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Insurance Abstract
A computerized system and method for administering non-disinvesting
policy loans on insurance contracts. Grant or denial of a non-disinvesting
policy loan on an insurance contract is based on market conditions
and specific policy data. The invention administers such a loan
in compliance with state insurance laws and security requirements,
including the transfer of funds among policy sub-accounts without
liquidating the funds before transfer and/or the transfer of non-disinvesting
policy loans as appropriate.
Insurance Claims
What is claimed is:
1. A method for administering a non-disinvesting loan on an insurance
policy, said policy having funds invested in one or more investment
sub-accounts, said method comprising: receiving sub-account data
associated with one or more of the sub-accounts of the policy, said
sub-account data relating to a value of the sub-accounts; computing
a tentative loan availability parameter for the sub-accounts of
the policy based on the sub-account data associated therewith; receiving
market interest rate information; computing a final loan availability
parameter for-the sub-accounts of the policy based on the tentative
loan availability parameter and the market interest rate information;
and determining an available loan amount for a non-disinvesting
loan on one or more of the sub-accounts of the policy based on the
final loan availability parameter and the value of each of the sub-accounts.
2. The method of claim 1, further comprising rendering a decision
on whether to grant or deny a request for the loan based on the
final loan availability parameter, the value of each of the sub-accounts,
and the amount of the requested loan.
3. The method of claim 2, providing notice of the loan grant or
denial decision to an insurer granting the policy.
4. The method of claim 1, wherein receiving the sub-account data
includes receiving the sub-account data from an insurer granting
the policy.
5. The method of claim 1, wherein the sub-account data includes
information representative of one or more of the following financial
characteristics of the sub-accounts: performance and variability.
6. The method of claim 1, wherein the sub-account data relates
to one or more of the following: amount of cash value in each of
the sub accounts of the policy and current application percentages
of net premiums to the sub-accounts.
7. The method of claim 1, further comprising receiving financial
information relating to one or more stock and bond indices, and
wherein the tentative loan availability parameter for the sub-accounts
of the policy is also based on the financial information.
8. The method of claim 1, wherein receiving the market interest
rate information comprises receiving the market interest rate information
from an external source.
9. The method of claim 1, further comprising receiving information
relating to interest rate limits set by state insurance laws.
10. The method of claim 9, wherein the final loan availability
parameter specifies a desired interest rate for the policy loan
and wherein computing the final loan availability parameter for
each of the sub-accounts of the policy comprises comparing the desired
interest rate for the policy loan to the interest rate limits set
by state insurance laws.
11. The method of claim 1, wherein the insurance policy comprises
a variable insurance policy having funds invested in one or more
of the following sub-accounts: mutual funds, diversified portfolios
of stocks and/or bonds, and money market.
12. The method of claim 1, further comprising reallocating funds
invested in the sub-accounts among the sub-accounts to ensure the
value of the sub-accounts provides adequate security for the loan.
13. The method of claim 12, further comprising transferring the
loan to a disinvesting loan if reallocating the funds invested in
the sub-accounts fails to ensure that the value of the sub-accounts
provides adequate security for the loan.
14. The method of claim 12, wherein reallocating the funds invested
in the sub-accounts includes updating the final loan availability
parameter daily and reallocating the funds in the sub-accounts as
a function of the updated final loan availability parameter.
15. The method of claim 1, further comprising receiving policy
data associated with the policy for use in computing the tentative
loan availability parameter, said policy data relating to one or
more of the following: amount of any disinvesting loans outstanding
related to a policy owner, amount of any non-disinvesting loans
outstanding related to the policy owner, the age of the policy owner,
the anniversary date of the policy, the amount of the policy, and
premium rate classification.
16. The method of claim 1, further comprising financing the non-disinvesting
loan via a special purpose reinsurance vehicle.
17. The method of claim 16, further comprising hedging by the reinsurance
vehicle.
18. The method of claim 1, wherein determining the available loan
amount for the non-disinvesting loan includes determining whether
the loan is to be used for paying one or more premiums of the policy.
19. One or more computer-readable media having computer-executable
instructions for performing the method of claim 1.
20. A method for administering a non-disinvesting loan on an insurance
policy, said policy having funds invested in one or more investment
sub-accounts, said method comprising: receiving sub-account data
associated with each of the sub-accounts of the policy, said sub-account
data relating to a value of each of the sub-accounts; computing
a tentative loan availability parameter for each of the sub-accounts
of the policy based on the sub-account data associated therewith;
receiving market interest rate information; computing a final loan
availability parameter for each of the sub-accounts of the policy
based on the tentative loan availability parameter and the market
interest rate information; and rendering a decision on whether to
grant or deny a request for a non-disinvesting loan based on the
final loan availability parameter, the value of each of the sub-accounts,
and the amount of the requested loan.
21. A network for administering a non-disinvesting loan on an insurance
policy comprising an administration system server associated with
an insurer granting the policy, said policy having funds invested
in one or more investment sub-accounts, said server receiving and
responsive to sub-account data associated with one or more of the
sub-accounts of the policy, said sub-account data relating to a
value of the sub-accounts, said server being configured to access
a processing module that computes a tentative loan availability
parameter for the sub-accounts of the policy based on the sub-account
data associated therewith, said server being further configured
to access a processing module that computes a final loan availability
parameter for the sub-accounts of the policy based on the tentative
loan availability parameter and market interest rate information.
22. The network of claim 21, wherein the server is configured to
access the processing module to determine an available loan amount
for a non-disinvesting loan based on the final loan availability
parameters and the value of each of the sub-accounts.
23. The network of claim 21, further comprising a first database
associated with the server for storing the sub-account data.
24. The network of claim 21, further comprising a second database
associated with the server for storing the market interest rate
information.
25. The network of claim 21, wherein the server is configured to
access the processing module to render a decision on whether to
grant or deny a request for the loan based on the final loan availability
parameter, the value of each of the sub-accounts, and the amount
of the requested loan.
26. The network of claim 21, further comprising a special purpose
reinsurance vehicle for financing the non-disinvesting policy loan.
27. The network of claim 21, wherein the sub-account data includes
information representative of one or more of the following financial
characteristics of the sub-accounts: performance and variability.
28. The network of claim 21, wherein the sub-account data relates
to one or more of the following: amount of cash value in each of
the sub accounts of the policy and current application percentages
of net premiums to the sub-accounts.
29. The network of claim 21, wherein the tentative loan availability
parameters for the sub-accounts of the policy are also based on
financial information relating to one or more stock and bond indices.
30. The network of claim 21, further comprising an external data
source coupled to the administration system server via a data communication
network for providing the market interest rate information.
31. The network of claim 21, wherein the final loan availability
parameter specifies a desired interest rate for the policy loan
and wherein the server is configured to access the processing module
to compares the desired interest rate for the policy loan to an
interest rate limits set by one or more state insurance laws.
32. The network of claim 21, wherein the insurance policy comprises
a variable insurance policy having funds invested in one or more
of the following sub-accounts: mutual fund, diversified portfolios
of stocks and/or bonds, and money market.
33. The network of claim 21, wherein the server is configured to
reallocate funds invested in the sub-accounts among the sub-accounts
to access the processing module to ensure the value of the sub-accounts
provides adequate security for the loan.
34. The network of claim 33, wherein the server is further configured
to access the processing module to transfer the loan to a disinvesting
loan if reallocating the funds invested in the sub-accounts fails
to ensure that the value of the sub-accounts provides adequate security
for the loan.
35. The network of claim 21, wherein the tentative loan availability
parameters, are also a function of one or more of the following
policy data: amount of any disinvesting loans outstanding related
to a policy owner, amount of any non-disinvesting loans outstanding
related to the policy owner, the age of the policy owner, the anniversary
date of the policy, the amount of the policy, and premium rate classification.
Insurance Description
TECHNICAL FIELD
[0001] This invention relates generally to administering a non-disinvesting
policy loan on a life insurance policy and, particularly, to computerized
systems and methods for automatically administering such a loan
including maintaining an adequate value of sub-accounts of the policy,
without liquidation, as collateral for the loan.
BACKGROUND OF THE INVENTION
[0002] Those knowledgeable in the insurance industry are familiar
with two main types of life insurance contracts or policies, namely,
term life insurance and permanent life insurance. Unlike a term
life insurance policy, a permanent life insurance policy can build
up a cash value and generally stays in force as long as the policy
owner continues to pay the premiums.
[0003] One category of permanent life insurance is variable life
insurance. A variable life insurance policy is basically a combination
of a permanent life insurance policy and an investment account.
All or part of each premium paid by the policy owner is invested
and the cash value and death benefit amounts of the policy depend
on how well the investments perform. In other words, the cash value
and the death benefit of the variable life insurance policy fluctuate
relative to the performance of one or more investment sub-accounts.
Typical investment sub-accounts include investments in mutual funds,
diversified portfolios of stocks and/or bonds, money market accounts
or the like. Moreover, the cash value of the policy provides a source
of funds from which the policy owner can borrow, or it can be used
as collateral to help secure a loan. Such loans are often referred
to in the industry as standard policy loans. Current state insurance
laws limit the rate that can be charged on a standard policy loan
based on, for example, an established financial indicator. Similarly,
policy loans may be made on indexed general account insurance products
and the like.
[0004] A conventional standard policy loan on a variable life insurance
policy, for example, requires liquidation of funds in the policy's
sub-accounts as security for the loan. The loan amount is then held
in a notional account, for example, until the loan is repaid. Upon
loan repayment, the funds from this account, typically referred
to as a loan account, are reinvested in policy sub-accounts. Thus,
when a policy owner makes a standard policy loan on a variable life
insurance policy, the insurance company will liquidate investments
in the policy's sub-accounts before granting the loan against the
policy. Under these circumstances, any additional gains (or losses)
that the investments in the various policy sub-accounts might have
yielded before the loan is repaid do not remain in the sub-accounts.
The policy loan provision that is currently in universal use excludes
any policy loan amount from participating in either the variable
sub-account performance or the index performance. In other words,
the policy loan provisions in current use for both variable and
indexed insurance products are "disinvesting" as to the
normal basis for determining investment credits. Presently, a disinvesting
loan such as the standard policy loan described above is the only
type of policy loan available to a variable or indexed general account
life insurance policy owner.
[0005] In light of the foregoing, there is a desire for a mechanism
permitting non-disinvesting policy loans on variable or indexed
contracts or the like that a lender, such as a life insurance company,
can make securely without liquidating funds in policy sub-accounts.
Moreover, because of the difficulty and complexity in continually
evaluating performance among several sub-accounts and operating
in compliance with state insurance laws, there is a desire for the
automated administration of policy loans, including automated sub-account
transfers and automated transfers between non-disinvesting and standard
policy loans to sufficiently protect the lender. In addition, improvements
are needed to permit collaboration between insurance companies,
reinsurers, and lenders in providing funds for and administering
such non-disinvesting policy loans.
SUMMARY OF THE INVENTION
[0006] Embodiments of the invention overcome one or more deficiencies
in the prior art by enabling, among other things, an insurance company
or the like to determine whether to grant a non-disinvesting policy
loan, which does not require the liquidation of investments, from
an insurance policy. The invention further permits administering
such loans to provide sufficient security and in compliance with
requirements of state insurance laws pertaining to policy loans.
Moreover, the features of the present invention described herein
are less laborious and easier to implement than currently available
techniques, provide greater security for the loan, and enable such
loans to be economically feasible and commercially practical for
the first time.
[0007] Briefly described, a method embodying aspects of the invention
is for administering a non-disinvesting loan on an insurance policy.
In this instance, the policy has funds that are invested in one
or more investment sub-accounts. The method includes receiving sub-account
data associated with one or more of the sub-accounts of the policy.
The sub-account data relates to a value of the sub-accounts as well
as sub-account composition, correlations to market indices, and
covariance estimates. The method also includes computing tentative
loan availability parameters for the sub-accounts of the policy
based on the sub-account data associated with them, receiving market
interest rate information, and computing final loan availability
parameters for the sub-accounts of the policy based on the tentative
loan availability parameters and the market interest rate information.
An available loan amount for a non-disinvesting loan on the sub-accounts
of the policy is determined based on the final loan availability
parameters and the value of each of the sub-accounts.
[0008] In another embodiment, a method for administering a non-disinvesting
loan on an insurance policy includes receiving sub-account data
associated with each of the policy's investment sub-accounts. The
method also includes computing a tentative loan availability parameter
for each of the sub-accounts of the policy based on the sub-account
data associated with them, receiving market interest rate information,
and computing a final loan availability parameter for each of the
sub-accounts of the policy based on the tentative loan availability
parameter and the market interest rate information. A decision on
whether to grant or deny a request for a non-disinvesting loan on
one or more of the sub-accounts of the policy is rendered based
on the final loan availability parameters, the value of each of
the sub-accounts, and the amount of the requested loan.
[0009] Yet another embodiment of the invention relates to a network
that administers a non-disinvesting loan on an insurance policy.
The network has an administration system server associated with
an insurer granting the policy. The server receives and responds
to sub-account data associated with one or more of the policy's
investment sub-accounts. The server is configured to access a processing
module that computes tentative loan availability parameters for
the sub-accounts of the policy based on the sub-account data associated
with them. The server is further configured to access a processing
module that computes final loan availability parameters for the
sub-accounts of the policy based on the tentative loan availability
parameters and market interest rate information.
[0010] Computer-readable media having computer-executable instructions
embody further aspects of the invention.
[0011] Alternatively, the invention may comprise various other
methods and apparatuses.
[0012] Other features will be in part apparent and in part pointed
out hereinafter.
BRIEF DESCRIPTION OF THE DRAWINGS
[0013] FIG. 1 is a block diagram illustrating an exemplary network
environment in which the present invention may be utilized for administering
a non-disinvesting policy loan of an insurance contract and maintaining
funding in a plurality of sub-accounts of the policy as a security
for the policy loan.
[0014] FIG. 2A and FIG. 2B are exemplary flow diagrams illustrating
process flow according to one embodiment of the invention for administering
a non-disinvesting policy loan of an insurance contract and maintaining
funding in the sub-accounts to provide adequate security for the
non-disinvesting policy loan.
[0015] FIG. 3 is a block diagram illustrating exemplary operation
of a reinsurance conduit according to an embodiment of the invention.
[0016] FIG. 4 is a block diagram illustrating exemplary process
flow according to an alternative embodiment of the invention for
administering a non-disinvesting policy loan of an insurance contract
and maintaining funding in a plurality of sub-accounts of the policy
as a security for the policy loan.
[0017] Corresponding reference characters indicate corresponding
parts throughout the drawings.
DETAILED DESCRIPTION OF THE INVENTION
[0018] Referring now to the drawings, FIG. 1 illustrates an exemplary
network environment in which the present invention may be utilized.
The invention relates to computerized means for granting and administering
a non-disinvesting policy loan on, for example, a variable life
insurance policy without reducing the aggregate funds in the policy's
sub-accounts. In addition, the invention continually evaluates performance
of the sub-accounts in light of market information, including statutory
rate limits and the like. For example, most current state insurance
laws limit the rate that can be charged on a policy loan based on
an established financial indicator. To provide security for the
lender, the invention enables sub-account transfers as well as transfers
between non-disinvesting and standard policy loans.
[0019] In FIG. 1, an exemplary block diagram illustrates a system
for administering a request for a non-disinvesting policy loan of
a variable insurance contract and maintaining funding in a plurality
of sub-accounts of the policy as a security for the policy loan.
A policy owner 101 makes a request at 103 for a non-disinvesting
policy loan based on a variable insurance contract or policy 105.
In one embodiment of the invention, the loan request, referred to
as LP for later calculations, may be a request for a non-disinvesting
policy loan at 103 to pay the premium of policy 105. In another
embodiment of the invention, the loan request at 103, referred to
as LX for later calculations, may be a request for a non-disinvesting
policy loan for reasons other than to pay the premium of policy
105.
[0020] The policy 105 in the embodiment of FIG. 1 combines the
traditional benefit of permanent life insurance with the ability
to invest the cash value of the policy 105 in various investment
sub-accounts 107 (e.g., stocks, bonds, mutual funds, etc.). In addition,
policy 105 may have a number of general accounts or fixed accounts,
not including a loan account. General or fixed accounts are those
in which the life insurance company guarantees the principal and
some minimum rate of interest, and may declare additional interest
or credit amounts tied to an index. Therefore, the policy owner
101 may take the advantage of this cash value invested in sub-accounts
107 by making the loan request on the policy 105.
[0021] An administrative system 109 associated with an insurer
111 processes the loan request based on policy data, sub-account
data, and interest rate information. In response to the request,
the administrative system 109 of FIG. 1 gathers data at 113 related
to policy 105. As an example, the data at 113 includes, but is not
limited to, policy data from the records of the insurer 111, such
as daily information of the amount of cash value in each sub-account
107 of the policy, the amount of any standard policy loans outstanding,
the amount of any non-disinvesting policy loans outstanding, the
insured's age, the policy anniversary date, the amount of the variable
insurance contract, the current allocation percentages of net premiums
to sub-accounts 107, and the premium rate classification. In addition,
the data at 113 to be processed by administrative system 109 includes
sub-account data related to each sub-account 107 under the policy
105. In one embodiment of the present invention, the sub-account
data used for processing the request includes, but is not limited
to, sub-account performance metrics (e.g., alpha, Beta and R-squared
measured against the appropriate index and correlation coefficients
for each pair of sub-accounts as described in APPENDIX A). In another
embodiment, the administrative system 109 provides only elementary
sub-account data to a processing module ("PM") 115, which
calculates the necessary performance metrics.
[0022] Although described in the context of a variable life insurance
policy, it is to be understood that aspects of the invention permit
non-disinvesting policy loans on variable or indexed contracts or
the like.
[0023] As described above, most current state insurance laws limit
the rate that can be charged on a policy loan based on an established
financial indicator. One such indicator is the Moody's Corporate
Bond Yield Average--Monthly Average Corporates, as published by
Moody's Investor Service, from two months before the month in which
the loan rate is set. Before processing the loan request from the
administrative system 109, the PM 115 receives financial information
from an external data source 117 (e.g., public databases) at 119.
For example, PM 115 receives quarterly, semi-annual, or annual London
InterBank Offered Rates (LIBOR) and the Moody's Corporate Bond Yield
Average--Monthly Average Corporates for the past several months
(e.g., 15). In a preferred embodiment, the administrative system
109 forwards the loan request, policy data, and sub-account data
to PM 115 via a data communication network 121. In other words,
the administrative system 109 receives the loan request at 103 and
the data at 113 relating to policy 105 and sub-accounts 107. The
PM 115 receives the interest rate information at 119 and all other
information from the administrative system via the network as shown
at 123. In the alternative, the calculation, decision-making, and
instruction capabilities of the PM 115 are built directly into the
administrative system 109.
[0024] Referring further to FIG. 1, PM 115, either as a separate
processing system or as incorporated into administrative system
109, evaluates and processes a loan request according to the non-disinvesting
loan structure of the present invention. In one embodiment, the
funding of the non-disinvesting policy loans occurs through a reinsurance
structure illustrated generally by a reinsurance conduit (e.g.,
reinsurance conduit 301 of FIG. 3).
[0025] The functioning of the reinsurance conduit is described
below with respect to FIG. 3. In one embodiment, direct writing
carriers are responsible for implementing a link to the PM (which
supports the non-disinvesting policy loan provisions) in from their
administrative systems, and for filing appropriate rider forms and
prospectus supplements.
[0026] Once the loan request is processed, PM 115 signals the administrative
system 109 of the grant or denial. In the case where the request
is approved, the administrative system 109 may issue an approved
policy loan to the policy owner 101.
[0027] In other words, a non-disinvesting loan structure according
to embodiments of the present invention involves policy owner 101
paying premiums on his or her respective policy 105, receiving a
policy loan, and repaying the loan. In this example, a direct writing
life insurance company such as insurer 111 issues the policy, makes
the loan to policy owner 101, and receives the premium payments
and loan repayments. Direct writing carriers may finance the loans
through a reinsurance conduit, or special purpose reinsurance vehicle,
as shown in FIG. 3.
[0028] Referring now to FIG. 2A and FIG. 2B, an exemplary flow
diagram illustrates an embodiment of the invention for administering
a non-disinvesting policy loan of a variable insurance contract
105 and maintaining funding in sub-accounts 107 to provide adequate
security for the non-disinvesting policy loan. Embodiments of the
present invention generally perform several functions including,
but not limited to the following: evaluating sub-account data and
market conditions and setting loan availability parameters; evaluating
interest market conditions and overriding loan availability parameters,
if appropriate; evaluating requests for non-disinvesting policy
loans to pay premiums; evaluating requests for non-disinvesting
policy loans other than to pay premiums; evaluating current loan
status and reallocating funds among sub-accounts if necessary; and
evaluating current loan status and transferring the non-disinvesting
loan to a standard policy loan if necessary.
[0029] In one embodiment, beginning at 202, the PM 115 receives
data related to the non-disinvesting policy loan and sub-accounts
of the policy from the administrative system 109 and financial data
from external data sources (e.g. public data bases). The server
PM executes instructions for computing the tentative loan availability
parameters at 204 by analyzing the data related to policy and sub-accounts
and the market condition data. At 206, PM 115 receives, for example,
state insurance law limits on interest rates that insurer 111 is
permitted to charge policy owner 101, and other market rates. At
208, PM 115 determines the final loan availability parameters by
analyzing the tentative loan availability parameters and the state
insurance law limits on interest rates.
[0030] As part of the evaluations at 204 and 208 described above,
embodiments of the present invention evaluate sub-account data and
market conditions and set loan availability parameters. The security
for a non-disinvesting policy loan consists of shares in policy
sub-accounts 107 that fluctuate in value. For this reason, the invention
performs ongoing market analysis to determine the adequacy of the
security for the loan. The data used for this analysis includes
specific information about the performance and volatility of each
sub-account 107 as well as data on general market conditions. The
invention processes this data to set tentative loan availability
parameters relative to each sub-account and in total at 204. The
system may also consider the use of options to enhance the security
of the sub-accounts.
[0031] As described above, the invention at 208 also evaluates
interest market conditions and overrides loan availability parameters
if appropriate. Policy loan interest rates that a life insurance
company is permitted to charge are subject to conditions set forth
in the insurance codes of the states. At the same time, interest
rates in the economy independently determine the cost that insurer
111 pays to obtain the funds needed to provide the non-disinvesting
policy loan. If the cost of funds to insurer 111 exceeds the loan
interest rates that it is permitted to charge, insurer 111 may need
to limit the availability of new or renewing non-disinvesting policy
loans. The invention processes the data on market interest rates
as well the-data that determines permissible rates under state insurance
laws. It then determines whether to override the tentative loan
availability parameters, and if so what the new parameters should
be. The system may also consider the use of options, futures, and
other derivatives to manage risk and enhance the overall security
of the program.
[0032] The PM 115 in this embodiment then decides whether to grant
or deny the policy loan request at 210. For example, the PM 115
determines whether to grant or deny the loan request based on a
set of formulas for calculating either a premium loan request or
another loan request, as described in detail below.
[0033] In addition, PM 115 evaluates requests for non-disinvesting
policy loans to pay premiums. Requests of this type should be granted
or declined by insurance companies based on a number of factors.
In one embodiment, the invention determines the proper response
by taking into account the size of the non-disinvesting policy loan
request, the amount of any outstanding policy loans, the amount
of cash value in each sub-account, the current allocation percentages
of net premiums to sub-accounts, the amount of life insurance, the
age and risk classification of the insured, the policy anniversary
date, and the loan availability parameters of each sub-account.
With respect to requests for non-disinvesting policy loans other
than to pay premiums, the invention does not use current allocation
percentages of net premiums to sub-accounts 107. Also, the loan
availability parameters for non-disinvesting policy loans other
than to pay premiums may be different than for those to pay premiums.
The invention determines whether these requests for non-disinvesting
policy loans should be granted based on these factors.
[0034] If the loan request is denied, the policy owner 101 is notified
at 212. If, on the other hand, the request is granted, the administrative
system 109 receives notice of the grant itself, notifies the policy
owner at 213, and proceeds to the operations shown in FIG. 2B. Administrative
system 109 monitors sub-accounts 107 at regular intervals (e.g.,
daily) and provides data to the PM 115 to determine if the cash
values of the sub-accounts 107 are sufficient security for the policy
loan at 214. If the cash values provide sufficient security, administrative
system 109 receives notice and continues to monitor sub-accounts
107 to determine when the policy loan has been repaid at 216. If
the policy loan has not been repaid, administrative system 109 continues
to monitor sub-accounts 107 daily and send data to PM 115 for evaluation.
If, however, the policy loan has been repaid, the monitoring of
the sub-accounts terminates and the policy loan account is closed
at 218.
[0035] After 214, if the cash value is insufficient security for
the policy loan, the PM 115 in one embodiment provides instructions
to the administrative system 109 to reallocate funds among sub-accounts
107 at 222. Advantageously, this is done without reducing the total
amount of the funds in sub-accounts 107. Then, the PM 115 determines
whether such reallocation is sufficient to provide adequate security
for the policy loan at 224. If the reallocation is sufficient, then
PM 115, for example, instructs administrative system 109 to perform
the appropriate reallocation and return to monitoring at 214 to
make a daily determination of the cash value in sub-accounts 107.
On the other hand, if the reallocation provides insufficient security
for the policy loan, PM 115 instructs administrative system 109
to transfer some or all of the funds in the outstanding policy loan
to a standard policy loan at 226.
[0036] According to embodiments of the invention, several parameters
factor into the decision to grant or deny a particular non-disinvesting
policy loan and the interest rate to be charged on the loan. The
following description sets forth exemplary calculations executed
by PM 115.
[0037] A maximum loan factor, MLF, for each sub-account 107 is
the maximum permitted ratio of non-disinvesting policy loans to
cash value in that sub-account. The MLF may be different for different
sub-accounts 107. When policy loans are made under a standard policy
loan provision, the loan account is used. The invention calculates
a maximum alternative (non-disinvesting) loan balance, MALB, for
non-disinvesting policy loan based on the sum of the cross products
of the MLF for each sub-account 107 (including the general or fixed
account, but not the loan account), multiplied by the amount of
cash value in that sub-account, plus any surrender credit, and minus
any surrender charge. But the MALB is not permitted to exceed the
total cash value, TCV, in the sub-accounts 107 (other than the loan
account) minus any surrender charge.
[0038] For example, if the cross product of MLF for a money market
sub-account and the total cash value in all sub-accounts, minus
any surrender charge, is greater than the alternative (non-disinvesting)
policy loan balance, ALB, then the cash value may be transferred
from all other sub-accounts on a pro-rata basis to the money market
sub-account until ALB no longer exceeds MALB for the policy. Further
to the example, if the cross product of MLF for the money market
sub-account and the total cash value in all sub-accounts, minus
any surrender charge, is less than or equal to ALB, then policy
loan amounts are transferred from the non-disinvesting policy loan
provision to the standard policy loan provision until the ALB no
longer exceeds MALB for the policy.
[0039] The following are used in the exemplary calculations:
[0040] LP=amount of an alternative (non-disinvesting) policy loan
request, proceeds to be applied as a premium
[0041] LX=amount of an alternative (non-disinvesting) policy loan
request, proceeds not to be applied as a premium
[0042] i.sup.APL=current interest rate charged on alternative (non-disinvesting)
policy loans
[0043] i.sup.SPL=current interest rate charged on standard policy
loans
[0044] n=number of variable sub-accounts
[0045] g=number of general accounts or fixed accounts, not including
the loan account
[0046] n+g=total number of sub-accounts including those in the
general account or fixed account
[0047] TCV=total cash value, before any surrender charges or credits,
excluding any standard policy loans (loan account values)
[0048] SC=surrender charge (-) or credit (+)
[0049] SV=surrender value, after any surrender charges or credits
[0050] CV.sub.t=cash value in variable sub-account t, 1.ltoreq.t.ltoreq.n
[0051] CV.sub.1=cash value in the money market account (variable
sub-account 1=money market)
[0052] CV.sub.n+t=cash value in sub-account (n+t) in the general
account or fixed account, 0.ltoreq.t.ltoreq.g
[0053] SLB=standard policy loan balance
[0054] ALB=alternative (non-disinvesting) policy loan balance
[0055] MALB=maximum alternative (non-disinvesting) policy loan
balance
[0056] MLF.sub.t=maximum loan factor for cash value in sub-account
t
[0057] % P=applicable percent of premium load for the current policy
year
[0058] % ALLOC.sub.t=% allocation for new premium to sub-account
1 t , t = 1 n + g ALLOC t = 1
[0059] PY.sub.frac=fraction of the current policy year remaining
from the end of the business day
[0060] As described above, in an embodiment in which PM 115 assesses
and approves the policy loan, the PM 115 may instruct 138 the administrative
system 109 to monitor 140 the sub-accounts 107 on a periodic basis,
preferably daily. This is because the security of the non-disinvesting
policy loan consists of shares of the cash value of sub-accounts
107 of the policy 105, and the cash value of the sub-accounts 107
may vary daily depending on the performance of the underlying investment
accounts. Therefore, in order to maintain an adequate security for
the policy loan, the PM 115 may instruct the administrative system
109 to reallocate the funds among the sub-accounts 107, if necessary,
to ensure adequate security for the loan. As an example, the invention
performs the following calculations at the end of each business
day using the cash value of the sub-accounts 107: 2 TCV = t = 1
n + g CV t t SV = TCV + SC MALB = [ Min ( t = 1 n + g CV t * MLF
t + SC , Min ( TCV , TCV + SC ) ) ] / ( 1 + Max ( i APL , i SPL
) * PY frac )
[0061] If ALB>MALB, then:
[0062] If ALB.ltoreq.(TCV*MLF.sub.1+SC) and ALB.ltoreq.Min(TCV,TCV+SC),
then solve for reallocation amounts; else liquidate alternative
(non-disinvesting) policy loan
[0063] If ALB.ltoreq.MALB, then check for premium loan request
[0064] APPENDIX A defines the factors that would be used in an
alternative calculation approach reflecting correlations and diversification
benefits of the sub-accounts, as illustrated in FIG. 4.
[0065] As illustrated above, the invention determines whether the
cash values of the sub-accounts 107 are sufficient security to the
approved policy loan. In a preferred embodiment, the PM 115 may
determine the exact amount of reallocation of funds among the sub-accounts
107. This is accomplished by analyzing the data about each sub-account
107 with the final loan availability parameters derived during the
initial granting of the loan request. The invention performs the
following to solve for the reallocation amounts:
[0066] Let M=amount of cash value reallocated to money market sub-account
[0067] CV.sub.t.sup.new=new cash value in sub-account t
[0068] Then CV.sub.1.sup.new=CV.sub.1+M.
[0069] Let CV.sub.-1=cash value outside the money market sub-account=TCV-CV.sub.1
3 Then CV - 1 new = CV - 1 - M Let MLF - 1 = t = 2 n + g MLF t *
CV t / t = 2 n + g CV t Then M = ( ALB - MALB ) / ( MLF 1 - MLF
- 1 ) CV t new = CV t * ( CV - 1 - M ) / CV - 1
[0070] Set CV.sub.t=CV.sub.t.sup.new for all t for any subsequent
calculations
[0071] Go to check for premium loan request
[0072] More generally, replacing the money market fund with a pre-determined
set of asset allocation models selected by the customer, the system
may determine if reallocating part or all of the assets to one of
these models results in an acceptable relationship between ALB and
MALB. Should the asset performance subsequently improve, the system
may permit reallocation of assets back to their original allocation
levels.
[0073] As a result of the above calculations to determine the exact
amount to be transferred among the sub-accounts 107, there is no
need to reduce the aggregate amount of the investments in the sub-accounts
107. In fact, this embodiment of the invention enables the PM 115
to maximize the return on the investment of the policy owner 101
while maintaining an adequate security for the policy loan without
liquidating the investment.
[0074] The invention also enables the PM 115 to transfer some or
the entire outstanding non-disinvesting policy loan to a standard
policy loan. This is desirable when the reallocation of funds among
the sub-accounts 107 is insufficient to provide adequate security
for the approved policy loan 112. In this instance, the invention
performs the following calculations to liquidate the non-disinvesting
policy loan:
[0075] Let R=amount of alternative (non-disinvesting) policy loan
transferred to standard policy loan
[0076] R=ALB-MALB
[0077] Let ALB.sup.new, SLB.sup.new be the new alternative (non-disinvesting)
and standard loan balances after transfer
[0078] ALB.sup.new=ALB-R
[0079] SLB.sup.new=SLB+R
[0080] CV.sub.t.sup.new=CV.sub.t-R*CV.sub.t/TCV for all t
[0081] Set ALB and SLB equal to their new values for any subsequent
calculations
[0082] Go to check for premium loan request
[0083] In making its determination, PM 115 evaluates the cash value
of the sub-accounts 107 and the final loan availability parameters.
In one embodiment where the request is for a non-disinvesting policy
loan to pay the premium of the policy 105, LP, the PM 115 takes
the following information, among others, into account: the final
loan availability parameters for each sub-account, the size of the
non-disinvesting policy loan request 103, the amount of any outstanding
policy loans, the amount of cash value in each sub-account 107,
the current allocation percentages of net premiums to sub-accounts
107, the amount of policy 105, the age and risk classification of
the policy owner 101, the policy 105 anniversary date, and the loan
availability parameters of each sub-account 107. The module performs
the following calculations to determine the granting or denial of
the request for a non-disinvesting policy loan to pay the premium
policy 105, LP and provides instructions for the administrative
system 109. The check for premium loan request is calculated according
to:
[0084] If LP=0, then go to check for other loan request
[0085] Let PremALB %=increase in MALB per dollar of premium paid
by alternative (non-disinvesting) policy loan 4 PremALB % = ( 1
- % P ) * t = 1 n + g MLF t * % ALLOC t
[0086] Let MLP=maximum allowable alternative (non-disinvesting)
policy loan to pay premium
[0087] MLP=(MALB-ALB)/(1-PremALB %)
[0088] If LP.ltoreq.MLP then execute premium loan request; else
deny premium loan request
[0089] In one embodiment of the invention, the premium loan request
is executed by:
[0090] Let ALB.sup.new=alternative loan balance after the premium
loan
[0091] ALB.sup.new=ALB+LP
[0092] Process premium transaction for premium of LP
[0093] Go to check for other loan request
[0094] In the event the premium loan request is denied, neither
the loan request nor the premium transaction is processed. A letter
may be sent to policy owner 101 stating that the non-disinvesting
loan amount requested is unavailable, that the maximum alternative
loan available was MLP on the date that the request was processed,
and that this amount changes daily.
[0095] In another embodiment in which the request is for a non-disinvesting
policy loan to pay other than premium of the policy 105, LX, the
PM 115 takes the following information, among others, into account:
the final loan availability parameters for each sub-account, the
size of the non-disinvesting policy loan request, the amount of
any outstanding policy loans, the amount of cash value in each sub-account
107, the amount of policy 105, the age and risk classification of
the policy owner 101, the policy 105 anniversary date, and the loan
availability parameters of each sub-account 107. In a preferred
embodiment, the administrative system 109 determines the purpose
of the loan request before forwarding it to PM 115. In addition,
the final loan availability parameters for each sub-account may
be different depending on the purpose of the loan request. The invention
performs the following calculations to determine the granting or
denial of the request for a non-disinvesting policy loan to pay
other than the premium policy 105, LX. A check for another loan
request may be performed according to:
[0096] If LX=0 then go to end
[0097] Let MLX=maximum allowable alternative (non-disinvesting)
policy loan other than to pay premium
[0098] MLX=MALB-ALB
[0099] If LX.ltoreq.MLX then execute other loan request; else deny
other loan request
[0100] In one embodiment, executing the other loan request involves:
[0101] Let ALB.sup.new=alternative loan balances after the other
loan
[0102] ALB.sup.new=ALB+LX
[0103] Go to end
[0104] In the event the other loan request is also denied, the
loan request is not processed. A letter may be sent to policy owner
101 stating that the non-disinvesting loan amount requested is unavailable,
that the maximum alternative loan available was MLX on the date
that the request was processed, and that this amount changes daily.
[0105] In operation, a policy owner 101 of a variable insurance
contract requests for a non-disinvesting policy loan with his/her
insurance company. The administrative system of the insurance company
forwards the policy data and the sub-account data to the PM to grant
or deny the request. If the PM determines to grant the policy loan
request, the system signals the administrative system of such decision.
The PM continues to monitor the cash value of the sub-accounts daily
to ensure that is an adequate security for the policy loan. If necessary,
the PM would calculate the exact amount of the finds to be reallocated
among the sub-accounts. The PM would automatically, without reducing
the total finds in the sub-accounts, transfer the exact amount among
the sub-accounts. Furthermore, if the PM determines the reallocation
of funds among the sub-accounts are insufficient to provide adequate
security for the loan, the PM would instruct the administrative
system to initiate a transfer of some or the entire outstanding
non-disinvesting policy loan to a standard policy loan.
[0106] Referring now to FIG. 3, reinsurance conduit 301 comprises
a special purpose reinsurance vehicle (SPRV) according to one embodiment
of the invention. The SPRV 301 is a reinsurance entity specifically
established for the purpose of providing funds to a plurality of
carriers 303 offering the non-disinvesting policy loan program according
to embodiments of the invention, and managing the risks associated
with such a program. The primary risks are (1) the sufficiency of
the interest payments to cover the lender financing costs, and (2)
the adequacy of the collateral to repay the loan principal. The
processing module 115 has several inputs as described in FIG. 1,
or alternatively in FIG. 4. SPRV 301 will generally evaluate the
non-disinvesting policy loan program, its willingness to provide
additional funding, and any requirement to reduce or eliminate loan
funding based on the cost of funds, required capital, cost of any
hedging programs, and the loan spread available. The cost of hedging
programs includes any guarantees provided on the adequacy of collateral
(such as may be provided by an affiliate of the patent holder),
as well as options, futures, swaps and direct asset purchases to
minimize the likelihood of loss or to increase the overall security
of the program for the benefit of the lenders.
[0107] Reference character 305 refers to a set of agreements with
direct carriers 303 where the reinsurer, via SPRV 301, finances
the loans made by the direct carriers 303. Under the agreement,
direct carrier 303 grants certain rights to SPRV 301 to set parameters
for the non-disinvesting policy loan program. The agreement is generally
a full participation in the amounts reinsured, including the interest
charged, loan repayments, and the like. The SPRV 301 in this embodiment
reimburses expenses associated with the loans (e.g., licensing fees,
administration costs), usually on a formula basis.
[0108] At 307, SPRV 301 also enters into a set of agreements with
loan providers 125. These agreements typically specify a loan rate
formula or process, funding commitment (amounts and duration), and
orderly exit provisions. They also place restrictions on SPRV 301,
such as requiring hedging programs to be in place.
[0109] In the illustrated embodiment, SPRV 301 considers hedging
program asset purchases 309 at 311. They can include any number
and type of arrangements. One such arrangement is a stop-loss agreement
to protect carrier 303 against the insufficiency of the collateral
securing policy loans (e.g., if a loan's collateral falls below
the outstanding loan, the stop-loss pays the difference between
the net amount received from the separate accounts and the outstanding
loan balance including interest). This agreement may be net of other
hedges. Other arrangements may include the purchase of options on
equity indices, futures, direct investments, and interest rate instruments
such as caps, floors, and options.
[0110] At 313, PM 115 takes as input information on all of the
arrangements of SPRV 301 and provides recommendations on the security
for existing non-disinvesting policy loans and for approval of new
non-disinvesting policy loans, as well as recommendations regarding
purchase or sale of hedges. For example, the processing module 115
may limit the portion of the net available spread (after funding
costs) available to purchase certain hedges. After deciding on the
most effective hedges, the security may be considered more effective
than without the hedge purchase. PM 115 may map each sub-account
as a weighted average of indices, and use the correlation of the
indices to determine net exposures to the various indices.
[0111] FIG. 4 is a block diagram illustrating exemplary process
flow according to an alternative embodiment of the invention for
administering a non-disinvesting policy loan of a variable insurance
contract and maintaining funding in a plurality of sub-accounts
of the policy as a security for the policy loan. FIG. 4 illustrates
inputs for an evaluation module (such as PM 115) applicable when
financing is provided via a reinsurance program according to an
alternative embodiment of the invention. This takes advantage of
the utilization of hedges to either increase maximum available loans,
or to protect existing loans without requiring repayment and/or
asset reallocation.
[0112] Other embodiments of the system may use approaches based
on VAR and ETL-like methodologies to determine maximum loan amounts
based on, for example, covariance benefits amongst investment options
in the policy, required asset allocation/reallocation strategies,
the use of derivatives to hedge risk, other components in the insurance
product structure, and the time horizon for ultimate loan settlement.
[0113] Although described in connection with an exemplary computing
system environment, the invention is operational with numerous other
general purpose or special purpose computing system environments
or configurations. The computing system environment is not intended
to suggest any limitation as to the scope of use or functionality
of the invention. Moreover, the computing system environment should
not be interpreted as having any dependency or requirement relating
to any one or combination of components illustrated in the exemplary
operating environment. Examples of well known computing systems,
environments, and/or configurations that may be suitable for use
with the invention include, but are not limited to, personal computers,
server computers, hand-held or laptop devices, multiprocessor systems,
microprocessor-based systems, set top boxes, programmable consumer
electronics, mobile telephones, network PCs, minicomputers, mainframe
computers, distributed computing environments that include any of
the above systems or devices, and the like.
[0114] Embodiments of the invention may be described in the general
context of computer-executable instructions, such as program modules,
executed by one or more computers or other devices. Generally, program
modules include, but are not limited to, routines, programs, objects,
components, and data structures that perform particular tasks or
implement particular abstract data types. The invention may also
be practiced in distributed computing environments where tasks are
performed by remote processing devices that are linked through a
communications network. In a distributed computing environment,
program modules may be located in both local and remote computer
storage media including memory storage devices.
[0115] The order of execution or performance of the methods illustrated
and described herein is not essential, unless otherwise specified.
That is, elements of the methods may be performed in any order,
unless otherwise specified, and that the methods may include more
or less elements than those disclosed herein.
[0116] When introducing elements of the present invention or the
embodiment(s) thereof, the articles "a," "an,"
"the," and "said" are intended to mean that
there are one or more of the elements. The terms "comprising,"
"including," and "having" are intended to be
inclusive and mean that there may be additional elements other than
the listed elements.
[0117] In view of the above, it will be seen that the several objects
of the invention are achieved and other advantageous results attained.
[0118] As various changes could be made in the above constructions,
products, and methods without departing from the scope of the invention,
it is intended that all matter contained in the above description
and shown in the accompanying drawings shall be interpreted as illustrative
and not in a limiting sense.
[0119] APPENDIX A
[0120] R-Squared vs. Standard Index: R-squared ranges from 0 to
100 and reflects the percentage of a fund's movements that are explained
by movements in its benchmark index. An R-squared of 100 means that
all movements of a fund are completely explained by movements in
the index. Thus, index funds that invest only in S&P 500 stocks
will have an R-squared very close to 100. Conversely, a low R-squared
indicates that very few of the fund's movements are explained by
movements in its benchmark index. An R-squared measure of 35, for
example, means that only 35% of the fund's movements can be explained
by movements in its benchmark index. Therefore, R-squared can be
used to ascertain the significance of a particular beta or alpha.
Generally, a higher R-squared will indicate a more useful beta figure.
If the R-squared is lower, then the beta is less relevant to the
fund's performance.
[0121] Beta vs. Standard Index: Beta, a component of Modem Portfolio
Theory statistics, is a measure of a fund's sensitivity to market
movements. It measures the relationship between a fund's excess
return over T-bills and the excess return of the benchmark index.
Equity funds are compared with the S&P 500 index; bond funds
are compared with the Lehman Brothers Aggregate Bond index. Morningstar
calculates beta using the same regression equation as the one used
for alpha, which regresses excess return for the fund against excess
return for the index. This approach differs slightly from other
methodologies that rely on a regression of raw returns.
[0122] By definition, the beta of the benchmark (in this case,
an index) is 1.00. Accordingly, a fund with a 1.10 beta has performed
10% better than its benchmark index--after deducting the T-bill
rate--than the index in up markets and 10% worse in down markets,
assuming all other factors remain constant. Conversely, a beta of
0.85 indicates that the fund has performed 15% worse than the index
in up markets and 15% better in down markets. A low beta does not
imply that the fund has a low level of volatility, though; rather,
a low beta means only that the funds market-related risk is low.
A specialty fund that invests primarily in gold, for example, will
often have a low beta (and a low R-squared), relative to the S&P
500 index, as its performance is tied more closely to the price
of gold and gold-mining stocks than to the overall stock market.
Thus, though the specialty fund might fluctuate wildly because of
rapid changes in gold prices, its beta relative to the S&P may
remain low.
[0123] Alpha vs. Standard Index: Alpha measures the difference
between a fund's actual returns and its expected performance, given
its level of risk (as measured by beta). A positive alpha figure
indicates the fund has performed better than its beta would predict.
In contrast, a negative alpha indicates a fund has underperformed,
given the expectations established by the fund's beta. Some investors
see alpha as a measurement of the value added or subtracted by a
fund's manager. There are limitations to alpha's ability to accurately
depict a manager's added or subtracted value. In some cases, a negative
alpha can result from the expenses that are present in the fund
figures but are not present in the figures of the comparison index.
Alpha is dependent on the accuracy of beta: If the investor accepts
beta as a conclusive definition of risk, a positive alpha would
be a conclusive indicator of good fund performance. Of course, the
value of beta is dependent on another statistic, known as R-squared.
(Alpha, beta, and R-squared statistics are all provided on Morningstar.com.)
[0124] For Alpha vs. the Standard Index, Morningstar performs its
calculations using the S&P 500 as the benchmark index for equity
funds and the Lehman Brothers Aggregate as the benchmark index for
bond funds. Morningstar deducts the current return of the 90-day
T-bill from the total return of both the fund and the benchmark
index. The difference is called the fund's excess return. The exact
mathematical definition of alpha that Morningstar uses is shown
below:
Alpha=Excess Return-((Beta.times.(Benchmark-Treasury))
Benchmark=Total Return of Benchmark Index
Treasury=Return on Three-month Treasury Bill
[0125] Value at Risk (VAR): VAR summarizes the predicted maximum
loss (or worst loss) over a target horizon within a given confidence
interval.
[0126] Conditional Tail Expectation, or Expected Tail Loss (ETL),
is a refinement of the VAR methodology. The ETL is the expected
value of the loss given that a loss occurs in excess of VAR. |