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wat?
07-06-2007, 07:39 PM
Ok, maybe I was tired at the time of doing the notes, but I came across the "gross-up rule" and it just threw me off.

Do you increase or decrease the interest rate to account for implicit mortality charges? It's decrease, isn't it? Or is it increase? (I think "interest rate" refers to the "crediting rate".)
inexactuary
07-09-2007, 12:32 PM
It's increase. The net rate product design has no explicit mortality charges but instead credits a lower interest rate. The guaranteed rate on this type of contract also implicitly guarantees an additional amount equal to the foregone mortality charges. So if the guaranteed rate is 4% and the implicit COI charge is 100bp, you should use 5%. I need to review the nuances, but that's the basic idea.
wat?
07-31-2007, 05:24 PM
It's increase. The net rate product design has no explicit mortality charges but instead credits a lower interest rate. The guaranteed rate on this type of contract also implicitly guarantees an additional amount equal to the foregone mortality charges. So if the guaranteed rate is 4% and the implicit COI charge is 100bp, you should use 5%. I need to review the nuances, but that's the basic idea.

Ahh, so the "rate" in the net rate product design is meant to be the crediting rate, not a discounting rate.

I think I get it. (And if I don't, I apologize - it's been a few weeks since I've revisited the LIME text.)
inexactuary
07-31-2007, 06:46 PM
Well, you have to discount future benefits at the greater of the guaranteed crediting rate in the contract and 4% (6% for GSP). For this type of product if you are guaranteeing a 4% credited rate, it is really a higher implied guarantee than a standard design guaranteeing 4%, so your discount rate for CVAT, GLP, etc. should reflect this.
wat?
07-31-2007, 07:49 PM
Well, you have to discount future benefits at the greater of the guaranteed crediting rate in the contract and 4% (6% for GSP). For this type of product if you are guaranteeing a 4% credited rate, it is really a higher implied guarantee than a standard design guaranteeing 4%, so your discount rate for CVAT, GLP, etc. should reflect this.

:lol: Well, clearly, I should look back at the text before asking my questions.

Thanks for the answers!