CAS Indexed Annuity Crediting Strategies and Interest Rate Concepts 2

Question 1

In the monthly sum crediting method, how is interest calculated over a one-year period?

Accepted Answer

By summing the capped monthly percentage changes and crediting the total at year-end

Answer

By averaging the monthly index closing values over the twelve-month term

Answer

By applying the annual participation rate to the December index value

Answer

By identifying and crediting the single highest monthly index gain

Question 2

A fixed indexed annuity offers a 65% participation rate on the S&P 500 with no cap and no spread. If the S&P 500 gains 12% over the crediting period, what interest rate is credited?

Accepted Answer

7.8%

Answer

12%

Answer

5.2%

Answer

19.5%

Question 3

What does 'index reset' mean in the context of an indexed annuity crediting term?

Accepted Answer

The beginning index value is set to the current index level at the start of each new crediting term

Answer

The account value is restored to the original premium at the start of each new term

Answer

The participation rate is recalculated based on current market volatility each year

Answer

The credited interest is subtracted from the account and re-credited at a higher rate

Question 4

How do insurance companies primarily hedge their obligation to credit interest based on index performance in a fixed indexed annuity?

Accepted Answer

By purchasing call options on the relevant index

Answer

By investing policyholder premiums directly in the underlying index

Answer

By allocating policyholder funds to high-yield bond portfolios

Answer

By entering into interest rate swap agreements with counterparty banks

Question 5

In which market environment does the monthly sum crediting method typically underperform annual point-to-point?

Accepted Answer

A volatile market with large swings both up and down within the year

Answer

A steadily rising bull market with consistent monthly gains

Answer

A flat market where the index ends the year unchanged

Answer

A market where the index rises sharply only in the first quarter

Question 6

What is a 'volatility control index' feature sometimes offered in indexed annuities?

Accepted Answer

An index strategy that dynamically adjusts equity and bond allocations to target a specific volatility level

Answer

A contractual provision that limits surrender charges during volatile markets

Answer

A rider that guarantees a minimum credit regardless of market volatility

Answer

A feature capping the maximum index volatility used in participation rate calculations

Question 7

Which of the following best describes the 'option budget' in a fixed indexed annuity?

Accepted Answer

The portion of investment earnings available to purchase index options determining caps and participation rates

Answer

The total amount of premium the insurer accepts per policy year

Answer

The maximum surrender charge the insurer may assess over the contract term

Answer

The annual fee deducted from the account for administrative expenses