Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Insurance
Reexamination Certificate
2000-02-25
2003-10-21
Rosen, Nicholas David (Department: 3625)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Insurance
C705S035000, C705S03600T
Reexamination Certificate
active
06636834
ABSTRACT:
FIELD OF THE INVENTION
The present invention relates to methods and apparatus for management and control of annuities and distribution of annuity payments.
BRIEF DESCRIPTION OF THE PRIOR ART
Annuities are contracts issued by insurers that provide one or more payments during the life of one or more individuals (annuitants). The payments may be contingent upon one or more annuitants being alive (a life-contingent annuity) or may be non-life-contingent. The payments may be made for a fixed term of years during a relevant life (an m-year temporary life annuity), or for so long as an individual lives (whole life annuity). The payments may commence immediately upon purchase of the annuity product or payments may be deferred. Further, payments may become due at the beginning of payment intervals (annuities-due), or at the end of payment intervals (annuities immediate). Annuities that provide scheduled payments are known as “payout annuities.” Those that accumulate deposited funds (e.g, through interest credits or investment returns) are known as “accumulation annuities.”
Annuities play a significant role in a variety of contexts, including life insurance, disability insurance, and pensions. For example, life insurances may be purchased by a life annuity of premiums instead of a single premium. Also, the proceeds of a life insurance policy payable upon the death of the insured may be converted through a settlement option into an annuity for the beneficiary. An annuity may be used to provide periodic payments to a disabled worker for so long as the worker is disabled. Retirement plan contributions may be used to purchase immediate or deferred annuities payable during retirement.
A life annuity may be considered as a guarantee that its owner will not outlive his or her payout, which is a guarantee not made by non-annuity products such as mutual funds and certificates of deposit (CDs). (Note that the terms “owner,” “annuitant,” “annuity purchaser,” or “investor” need not refer to the same person. Herein, the terms will be used interchangeably with the meaning being understood by context.) Payout annuities can provide fixed, variable, or a combination of fixed and variable annuity payments. A fixed annuity guarantees certain payments in amounts determined at the time of contract issuance. A variable annuity will provide payments that vary with the investment performance of the assets that underlie the annuity contract. These assets are typically segregated in a separate account of the insurer. A combination annuity pays amounts that are partly fixed and partly variable.
Both fixed and variable annuities can guarantee scheduled payments for life or for a term of years. A fixed annuity offers the security of guaranteed, pre-defined periodic payments. A variable annuity also guarantees periodic payments, but the amount of each payment will vary with investment performance. Favorable investment performance will generate higher payments. This is a major benefit during inflationary periods because the growth in payments may offset the devaluation of money caused by inflation. In contrast, fixed annuities provide fixed payments that become successively less valuable over time in the presence of inflation.
Although investment returns are not guaranteed to the owner of a variable annuity, the owner has the opportunity to achieve investment results that provide ultimately higher payments than provided by the fixed annuity payment. The range of investment options associated with variable annuity contracts is quite broad, ranging from fixed income to equity investments. Typically, the consideration paid for the variable annuity fund will be used to purchase the underlying assets. The annuitant is then credited with the performance of the assets.
At all times, the insurer must maintain adequate financial reserves to make future annuity benefit payments. The reserves of an annuity fund and the benefits payable will be affected by a plurality of factors such as mortality rates, assumed investment return, investment results and administrative costs. Actuarial mortality tables may be used to determine the expected future lifetime of an individual and aggregates of individuals. The future lifetime may be thought of as a random variable that affects the distribution of payments over time for a single annuity or aggregates of annuities. Typically, mortality assumptions will be made at the time of contract issuance based upon actuarial mortality tables. Mortality tables may reflect differences in actuarial data for males and females, and may comprise different data for individual markets and group markets. The insurer bears the risk that the annuitant will live longer than predicted. The annuitant bears the risk of dying sooner than expected. The future performance of the underlying investments may also be estimated by assuming an expected rate of return on the investments. The investment performance will affect the available reserves in any given payment interval and will also affect the present value of a benefit payment to be made in a given payment interval. The present value of a single payment to be made in the future may be thought of as a random variable:
y
t
=b
t
v
t
where y
t
is the present value of the benefit payment, b
t
, and v
t
is the interest discount factor from the time of payment back to the present time. Thus, v
t
is itself a random variable dependent upon market factors.
The present value of an annuity is therefore a random function, Y, of random variables representing interest and the future lifetime of the annuitant. The actuarial present value, ä
x
, of an annuity for a life at age x 10 is the expected value of Y, E[Y]. For example, for a whole-life annuity-due that pays a unit amount at each payment period, k, the actuarial present value of the annuity may be expressed as:
a
¨
x
=
∑
k
=
0
∞
v
k
k
p
k
(
1
)
where: v
k
is the interest discount factor for a payment at the kth payment interval and
k
p
x
is the probability that a life at age x survives to age x+k, as determined from actuarial mortality tables. To simplify analysis, it is commonly assumed by actuaries that the effective interest rate, i, is constant, so that the discount factor v is a constant given by v=(1+i)
−1
.
Equation (1) defines a backward recursion relation for determining the actuarial present value of the annuity at any interval k, as follows:
a
¨
x
=
1
+
∑
k
=
0
∞
v
k
+
1
k
+
1
p
x
=
1
+
vp
x
∑
k
=
0
∞
v
k
k
p
x
+
1
=
1
+
vp
x
a
¨
x
+
1
so
that
a
¨
x
+
k
=
1
+
vp
x
+
k
a
¨
x
+
k
+
1
(
2
)
Similarly, recursion relations can be developed for other types of annuity structures.
The growth of the annuity funds will depend on the payments, b
k
, made at each interval, the investment returns on the funds, the premiums paid into the fund by the purchaser, and any expenses charged against the fund. Expenses incurred by the insurer will include taxes, licenses, and expenses for selling policies and providing services responsive to customer needs.
A typical annuity contract incorporates fixed assumptions concerning mortality and expenses at the time of contract inception. Positive or adverse deviations from these assumed distributions will be absorbed by the insurer. For a fixed annuity, the insurer bears the risk that the investment return guaranteed to the contract holder will be greater than the actual market performance attainable by investment of the fixed premium or premiums received from the payee.
In contrast, for a variable annuity, the risk that the investment return on assets underlying the annuity will exceed or fall below an investment return rate assumed at the time of contract issuance is passed to the contract holder.
This is done by computing a subsequent payment, b
k+1
, due at time k+1, from a pr
Fulbright & Jaworski LLP
Metropolitan Life Insurance Company
Rosen Nicholas David
LandOfFree
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