Mortality Cash Flow Swap for Predictable Insurance Funding
Find Innovative SolutionsGenerate Solutions
Solution Overview
Problem
Entities with future actual mortality cash flows face uncertainty in timing and amount, such as corporations using corporate-owned life insurance (COLI) or bank-owned life insurance (BOLI) as funding vehicles, requiring more predictable cash flows, which existing generic benefit index pricing in P&C insurance derivatives cannot effectively manage due to variability in mortality and other benefit occurrences.
Innovation Solution
A financial derivative structured as a 'Swap' is used, where actual mortality or other cash flows are exchanged for expected cash flows, with specific terms tailored to the underlying plan or policies, allowing for regular net settlements and incorporating counterparty fees, potentially involving reinsurers or original insurers, and potentially including a portion of mortality risk retention by the policy beneficiary.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Ease of manufacture
If generic benefit index pricing is used in P&C insurance derivatives, then the pricing process is simplified, but the ability to effectively manage mortality risk is insufficient due to high variability in actual mortality results
Solution Approach 1:
The patent applies local quality by transitioning from generic benefit index pricing to customized pricing models that are specifically tailored to each life insurance policy's unique characteristics. The system calculates individualized expected cash flows based on the specific policy terms, mortality assumptions, and actuarial data for each policy, thereby addressing the high variability in actual mortality results with precision tailored to each local case.
Solution Approach 2:
The patent employs parameter changes by dynamically adjusting the pricing parameters based on actual mortality experience and policy-specific factors. The system continuously updates expected cash flow projections by incorporating actual mortality results, policy anniversaries, and changing actuarial assumptions, transforming static generic pricing into dynamic parameter-adjusted pricing that adapts to real-world conditions.
2Reliability
If actual mortality cash flows are used, then the cash flows reflect real mortality experience, but the timing and amount of cash flows become uncertain and irregular
Solution Approach 1:
The patent implements feedback mechanisms by continuously comparing actual mortality cash flows against expected cash flows and using this feedback to adjust future projections. The system monitors actual mortality experience, calculates variances from expected outcomes, and incorporates these feedback loops into ongoing cash flow management, enabling more accurate predictions and stable financial planning despite the inherent variability in actual mortality events.
Solution Approach 2:
The patent applies preliminary action by calculating and preparing expected cash flow projections in advance based on actuarial assumptions and policy terms. These pre-calculated expected cash flows serve as benchmarks and planning tools, allowing organizations to prepare for future cash flow needs before actual mortality events occur, thereby stabilizing financial planning despite the uncertainty of actual timing and amounts.
3Stability of the object's composition
If a Swap contract is structured to exchange actual cash flows for expected cash flows, then cash flow predictability is improved, but the complexity of the financial derivative increases
Solution Approach 1:
The patent applies segmentation by breaking down the complex Swap contract into manageable components, including separate calculations for expected cash flows, actual cash flows, and net settlement amounts. The system divides the Swap into discrete policy-level transactions, allowing each component to be calculated and managed independently, thereby reducing overall contractual complexity while maintaining cash flow predictability.
Solution Approach 2:
The patent employs intermediary calculations and processing systems that act as mediators between the complex Swap contract requirements and the underlying mortality data. The system uses intermediate expected cash flow projections and variance calculations as bridge elements, simplifying the interaction between parties and making the complex Swap structure more manageable through standardized computational layers.
Data Source
AI summary
A method implemented with a machine, the machine, and the method for using the machine, and products produced thereby, the method including using a digital electronic computer having a processor programmed for electronically processing input data into output data, the computer electronically connected to an input device and to output devices, for calculating expected and projected results of assumptions related to specific contractual exposures (either underlying plans of insurance or reinsurance, or contractual insurable risk exposure to individuals, or corporate contractual benefit payment exposures to individuals), maintaining and storing such calculations, periodically comparing the expected and projected results to actual occurrences results as inputted into the computer, calculating the differences between actual and projected results and preparing reports of the results of the calculations.