CAS Indexed Annuity Crediting Strategies and Interest Rate Concepts 3

Question 1

In a rising interest rate environment, how are the cap rates and participation rates in newly issued fixed indexed annuities typically affected?

Accepted Answer

They increase because higher bond yields expand the insurer's option budget

Answer

Higher interest rates increase the yield on the bonds backing the insurer's general account, expanding the option budget available to purchase index options and allowing the insurer to offer more competitive caps and participation rates.

Question 2

What is a 'dual directional' or 'trigger' crediting strategy in an indexed annuity?

Accepted Answer

A strategy that credits interest positively even when the index declines, provided it stays above a defined trigger level

Answer

A dual directional strategy credits a positive return when the index is flat or up AND when the index declines but remains above a defined trigger level (e.g., does not fall more than a set percentage), rewarding mild downturns.

Question 3

Which factor does NOT typically influence the cap rate or participation rate offered on an indexed annuity strategy?

Accepted Answer

The applicant's age and individual risk tolerance

Answer

Cap rates and participation rates are determined by market-level factors such as interest rates, option costs, and index volatility—not by individual applicant characteristics such as age or risk tolerance.

Question 4

When comparing a fixed indexed annuity to a variable annuity, which statement most accurately describes the indexed annuity's market participation?

Accepted Answer

The FIA credits interest linked to an index return without the policyholder directly owning index investments

Answer

In a fixed indexed annuity, the insurer's general account holds the assets and credits interest based on index performance; the policyholder never owns securities, which is why principal is protected but gains are capped.

Question 5

What is the primary disadvantage of a high participation rate with no cap in a fixed indexed annuity compared to a capped strategy?

Accepted Answer

No cap strategies may have a higher spread or lower participation rate in low-volatility environments

Answer

Uncapped strategies often compensate the insurer's higher option cost through a lower participation rate or higher spread, meaning that in moderate-gain years the net credit may be lower than a well-capped strategy with a higher participation rate.

(CAS) Certified Annuity Specialist Practice Test

(CAS) Certified Annuity Specialist Practice Test

CAS Indexed Annuity Crediting Strategies and Interest Rate Concepts 3