Variable Universal Life Insurance Volatility Reduction via Target Unit Value
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Solution Overview
Problem
Existing methods for managing Bank-Owned Life Insurance (BOLI) and Corporate-Owned Life Insurance (COLI) products face volatility issues, which are costly and cumbersome to address using Stable Value wrap contracts, often reducing volatility more than necessary.
Innovation Solution
A method for administering a variable universal life insurance product with a volatility reduction feature, involving the creation of unsmoothed and smoothed subaccounts, where the smoothed subaccount's target unit value is calculated using a rate factor and moving average adjustments to determine the cash surrender value, offering a more nuanced volatility management approach.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Stability of the object's composition
If Stable Value wrap contracts are used to reduce volatility, then volatility is reduced, but cost and administrative complexity increase
Solution Approach 1:
The patent introduces a target unit value as an intermediary mechanism that mediates between the volatile actual unit values and the stable cash surrender value. This target unit value acts as a buffer, absorbing volatility through its calculation methodology (using minimum crediting rates and smoothing formulas) rather than requiring complex wrap contracts. The target unit value translates volatile market performance into stable policy values, resolving the contradiction by providing volatility reduction through a simpler administrative structure.
Solution Approach 2:
The patent changes the parameter used to determine cash surrender value from direct reliance on actual unit values to reliance on target unit values. This parameter change transforms the volatility characteristic of the investment account into a stable cash surrender value by using minimum crediting rates and smoothing calculations in the target unit value determination process, thereby reducing volatility without requiring complex wrap contract structures.
2Stability of the object's composition
If Stable Value wrap contracts are used to reduce volatility, then volatility is reduced, but cost increases
Solution Approach 1:
The target unit value serves as a cost-effective intermediary that achieves volatility reduction without the high costs associated with wrap contracts. By using a calculation-based approach (minimum crediting rates, smoothing formulas) rather than contractual guarantees requiring complex administration and insurance, the system achieves similar volatility reduction at lower cost.
Solution Approach 2:
The patent replaces expensive, complex wrap contract structures with a simpler, calculation-based target unit value mechanism. This simpler mechanism achieves the essential function of volatility reduction through mathematical smoothing rather than costly contractual arrangements, effectively substituting a low-cost computational approach for high-cost contractual solutions.
3Stability of the object's composition
If Stable Value wrap contracts are used, then volatility is reduced more than needed, but this excessive reduction is not always desirable
Solution Approach 1:
The target unit value mechanism is dynamic and adaptable, allowing the degree of smoothing to be adjusted through different minimum crediting rates and smoothing formula parameters. Unlike rigid wrap contracts that provide fixed levels of volatility reduction, the target unit value can be tuned to provide appropriate smoothing for different policy types, market conditions, and risk tolerances, enabling flexible adaptation to varying needs.
Solution Approach 2:
The patent enables flexible control over volatility reduction by changing parameters in the target unit value calculation, such as minimum crediting rates and smoothing periods. These parameter adjustments allow the system to provide different degrees of smoothing as needed, rather than the all-or-nothing approach of wrap contracts, thereby adapting to varying volatility reduction requirements.
Data Source
AI summary
A method and system of administering a financial product having a volatility reduction feature comprises providing a life insurance policy having a cash surrender value, creating at least one subaccount associated with the policy, storing a number of accumulation units associated with the subaccount, storing a plurality of accumulation unit values, calculating an average of stored accumulation unit values and using the average to determine a target unit value. The surrender value of the subaccount is periodically determined by multiplying the number of accumulation units by the target unit value. The surrender value of the subaccount is used to periodically determine the cash surrender value of the insurance policy.