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

The monthly sum method adds together each month's index percentage change (subject to monthly caps) and credits the cumulative total at the end of the year, which can be negative if losses outweigh gains.

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

With a 65% participation rate and a 12% index gain, the credited interest equals 65% × 12% = 7.8%.

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

Reset means that at the start of each new crediting period, the index starting point is updated to the current market level, preventing prior losses from dragging down future crediting calculations.

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

Insurers allocate a portion of the premium (the option budget) to purchase index call options, which provide the upside participation paid to policyholders while the remaining premium goes into fixed-income investments.

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

In a volatile market, monthly sum caps limit upside in strong months while full monthly losses reduce the running sum, causing it to underperform point-to-point which only captures net annual movement.

(CAS) Certified Annuity Specialist Practice Test

(CAS) Certified Annuity Specialist Practice Test

CAS Indexed Annuity Crediting Strategies and Interest Rate Concepts 2