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Insurance Abstract
The present invention relates to methods, apparatuses and computer
readable media for facilitating the creation of a forward contract
on an insurance policy.
Insurance Claims
1. A method for facilitating the creation of a forward contract
for an insurance policy, said method comprising the acts of: providing
a first entity with a put option to transfer an interest in the
insurance policy to another at a predetermined future date; and
receiving consideration from the first entity; wherein said first
entity acquired the interest in the insurance policy from a second
entity other than an issuer of the insurance policy.
2. The method defined by claim 1, wherein the issuer is obligated
to pay a benefit under the insurance policy upon an occurrence of
a predetermined event.
3. The method defined by claim 2, wherein the predetermined event
is the death of an individual.
4. The method defined by claim 3, wherein the individual is at
least sixty-five years of age.
5. The method defined by claim 4, wherein the individual is no
more than eighty-five years of age.
6. The method defined by claim 1, wherein the consideration includes
a cash payment.
7. The method defined by claim 2, further comprising the act of
assigning a value for the put option that is to be used as a basis
for determining the consideration to be received from the first
entity, the value being a function of at least (i) a total cost
of expenses associated with maintaining the put option until the
predetermined future date, (ii) a total cost of expected insurance
premiums to be paid subsequent to the predetermined future date,
and (iii) the benefit to be paid under the insurance policy upon
the occurrence of the predetermined event.
8. A method for facilitating the creation of a forward contract
for an insurance policy, said method comprising the acts of: receiving
a put option to transfer an interest in the insurance policy to
another at a predetermined future date, the interest in the insurance
policy having already been acquired from a first entity other than
an issuer of the insurance policy; and providing consideration in
exchange for the put option.
9. The method defined by claim 8, wherein the issuer who is obligated
to pay a benefit under the insurance policy upon an occurrence of
a predetermined event.
10. The method defined by claim 9, wherein the predetermined event
is the death of an individual.
11. The method defined by claim 10, wherein the individual is at
least sixty-five years of age.
12. The method defined by claim 11, wherein the individual is no
more than eighty-five years of age.
13. The method defined by claim 8, wherein the consideration includes
a cash payment.
14. The method defined by claim 9, further comprising the act of
assigning a value for the put option that is to be used as a basis
for determining the consideration to be received from the entity,
the value being a function of at least (i) a total cost of expenses
associated with maintaining the put option until the predetermined
future date, (ii) a total cost of expected insurance premiums to
be paid subsequent to the predetermined future date, and (iii) the
benefit to be paid under the insurance policy upon the occurrence
of the predetermined event.
15. A computer-readable storage medium comprising instructions
to facilitate the creation of a forward contract for an insurance
policy, the instructions being executable by a computer having a
memory to store said instructions and to perform the following acts:
calculating a value for a put option to transfer an interest in
the insurance policy to another at a predetermined future date,
the interest in the insurance policy having already been acquired
from a first entity other than an issuer of the insurance policy,
the value being a function of at least (i) a total cost of the expenses
associated with maintaining the put option until the predetermined
future date, (ii) a total cost of the expected insurance premiums
to be paid subsequent to the predetermined future date, and (iii)
a total benefit to be received under the insurance policy upon an
occurrence of a predetermined event that triggers a right to said
benefit; storing said value in said memory; outputting said value
in a human-readable form.
16. The computer-readable storage medium defined in claim 15, wherein
said predetermined event is the death of an individual.
17. An apparatus for facilitating the creation of a forward contract
for an insurance policy, said apparatus comprising: a memory storing
data; and a computer being coupled to said memory, said computer
being programmed to access said memory, to retrieve a portion of
the data relating to the insurance policy, to calculate a value
for a put option to transfer an interest in the insurance policy
to another at a predetermined future date, to store said value in
said memory, and to output said value in a human-readable form;
wherein the interest in the insurance policy has already been acquired
from a first entity other than an issuer of the insurance policy;
and wherein the value is a function of at least (i) a total cost
of the expenses associated with maintaining the put option until
the predetermined future date, (ii) a total cost of the expected
insurance premiums to be paid subsequent to the predetermined future
date, and (iii) a total benefit to be received under the insurance
policy upon an occurrence of a predetermined event that triggers
a right to the benefit.
18. The apparatus defined in claim 17, wherein said predetermined
event is the death of an individual.
19. A method for facilitating the creation of a forward contract
for a life insurance policy, said method comprising the acts of:
providing a first entity with a put option to transfer an interest
in the life insurance policy to another at a predetermined future
date, the life insurance policy being issued by a second entity
that is obligated to pay a benefit under the insurance policy upon
the death of an individual; and receiving consideration from the
first entity; wherein said first entity acquired the interest in
the insurance policy from a third entity other than an issuer of
the insurance policy.
20. The method defined by claim 19, wherein the individual is at
least sixty-five years of age.
21. The method defined by claim 20, wherein the individual is no
more than eighty-five years of age.
22. The method defined by claim 19, wherein the consideration includes
a cash payment.
23. The method defined by claim 19, further comprising the act
of assigning a value for the put option that is to be used as a
basis for determining the consideration to be received from the
first entity, the value being a function of at least (i) a total
cost of expenses associated with maintaining the put option until
the predetermined future date, (ii) a total cost of expected insurance
premiums to be paid subsequent to the predetermined future date,
and (iii) the benefit to be paid under the insurance policy upon
the death of the individual.
24. A method for facilitating the creation of a forward contract
for a life insurance policy, said method comprising the acts of:
receiving a put option to transfer an interest in the life insurance
policy to another at a predetermined future date, the interest in
the insurance policy having already been acquired from a first entity
other than an issuer of the insurance policy, the issuer being obligated
to pay a benefit under the insurance policy upon the death of an
individual; and providing consideration in exchange for the put
option.
25. The method defined by claim 24, wherein the individual is at
least sixty-five years of age.
26. The method defined by claim 25, wherein the individual is no
more than eighty-five years of age.
27. The method defined by claim 24, wherein the consideration includes
a cash payment.
28. The method defined by claim 24, further comprising the act
of assigning a value for the put option that is to be used as a
basis for determining the consideration to be received from the
entity, the value being a function of at least (i) a total cost
of expenses associated with maintaining the put option until the
predetermined future date, (ii) a total cost of expected insurance
premiums to be paid subsequent to the predetermined future date,
and (iii) the benefit to be paid under the insurance policy upon
the death of the individual.
Insurance Description
CROSS REFERENCE TO RELATED PATENT APPLICATIONS
[0001] This patent application is a continuation-in-part of U.S.
Non-Provisional Utility patent application Ser. No. 11/370,831,
entitled "Methods, Apparatuses and Computer Readable Media
for Facilitating the Creation of a Forward Contract for an Insurance
Policy", filed Mar. 9, 2006, the disclosure of which is herein
specifically incorporated in its entirety by reference.
TECHNICAL FIELD
[0002] The present invention relates to methods, apparatuses and
computer readable media for facilitating the creation of a forward
contract for an insurance policy, which may be a life insurance
policy.
RELATED ART
[0003] There is a secondary market in which investors acquire an
interest in insurance policies, and in particular life insurance
policies, from existing insurance policy holders. The practice of
acquiring an interest in life insurance policies from an insured
individual for investment purposes is generally referred to as a
viatical settlement or life settlement. The viatical settlement
is typically associated with the acquisition of an interest in a
life insurance policy from a life insurance policy holder suffering
from a serious or terminal illness. By consummating the transaction,
the policy holder receives an up front cash payment from an investor
for medical or other expenses in exchange for an interest in his
or her life insurance. The method for determining the price at which
a settlement may be achieved varies depending upon the needs of
the investor. One such methodology is disclosed in U.S. Pat. No.
6,393,405, which is incorporated herein by reference. Upon the insured
individual's death, the investor would receive payment from the
insurer that issued the life insurance policy in accordance with
the death benefit specified under the policy. Of course, there are
many more individuals who might be amenable to transferring an interest
in a life insurance policy that they hold who are not seriously
or terminally ill and a growing life settlement market has emerged
to facilitate their needs.
[0004] Healthy insured individuals often acquire life insurance
policies based on a given set of assumptions that may change over
time in a manner that obviates or reduces the need to be insured
on an ongoing basis. By way of example, the major bread winner of
a family may seek to acquire a death benefit that permits his or
her family to maintain a certain standard of living and to pay for
college expenses for children in the event of an untimely death.
At some point, however, the mortgage may be paid off and the children
may graduate from college such that there is no longer a need for
the insured to maintain the insurance. Another example, would be
a business owner who wants to ensure that there is continuity in
the business that they own upon their death. If the business owner
sells or otherwise disposes of their business, then there may not
be a need to maintain the insurance policy going forward. Under
those situations, the insured individual traditionally has had very
few options. The insured individual could tender the life insurance
policy to the insurance company from which it was procured for its
cash surrender value, which is often very low. Alternatively, the
insured individual may simply let the insurance policy lapse by
not paying the appropriate premiums. Neither of those traditional
options are satisfactory, given that the insured may have paid insurance
premiums for years. Another approach has been to sell an interest
in the insurance policy to an investor, who will receive the death
benefit, or a portion thereof upon the death of the insured individual.
Even this approach, however, does not afford an individual with
the opportunity to anticipate ahead of time that his circumstances
might change in a way that would obviate or reduce the need for
life insurance, and to account for that in his or her financial
planning. Therefore, what is needed is a more flexible approach
to the transfer of interests in life insurance policies.
SUMMARY OF THE INVENTION
[0005] In accordance with an exemplary embodiment of the invention,
a method is provided for facilitating the creation of a forward
contract for an insurance policy. The method includes the acts of
providing a first entity with a put option to transfer an interest
in the insurance policy to another at a predetermined future date
and, in exchange, receiving consideration from the first entity.
The insurance policy is issued by a second entity that is obligated
to pay a benefit under the insurance policy upon an occurrence of
a predetermined event, such as the death of an individual. The method
may also include assigning a value for the put option that is to
be used as a basis for determining the consideration to be received
from the first entity, the value being a function of at least (i)
a total cost of expenses associated with maintaining the put option
until the predetermined future date, (ii) a total cost of expected
insurance premiums to be paid subsequent to the predetermined future
date, and (iii) the benefit to be paid under the insurance policy
upon the occurrence of the predetermined event.
BRIEF DESCRIPTION OF THE DRAWINGS
[0006] FIG. 1 is a block diagram showing the steps of an embodiment
of the present invention.
[0007] FIGS. 2A and 2B are diagrams of entities interacting in
a manner to implement embodiments of the present invention.
[0008] FIG. 3 is a block diagram of an overall system that can
be used to implement embodiments of the present invention.
DETAILED DESCRIPTION OF EMBODIMENTS OF THE INVENTION
[0009] The present invention relates to methods, apparatuses and
computer readable media for facilitating the creation of a forward
contract for an insurance policy, and in particular a life insurance
policy. The use of a forward contract to provide a put option for
the acquisition of an interest in a life insurance policy should
comply with all state and federal laws and regulations. For example,
most states have viatical or life settlement laws that regulate
the purchase and sale of life insurance in the secondary market.
Essentially, entities that acquire life insurance in the secondary
market in certain states need to be licensed and are subject to
state insurance regulations. Therefore, it may be mandatory that
an investor (or other put option provider) either be a licensed
provider or, preferably, have an appropriate agreement in place
with a licensed settlement provider.
[0010] A method of an embodiment of the present invention is described
with reference to FIG. 1. In a first step 100 of the method, an
individual enters into a forward contract for a put option in connection
with a transfer of an interest in a life insurance policy at a future
date and for a price certain. The interest transferred in the life
insurance policy may be the whole or something less than the whole.
As a result of receiving the option, the individual obtains a put
option to receive a sum certain payout, exercisable on a date certain
in exchange for some consideration, such as an up-front cash payment
and/or some other asset such as stocks or bonds. The individual
is, in essence, buying an option on his own life. The longer the
individual lives and the healthier he is, the more valuable the
option is to the insured individual. In a second step 110, the individual
decides to exercise the put option and delivers a put option notice
to the investor or other put option provider. The put option notice
includes all paperwork required to execute a life settlement agreement,
including any required medical consents and continued contact agreements
to ensure proper monitoring for the life of the holder of the put
option after it has been exercised.
[0011] In a third step 120, the investor, who is in this instance
the life settlement provider, buys the life insurance policy (in,
for example, a conventional life settlement transaction) from the
owner who sells the insurance policy at the pre-determined price
and continues to report, track and monitor events relevant to the
life insurance policy on behalf of the financing entity. If the
individual lives past age ninety-five then the extension risk cover
is triggered and there is a cash in-flow to the financing entity.
[0012] FIG. 2A shows certain entities whose activities are relevant
to the implementation of the present invention. Process flows are
shown in FIG. 2A as solid lines and fund flows are shown therein
as dotted lines. The insured individual 200 completes the insurance
application, including identifying the appropriate beneficiary,
and submits 222 it to the insurance company 220. The insurance company
220 issues 224 a policy covering the life of the insured and collects
226 any premiums associated with the insurance policy. The insurance
company 220 also manages policy accounts, reports to the insured
(or owner of the insurance policy) on at least an annual basis.
In addition, the insurance company 220 must pay 228 the cash surrender
value of the insurance policy at any time upon surrender of the
policy by the owner or must pay the net death benefit to the stated
beneficiaries of the life insurance contract upon proof of death
of the insured.
[0013] A life settlement provider 240 engages in the business of
viatical or life settlements. The life settlement provider 240 negotiates
with sellers or life settlement brokers and executes purchase and
sale agreements (and related documents) to acquire interests in
life insurance policies from the insured or owner of the policy.
The life settlement provider 240 takes title to the insurance policy
and reports to state insurance departments to comply with legal
and regulatory obligations. Once the life settlement provider 240
takes title to the insurance policy, the life settlement provider
240 must provide 242 proof of ownership of the insurance policy
upon the death of the insured individual 200 in order to receive
244 the net death benefit provided under the insurance policy. In
addition, the life settlement provider 240 exchanges 246 consideration
in return 248 for the right to receive the net death benefit under
the insurance policy upon the death of the insured individual 200.
[0014] The life settlement provider 240 may sell 252 the insurance
contract to a financing entity 260 via, for example, a US based
trust arrangement. The financing entity 260 provides 262 capital
to the life settlement provider 240 to purchase insurance policies
and as a result may get the net death benefit (or a portion thereof)
upon the death of the insured individual.
[0015] A put option provider 270 (or an agent thereof) may work
with the settlement provider 240 and other parties to facilitate
a transaction involving a put option on the transfer of an interest
in an insurance policy. The life settlement provider 240 may perform
some or all of the functions of the put option provider 270. The
direction of the transfer of consideration pursuant to the exchange
246 of consideration will depend upon who is financing the acquisition
of the insurance policy. If the life settlement provider 240 is
financing the acquisition of the life insurance policy, then the
consideration will be transferred to the put option provider 270
from the life settlement provider 240 and the life settlement provider
240 will receive the net death benefit (or some portion thereof).
Alternatively, if the put option provider 270 is financing the acquisition
of the insurance policy, then the consideration will flow to the
life settlement provider 240 from the put option provider 270 so
that the life settlement provider 240 can obtain title to the insurance
policy (not shown) from the insured individual 200. In that instance,
the put option provider 270 will receive the net death benefit (or
some portion thereof).
[0016] The put option provider 270 issues 272 a put option to the
insured individual 200 (or the insurance policy owner or related
trust) and receives 274 cash or some other consideration from the
insured individual 200 in return. The put option provider 270 also
pays 276 a sum certain to the insured individual 200 at a pre-determined
date upon receipt 278 of the put option notice and related documentation.
Accordingly, the put option provider 270 receives cash up front
in exchange for a contingent obligation to pay a sum certain on
the put option date. It is preferable to offer a put option to any
holder of a life insurance contract over the age of sixty-five.
It is also preferred to offer a put option to a holder who is less
than the age of eighty-five.
[0017] Preferably, the put option provider 270 should be credit
worthy and willing to take on a long term obligation. A preferred
minimum put period is five years, with a preferred average put period
being ten years. The financing entity 260 may provide 280 capital
or credit enhancements to the put option provider 270 and receive
282 in exchange the right to receive either the whole or some portion
of the proceeds of the net death benefit upon death of the insured
individual 200 less any expenses charged by the put option provider
270.
[0018] Preferably, the put option provider 270 should acquire extension
risk coverage to cover individuals that live past the age of ninety-five.
This is useful because even though the probability of survival past
age ninety-five is small, the premiums are expensive at that age.
More importantly, the capital markets generally do not want to extend
coverage for too long a period of time and eliminating the uncertainty
of the post age ninety-five segment makes it easier to model cash
flows. Thus, a life reinsurer, or contingency insurance provider
290 may be useful in instances where the insured individual 200
may live past age ninety-five. The life reinsurer, or contingency
insurer 290 provides 292 extension risk coverage with respect to
such an individual 200 in exchange for premiums paid 294 by the
put option provider 270. In addition, the life reinsurer 290 may
also provide 296 capital or credit enhancement to the put option
provider 270. In fact, a life reinsurer 290 is a likely entity to
fund a forward contract for a put option on a life insurance policy
because they are used to long duration products and use actuarial
forecasting extensively.
[0019] One of the current impediments to the securitization of
life settlement backed bonds is the extension risk associated with
individuals living past statistical averages for life spans. As
noted above, premiums on permanent insurance policies (e.g., universal
life) increase dramatically for individuals of advanced ages. Many
entities that have aggregated policies in the past have done so
without the benefit of adequate extension risk insurance coverage.
The present invention enables existing policy holders, who have
acquired their interests in insurance policies on the secondary
market, to access cheaper capital by showing guaranteed cash inflows
at predetermined dates based on the acquisition of put options on
the insurance policies from other entities, such as the put option
provider 270. Thus, for example, policy holders that have acquired
an interest in an insurance policy from another and that have poorly
estimated their extension risk coverage would be able to buy put
options to ensure inflows sufficient to mitigate the risk that their
pools of insurance policies would be unable to generate significant
cash to fund escalating premiums. The use of the present invention
would also allow low cost capital providers to participate in the
life settlement secondary market as rating agencies that would be
able to better model cash flows using monte carlo simulation models
which simply assume that option cash inflows would result should
individuals live longer than anticipated, rather than run cash outflows
for indeterminate periods with escalating premiums.
[0020] FIG. 2B shows certain entities whose activities are relevant
to the implementation of an embodiment of the present invention
in which an interest in an insurance policy is acquired from a policy
holder 2000 that has acquired its interest in the insurance policy
in the secondary market. Only the manner in which FIG. 2B differs
from FIG. 2A will be described in detail. The policy owner 2000
may be any entity that acquires 2010 an interest in the insurance
policy from the insured individual 200 or from some other entity
other than the issuer of the insurance policy, which is the insurance
company 220. By way of example, the policy holder 2000 may be a
life settlement provider, put option provider, financing entity
(such as a hedge fund), or a trust (e.g., an irrevocable life insurance
trust or an estate planning trust set up by an insured individual).
Trusts are particularly advantageous, as these vehicles are commonly
set up by insured individuals to hold interests in life insurance
policies. In exchange for the interest in the insurance policy,
the policy holder provides 2020 the insured individual 200 with
consideration (including cash and/or some other assets, such as
stocks or bonds). Thereafter, the put option provider 270 (or life
settlement provider 240) acquires 2030 the interest in the insurance
policy (or some portion thereof) from the policy owner 2000 in exchange
2040 for some consideration (including cash and/or some other assets,
such as stocks or bonds).
[0021] Another aspect of the present invention relates to the techniques
employed to determine the price for a put option for the transfer
of an interest in a life insurance policy at some date certain in
the future. These same techniques could be used for insurance policies
held by policy holders who have acquired their interests in the
insurance policies on the secondary market from entities other than
the issuer of the insurance policies. The price of the option may
be calculated based on, for example, a sum certain payout for the
insured individual 200 (or entity that owns life insurance covering
the life of an individual) that is, for example, age sixty-five
or older. The price of the option may also take into consideration,
for example, the expected mortality of the insured individual 200,
the cost to maintain the insurance contract, an assumed cost of
capital and the cost of extension risk insurance. The price of the
option may be indifferent to the health status of the insured individual
200, though the entity acquiring the insurance policies may well
earn better returns on an insured individual 200 whose health has
deteriorated since acquiring the life insurance.
[0022] Certain information relating to the insured individual 200
may be gathered to facilitate the present invention. This information
may include, for example, the following information: the age of
the insured individual 200, the rating at issue date, the sex of
the insured individual 200, the smoker status of the insured individual
200, the type of insurance policy, the amount of the insurance policy,
the premium at the issue date of the insurance policy, the expiration
date of the insurance policy, the interest and crediting rates within
policy, the cost of insurance tables and any applicable surrender
charges. The gathered information may then be used to determine
a price for the option in a manner that will factor in assumptions
and determine the future value of the insurance contract in the
secondary market at certain dates (i.e., put option dates). The
pricing techniques used in conjunction with the present invention
may assume certain conditions, including for example, that the health
status of the insured individual does not deteriorate, that some
percentage of the insured individuals who pay for the put option
benefit will not exercise their options and that the underlying
mortality will improve somewhat throughout the option period. Preferably,
the pricing methodology will model the percentage of insured individuals
who will not exercise the option including those who die before
the put option date, those whose health or family circumstances
have recently changed making the insurance more valuable to the
family without the option and those who simply prefer to keep the
insurance in force at the put option date for family and/or estate
planning reasons.
[0023] In assessing the put option pricing, the put option provider
270 should project the future cost to maintain insurance in force
from the put option date to the date of death of the insured individual,
and preferably this should be accomplished by using standard mortality
tables to make assumptions and build in mortality improvements (e.g.,
the insured individual 200 may live a year, but only pay for nine
months of that year). Standard mortality tables are well-known in
the art. By way of example, the Individual Life Insurance Valuation
Mortality Task Force of the Society of Actuaries published the 2001
Valuation Basic Mortality Table (2001 VBT), which is well known
in the art and it may be employed in connection with the present
invention.
[0024] In accordance with the present invention, the price or policy
holder option value (POV) at the time of offering may be determined
using the following formulas: Face=Policy Face Amount
[0025] PY=Policy Year (measured from time of issuance of insurance
policy)
[0026] IA=Issue Age (age of insured at time of insurance policy)
[0027] AA=Attained Age=IA+PY-1
[0028] q.sub.2001VBT(AA)=Attained Age (based on, for example, 2001
VBT Mortality)
[0029] fac=mortality adjustment factor (user assigned value assessment
of mortality improvements)
[0030] q.sub.e(AA)=Attained Age Expected Mortality=.sub.q2001VBT(IA+PY-1).times.
fac
[0031] q.sub.w(AA)=Insurance Policy Lapse Rate (rate is a percentage
and is a user assigned value)
[0032] INF.sub.AA=Percentage of Policies Inforce at Attained Age=INF.sub.AA-1.times.(1-q.sub.w(AA-1)).times.(1.times.q.sub.e(AA-1))
[0033] INF.sub.IA=1
[0034] Opq.sub.w(AA)=Option Lapse Rate (rate is a percentage and
is a user assigned value)
[0035] OpINF.sub.AA=Percentage of Options Inforce at Attained Age=OpINF.sub.AA-1(1-Opq.sub.w(AA-1))
[0036] OPINF.sub.IA=1
[0037] OpChg.sub.AA=Attained Age Option Charge to Policyholder
[0038] OpExp.sub.AA=Attained Age Option Expenses
[0039] NOpChgAA=Attained Age Net Annual Charge for Policy Option=(OpChg.sub.AA-OPExp.sub.AA).times.OpINF.sub.AA
[0040] OpInt=Interest Rate to Accumulate Option Charges
[0041] AccOpChg.sub.AA=(AccOpChg.sub.AA-1+NOpChg.sub.AA).times.(1+OpInt)
[0042] OED=Date when Option is to be exercised
[0043] IIF.sub.AA=Percentage of Attained Age Policies In-force
after Option Exercised and Investors own Policy
[0044] IIF.sub.AA=IIF.sub.AA-1.times.(1-q.sub.e(AA-1))
[0045] IIF.sub.AA=0 for AA<OED
[0046] IIF.sub.OED=OPINF.sub.OED.times.INF.sub.OED
[0047] Prem.sub.AA=Attained Age Policy Premiums (to be paid by
acquirer of insurance policy after OED)
[0048] IPrem.sub.AA=Investor Paid Premiums=IIF.sub.AA.times.Prem.sub.AA
[0049] DB.sub.AA=Attained Age Death Benefits=q.sub.e(AA).times.Face.times.IIF.sub.AA
[0050] Fexp.sub.AA=Attained Age Facility Expenses (to be paid by
acquirer of insurance policy after OED)
[0051] IR=Investor Expected Return POV OED = Policyholder .times.
.times. Option .times. .times. Value .times. .times. at .times.
.times. .times. OED = t = 1 OED .times. [ NOpChg t .times. ( 1 +
OpInt ) OED - ( t - 1 ) ] + t = OED .infin. .times. [ DB t - ( Prem
AA + Fexp AA ) ( 1 + IR ) t + 1 - OED ]
[0052] POV=Policyholder Option Value at Offering=POV.sub.OED/IIF.sub.OED
[0053] The above-identified data and formulas facilitate calculation
of the price to pay a policy holder for their insurance coverage
at a future specified date. Certain assumptions underlie the use
of these data and formulas, but these assumptions may vary depending
on the investment priorities of the investor. One assumption is
the target return rate that the investor will earn on the policy
cash flows from the date that the policy holder sells his or her
policy to the investor or an investment vehicle or facility owned
and/or operated by the investor. Another assumption is the accumulation
rate for net option premiums, which is the interest rate the investor
will earn on the net proceeds (gross amount less commissions) received
from policyholders who purchase the option. The net premiums are
accumulated up until the option date, then those amounts are used
to offset the amount paid to the policyholder who is exercising
their option. This accumulation of net premiums paid is therefore
factored into the target return for investors.
[0054] Additional assumptions which may also impact the above-referenced
calculations, include the mortality rate, the lapse rate, the option
lapse rate, the option exercise rate and the paid premium rate.
With regard to the mortality rate, the higher the mortality, the
fewer the number of individuals who will be living to the option
date, and the higher the option value is to the policy holder. The
lapse rate is that which is experienced by insurance companies.
Higher lapse rates means that fewer individuals will be in a position
to exercise a put option, which means that the put option will have
a higher option value to the policyholder. The lapse assumption
is not used once the investor takes over a policy. The option lapse
rate is the rate at which policyholders lapse the option that they
purchased by not paying the renewal option premiums. This assumption
is a gross rate and incorporates deaths as well as voluntary lapses.
Again, the higher the option lapse rate is set, then the fewer the
number of individuals who will be in a position to exercise the
put option and the higher the calculated option value will be to
the policy holder. The option exercise rate is the percentage of
eligible put option holders who actually decide to exercise their
option and sell their policy instead of holding on to it. The lower
the option exercise rate is set, then the fewer the number of individuals
that will exercise the option and the higher the calculated option
value will be to the policy holder. The paid premium rate is set
at 90% of the expected mortality. A higher paid premium rate will
lead to greater future costs to the investor to maintain the insurance
policy, which reduces the amount that can be paid for the option.
A lower paid premium rate will have just the opposite effect. The
foregoing assumptions may be augmented or changed without departing
from the invention.
[0055] The present invention may be aided and or implemented with
the use of a computer system 300, as shown in FIG. 3. The computer
system 300 includes at least one computer 305 having one or more
processors (not shown) coupled to memory (not shown). The computer
305 may be accessible to a user directly or indirectly via one or
more networks, such as a local area network, wide area network,
wireless network, or the Internet. If the computer 305 is directly
accessible, the user may interact with the computer 305 via input
output devices (not shown), such as a keyboard, mouse or trackball.
In addition, the computer 305 may have a display 307, such as a
monitor, LCD display or plasma display, which displays information
to the user. The computer 305 may also be coupled to a printer (not
shown) for printing information. The computer 305 stores in memory
the software (and corresponding data) that is used to assist with
or implement the present invention. Also stored in the memory of
the computer 305 are the data relied upon by the software application
of the present invention. The computer 305 may be coupled to a database
310 (or multiple databases), such as a relational database. The
database 310 may store information relating to insured individual(s),
insurance policies, financial data and actuarial data. By way of
example, the database 310 may reside on the computer 305 or may
be on a database server (not shown) that is accessible via one or
more networks. Software applications may be stored on various electronic
media, such as hard drives, optical drives, floppy disks, flash
memory, random access memory, read only memory, or other computer
readable media known in the art.
[0056] An embodiment of the present invention may be assisted or
implemented with the use of a software application (or applications)
contained in a computer readable medium. In particular, software
is provided which facilitates the calculations of the option values
already discussed using the formulas indicated above or those substantially
similar to those formulas. The display 307 may be used to display
the results of calculations used to implement the pricing methodology
of the present invention. In a preferred embodiment, the policy
holder option value calculations may be facilitated using the above
referenced formulas in a spreadsheet application, such as Microsoft
Excel, running on the computer 305.
[0057] Although different embodiments of the present invention
have been discussed, those skilled in the art will appreciate that
variations may be made thereto without departing from the principles
of the present invention. Although the preferred embodiment has
been described to include a number of features, an apparatus, method
and computer readable medium may be designed which does not include
all of those features, and yet still fall within the spirit and
scope of the present invention. |