guaranteed minimum withdrawal benefits (GMWBs) § Allowed annual withdrawals starting at a specified age (e.g. 65) § Withdrawal = specified % of AV (e.g. 5%) § Some versions guaranteed withdrawals for life (GLWB) LPM – Section A – Fall 2024 & Spring 2025 93 / 133 LPM – Section A – Fall 2024 & Spring 2025 94 / 133 Compare variable annuities to fixed annuities in terms of structure and regulation. © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities Legal Structure of VAs vs. Fixed DAs ‚ VA does not offer guaranteed return on AV ‚ VAs have monthly AV charges ‚ VAs offer many fund choices (money market... bond... equity) ‚ VA assets are held in separate account § Assets backing VA guarantees held in GA § SA assets protected from general creditors § GA to SA transfers not allowed Regulation of VAs ‚ State-specific insurer license required like DAs ‚ Federal regulation of VAs § SEC requires registration of each VA contract § FINRA regulates advertisements and requires seller license LPM – Section A – Fall 2024 & Spring 2025 94 / 133 LPM – Section A – Fall 2024 & Spring 2025 95 / 133 What is the typical charge structure of a variable annuity? © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities Main fee: M&E charge (% of AV per year) ‚ Covers longevity risk (mortality lower than expected) ‚ Covers expense risk ‚ Varies by producer (higher for salespeople than direct channels) Other fees intended as cushion in case M&E charge is insufficient 1. Administrative charge (flat annual dollar amount like $20/year) § Covers risk of low AVs 2. Fees for guaranteed benefits sold as riders 3. Fund manager fee paid to insurer § Defrays incremental cost of adding additional fund options LPM – Section A – Fall 2024 & Spring 2025 95 / 133 LPM – Section A – Fall 2024 & Spring 2025 96 / 133 Compare the taxation of VAs, qualified retirement plans, and mutual funds. © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities VAs vs. Qualified Retirement Plans ‚ Both: defer tax on earnings, then tax at ordinary income rates on withdrawal ‚ VA advantage: contributions are not limited by law ‚ VA disadvantage: contributions are not pre-tax VAs vs. Mutual Funds ‚ Both: funded with after-tax dollars ‚ VA advantages: § Defer taxes until withdrawal (no capital gains each year) § Fund inside contract transfers are not taxable events ‚ VA disadvantages: § Ordinary income tax rates ą capital gains tax rates LPM – Section A – Fall 2024 & Spring 2025 96 / 133 LPM – Section A – Fall 2024 & Spring 2025 97 / 133 Compare the taxation of VAs and fixed deferred annuities. © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities Both defer tax until withdrawal ‚ Both must provide at least 1 annuitization option Both use an exclusion ratio ‚ 1 ´ Exclusion Ratio = Taxable portion of each payment ‚ VA difference: if annuitant outlives life expectancy, payments are 100% taxable LPM – Section A – Fall 2024 & Spring 2025 97 / 133 LPM – Section A – Fall 2024 & Spring 2025 98 / 133 Describe key GMWB hedging issues and risks. © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities Market risks created by the embedded put option 1. Stock movements § Up or down movements force rebalancing § Cost = additional investment in hedge 2. Increased volatility § Hedge costs increase faster as volatility increases § Could hedge with VIX futures, but most insurers don’t 3. Interest rate risk § Can hedge with interest rate swaps (e.g. pay floating / receive fixed) § Changes in interest rates also lead to incorrect hedge positions Cost of hedging = sum of all the above costs to update hedge portfolios LPM – Section A – Fall 2024 & Spring 2025 98 / 133 LPM – Section A – Fall 2024 & Spring 2025 99 / 133 Describe key GMWB policyholder behavior and other risks. © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities Policyholder behavior risks can NOT be hedged like market risks 1. Persistency risks (lapse risk) § Risk of low ultimate lapse rates ñ under-priced benefits § Risk of high early lapses ñ don’t recover costs 2. Utilization risks § Higher than expected utilization ñ under-priced benefits 3. Disruptive or catastrophic events § Counterparty risk in hedges § Risk of high cash collateral requirements § Derivatives markets may close during high volatility Very long-term risks: regulation prohibits transferring GMWB liability after issue LPM – Section A – Fall 2024 & Spring 2025 99 / 133 LPM – Section A – Fall 2024 & Spring 2025 100 / 133 Compare the perspectives of a CMO and CFO regarding GMWB pricing. © 2024 The Infinite Actuary, LLC Source: LPM-142: Malcolm Life Enhances Its Variable Annuities The CEO The CMO The CFO Wants lower price Ñ higher sales Wants higher price Ñ less risk Arguments in favor of higher GMWB sales Arguments in favor of lower GMWB sales ‚ Better guarantee than mutual funds ‚ Annuity price wars are “ruinous” ‚ Downside floor attracts fixed DA owners ‚ Hedging could be expensive, even impossible ‚ Solves psychological problems with GMIB ‚ Rating downgrade risk ‚ Maintain access to principal ‚ No loss on death LPM – Section A – Fall 2024 & Spring 2025 100 / 133 LPM – Section A – Fall 2024 & Spring 2025 101 / 133 Give a brief description of RILAs, including how they compare with fixed indexed annuities and variable annuities © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities ‚ RILAs have characteristics of FIAs and VAs § Like FIA: Has index credits hedged with options; also subject to SNL § Like VA: Contractholder AV can go down (maybe a lot) § RILA assets are split between GA and SA ‚ Higher AV growth potential than FIAs (higher caps) ‚ Less downside protection than FIAs § Floor design: like a FIA with a floor set below 0% § Buffer design: insurer absorbs losses up to a buffer ‚ Crediting terms range from 1 to 6 years ‚ ROP riders common; GLWBs also increasing in popularity LPM – Section A – Fall 2024 & Spring 2025 101 / 133 LPM – Section A – Fall 2024 & Spring 2025 102 / 133 Comparison of Deferred Annuities (Review back of card) © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities Low Risk High Risk FA FIA RILA VA General vs. Separate Account GA GA Both SA Credited Interest Declared Indexed Indexed Market Return Market losses possible No No Yes Yes Contract values change daily No No Yes Yes Subject to SNL Yes Yes Yes No SC vs. MVA Both Both Both SC LPM – Section A – Fall 2024 & Spring 2025 102 / 133 LPM – Section A – Fall 2024 & Spring 2025 103 / 133 Describe the two most common RILA crediting structures © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities 1. Cap with floor: Contractholder bears losses up to a floor, after which the insurer bears all losses “ ‰ Credit “ max Floor, minrCap, PartRate ˆ IndexReturns 2. Cap with buffer: Insurer incurs losses up to a buffer, after which the contractholder bears all losses # “ ‰ min Cap, minr0, PartRate ˆ IndexReturn ´ Buffers if IndexReturn ă 0 Credit “ “ ‰ min Cap, PartRate ˆ IndexReturn otherwise LPM – Section A – Fall 2024 & Spring 2025 103 / 133 LPM – Section A – Fall 2024 & Spring 2025 104 / 133 Describe RILA rate setting and key risk drivers © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities ‚ Rating setting process § Caps and buffers are declared 1–2x/month § Example: 15% cap, 10% buffer, 1-year term on the Nasdaq index ‚ Key rate drivers: fixed income yields and option costs § As fixed income yields Ò, option budgets Ò § Option costs vary with σ, risk-free rates, dividend yields, and other factors ‚ Rate sheet variable relationships § Caps Ò as term Ò (e.g. 1 or 6-year) § Buffer design: caps Ó as buffer Ò § Buffer designs offer higher caps than floor designs § Caps vary by index (e.g. S&P 500, Nasdaq) LPM – Section A – Fall 2024 & Spring 2025 104 / 133 LPM – Section A – Fall 2024 & Spring 2025 105 / 133 Describe how the FIA option budget is determined © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities FIA premiums are invested in bonds of average credit rating (AA to BBB) Insurer purchases a call spread to hedge index credits Option Budget = Earned Rate ´ Credit Default Charge ´ Expenses ´ Profit Margin ‚ Credit default charge = default losses on invested assets ‚ Expenses: commissions, acquisition, maintenance ‚ Profit margin: based on the insurer’s requirements and pricing guidelines § Aka “pricing spread” or “target spread” LPM – Section A – Fall 2024 & Spring 2025 105 / 133 LPM – Section A – Fall 2024 & Spring 2025 106 / 133 Describe how to calculate the cost of hedging the RILA buffer and floor designs © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities Typical hedging approach: purchase derivatives that replicate the contract’s payoff Buffer Design Option Cost “ ATM Call ´ OTM Call ´ OTM Put loooooooooooomoooooooooooon Call Spread ‚ Buy ATM call struck at current index ‚ Sell OTM call struck at cap ‚ Sell OTM put struck at buffer Floor Design Option Cost “ loooooooooooomoooooooooooon OTM Put ´ ATM Put ATM Call ´ OTM Call ` looooooooooomooooooooooon Call Spread Put Spread ‚ Buy ATM call struck at current index ‚ Sell OTM call struck at cap ‚ Buy OTM put struck at floor ‚ Sell ATM put struck at current index LPM – Section A – Fall 2024 & Spring 2025 106 / 133 LPM – Section A – Fall 2024 & Spring 2025 107 / 133 Describe how RILA interim values can be determined © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities RILA values must be calculated daily (interim values) ‚ Available on surrender, death, etc. Two main methods for deriving a daily interim value: 1. Market value approach – replicating option portfolio § Inputs = index return, interest rates, equity σ, dividend yield § Stronger match: minimizes balance sheet volatility and contractholder behavior risk § Easier to explain to regulators than pro-rata 2. Pro-rata approach – simple formula based on index return and time § Easier to explain to advisors/contractholders than MV approach § More balance sheet volatility and contractholder behavior risk LPM – Section A – Fall 2024 & Spring 2025 107 / 133 LPM – Section A – Fall 2024 & Spring 2025 108 / 133 Describe RILA lock features © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities Some RILAs allow the contractholder to lock in interim values ‚ Manual lock – contractholder can lock interim value on any non-anniversary day § Locks in AV for the remainder of the index term § Reduced only for withdrawals ‚ Automatic lock – contractholder can provide a target value to lock in § Once the interim value hits the target, it is locked in permanently § Target values can be modified until a lock takes place LPM – Section A – Fall 2024 & Spring 2025 108 / 133 LPM – Section A – Fall 2024 & Spring 2025 109 / 133 Describe common RILA riders © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities ROP on death (“ROP DB”) is the most common rider ‚ DB = max[Interim Value, Premiums Paid ´ Withdrawals] GLWB riders have become more popular in recent years ‚ Traditional benefit base: income payments = withdrawal % ˆ benefit base § Benefit base = nominal amount that grows at a specified rate independent of the AV § Withdrawal % varies with age when withdrawals start § If withdrawal ą guaranteed amount, it reduces future guaranteed withdrawals ‚ Non-traditional (no benefit base): initial income payment = % of AV LPM – Section A – Fall 2024 & Spring 2025 109 / 133 LPM – Section A – Fall 2024 & Spring 2025 110 / 133 Describe RILA hedging risk management strategies © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities ‚ Hedging with options – major considerations: 1. Transaction size: trading cost is lowest when notional ě $1M § Some insurers restrict index term start dates to 2–4x/mo to increase trade sizes 2. Counterparty risk: the use of options introduces counterparty risk 3. Liquidity: put options sold require collateral § Collateral calls are typically met with cash or treasuries 4. Decrements: hedge positions should reflect deaths, surrenders, and withdrawals ‚ Hedging with VA GMxBs instead of options § VA GMxBs typically have the opposite equity market exposure as RILAs § May be cheaper with less counterparty risk LPM – Section A – Fall 2024 & Spring 2025 110 / 133 LPM – Section A – Fall 2024 & Spring 2025 111 / 133 Describe four risks relevant to RILAs © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities ‚ Rate setting risk – profit Ó as option prices Ò after rate declaration § Mitigate with more frequent rate adjustments ‚ Investment risk – market and default risk in fixed income assets § Mitigate with higher quality assets and appropriate pricing ‚ Liquidity risk: contractholder behavior and collateral calls § Contractholder behavior: if surrenders spike, the insurer may have to sell assets § If the index falls enough, the insurer may have to sell assets to meet collateral calls ‚ Operational risk – RILAs require significant expertise and complex operations § Require expertise in hedging, investments, ALM, and contract design § Higher sophistication Ñ higher risk of improper operational execution LPM – Section A – Fall 2024 & Spring 2025 111 / 133 LPM – Section A – Fall 2024 & Spring 2025 112 / 133 Describe challenges with RILA asset account management and RILA regulatory considerations © 2024 The Infinite Actuary, LLC Source: Registered Index-Linked Annuities ‚ General vs. separate account management § GA assets are often intermingled and not allocated to specific LOBs § SA assets are more often allocated to a specific product/contract § RILA assets are held in both the GA and SA § RILA practice is still emerging ‚ Reserves and regulations § The NAIC is developing a nonforfeiture standard for RILAs § RILAs follow VM-21 for US statutory reserves § RILA RBC requirements follow those for VAs § Under US GAAP: § The base RILA contract follows ASC 815 § RILA riders are classified as market risk benefits (MRBs) LPM – Section A – Fall 2024 & Spring 2025 112 / 133 LPM – Section A – Fall 2024 & Spring 2025 113 / 133 Describe why structured settlements are viewed positively by governments and policymakers © 2024 The Infinite Actuary, LLC Source: Structured Settlement Annuities ‚ Helps control costs and reliance on government benefit programs ‚ Less likely to be squandered by the plaintiff than a lump sum ‚ Plaintiff does not have to invest/manage