A number of investment vehicles involve upfront acquisition costs (such as marketing costs, sales commissions, underwriting expenses, contract issuance costs and the like). Typically, these upfront acquisition costs are treated as “deferred acquisition costs”. In many industries, from a Generally Accepted Accounting Principal (“GAAP”) accounting perspective, deferred acquisition costs are recorded as an asset when occurred. As an example, when deferred acquisition costs are incurred for the issuance of a variable annuity contract, the issuer of the contract records the deferred acquisition costs of the contract as an asset when incurred. The asset is then amortized over the expected life of the contract in proportion to the anticipated future profits associated with that contract.
Unfortunately, given fluctuations in the economy and markets, it can be difficult to estimate the future profits associated with many types of contracts, as the future profit assumptions are based on current investment returns, current expectations of mortality, policy lapses, etc. Further, during the term of the contract, if the issuer's anticipated future investment returns, mortality, policy lapses and maintenance expenses differ significantly from previous estimates, the issuer may be required to perform a deferred acquisition cost “unlock”. This unlock changes the current period's expected deferred acquisition cost amortization, resulting in a benefit or a charge to earnings. For issuers with large numbers of contracts outstanding, the unlock can have a significant impact on earnings. In a volatile and unpredictable market, such impacts can be significant and undesirable. For example, in a volatile and unpredictable market, particularly where a market is significantly down, contract earnings can be dramatically lower than originally estimated. A substantial drop in a market results in a substantial drop in contract earnings. This results in a need to perform substantial deferred acquisition cost “unlocks”, causing substantial (and unexpected) changes in earnings of the issuer of the contract. It would be desirable to provide some predictability to contract earnings estimates so that these unexpected “unlocks” could be avoided or reduced.
Further, consumers who are issued such contracts want clear and predictable terms and disclosures. It would be desirable to provide a system for calculating and assessing fees associated with acquisition costs in a manner that is clear and predictable to consumers, and that does not require the unpredictable use of deferred acquisition cost treatment.
According to some embodiments, a communication device is to receive information about a plurality of contracts, and a processor is coupled to the communication device. A storage device in communication with said processor stores instructions adapted to be executed by said processor to identify one or more premium payments and identify a distribution fee rule applicable to each of the premium payments. The processor is operative to compute, using the distribution fee rule, a distribution fee associated with each of the premium payments and calculate a total distribution fee associated with the contract based on a total of the distribution fees associated with each of the premium payments. The processor is further operative to update a value of said contract based on the total distribution fee.
Pursuant to some embodiments, the contracts are variable annuity contracts having acquisition costs, and the distribution fee is selected based on the expected size of the acquisition costs. In some embodiments, the processing is performed on a set of contracts having an upcoming contract anniversary date.
Pursuant to some embodiments, the value of each contract is reduced by the amount of the total distribution fee as of the next contract anniversary date. In some embodiments, the distribution fee rule includes a fee calculation rule and the rule specifies a set percentage of the premium payment. In some embodiments, the distribution fee rule includes a distribution fee schedule for each of the premium payments. In some embodiments, the distribution rule may further include a prorating rule for prorating premium payments made after a contract anniversary date when in the first year of the distribution fee schedule. In some embodiments, a contract includes terms permitting premiums to be invested in a variable market (such as an equity market) such that a contract value varies based on the market, and the distribution fee is not based on the value of the account (or on the underlying market).
In some embodiments the processor is further operative to deduct the total distribution fee from at least a first account associated with the contract and cause the generation of a statement reflecting an updated status of the at least first account.
Still other embodiments are associated with a computer-implemented method to facilitate assessment of distribution fees to variable annuity contracts which includes, for each of a plurality of variable annuity contracts, establishing, by a processor, a distribution fee schedule associated with each premium payment of each of the variable annuity contracts, the distribution fee schedule established based on a distribution fee rule set. The method includes calculating, by the processor, a distribution fee for each of the variable annuity contracts, the distribution fee calculated based on the distribution fee schedule and an amount of each premium payment. The processor stores a total distribution fee for each of the plurality of variable annuity contracts and automatically reduces a contract value of each of the plurality of variable annuity contracts by the total distribution fee associated with a respective one of the plurality of variable annuity contracts.
A technical effect of some embodiments of the invention is an improved and contract management system for issuers of contracts having upfront acquisition costs (such as variable annuities) for which it may be desirable to calculate and apply fixed charges over a period of the life of the contracts. Moreover, some embodiments may provide benefits, such as automated calculation and application of distribution fee rules on an automated basis (e.g., such as on or prior to contract anniversaries). With these and other advantages and features that will become hereinafter apparent, a more complete understanding of the nature of the invention can be obtained by referring to the following detailed description and to the drawings appended hereto.
Applicants have recognized a need for an ability to calculate, apply and otherwise manage distribution fees, where the distribution fees are calculated and applied to compensate an issuer of a contract (such as a variable annuity contract) for acquisition costs associated with issuing the contract. In some embodiments, the application of the distribution fees provides more predictability in the expense and amortization of deferred acquisition costs, thereby providing greater certainty and efficiency to both the issuer as well as to holders of such contracts.
The effect of volatility in revenue associated with such contracts is illustrated in
Referring now to
For the purposes of describing features of embodiments of the present invention, a number of terms are used herein. For example, the term “contract” is used herein to refer to an agreement between an issuer and a holder. In some embodiments, features of the present invention have found to achieve desirable results for variable annuity contracts, and as a result, for the purpose of illustrative features of some embodiments, features will be described by referring to the issuance of a variable annuity contract. In some embodiments, the “contracts” referred to herein are “insurance contracts” including primary (or stand alone) insurance contracts or riders or addendums to insurance contracts. Those skilled in the art will appreciate that features of the present invention may be utilized with similar desirable results with other types of contracts which involve acquisition costs and which may be subject to deferred acquisition cost accounting treatment.
As used herein, a “contract” has a number of attributes or terms, including a “contract anniversary” which is the anniversary of the date on which the contract was issued. A contract also includes a “contract value” which is the value of the accounts associated with the contract on any given valuation day (where a “valuation day” is a day that values of individual accounts may be determined, such as, for example, days that a stock exchange is open and trading in the event that the value of the individual accounts are based on securities traded on that exchange). As used herein, the term “account” refers to sub-accounts holding securities related to the contract. A contract may have multiple accounts associated with it, and the overall contract value is based on the value of each of the accounts.
As used herein, the term “insurance product” refers to a contract or certificate providing a holder (or beneficiary) an indemnity against occurrence of a uncertain event or loss. An insurance product may be an annuity, bond or other instrument payable upon the occurrence of an event or loss. A “premium” is an amount paid by a contract holder to the issuer to be invested in an account under the contract. As used herein, the term “remaining gross premium” refers to the total premium payments minus any prior partial “surrenders” (or complete or partial withdrawals from accounts associated with the contract) in excess of any annual withdrawal amount permitted under the contract. Some of these terms (and others) will be discussed further below in describing features of some embodiments.
To address some of the problems described in the background section of this application, an automated distribution fee management system may be provided. For example,
Pursuant to some embodiments, distribution fee management system 100 includes a distribution fee management server 110 which operates on contract data 118 to identify, calculate, and apply distribution fees to individual contracts issued by an entity. For the purposes of this discussion, the “contracts” will be described as being variable annuity contracts issued by an issuer to individual investors (or “holders”). These contracts may be standalone contracts or riders to contracts. Contract data 118 may be a data store which includes a large number of different contract terms associated with individual variable annuity contracts issued by the issuer. Contract data 118 may be shared with, retrieved from, or otherwise obtained from a master contract database or system operated by or on behalf of the issuer. Contract data 118 may be updated each time a new contract is issued or each time a term or status of a contract changes. In some embodiments, the operation of distribution fee management server 110 results in writing or updating of contract data 118 (e.g., to include updated distribution fees and fees associated with individual contracts).
Distribution fee management server 110 may be operated by, or on behalf of, the issuer of variable annuity contracts. In some embodiments, the issuer may make certain features of the distribution fee management server 110 available to individual users or clients operating client devices 130. For example, in some embodiments, statements or reports (e.g., including information about distribution fees that have been assessed or that will be assessed) may be accessed by clients operating client devices 130.
As shown, distribution fee management server 110 includes a number of modules or programs which operate to control the calculation, assessment and administration of distribution fees pursuant to embodiments of the present invention. For example, the server 110 may include a contract engine 112 which operates to manage, retrieve, or update contract data 118 pursuant to some embodiments. Server 110 may also include a distribution fee engine 114 which operates to identify individual contracts that require assessment of a distribution fee as well as the calculations required to determine the total distribution fee associated with individual contracts. A reporting engine 116 may also be provided to generate or retrieve reports or statements associated with the distribution fees assessed by the distribution fee engine 114. The operation and configuration of the distribution fee engine 114 and other components will be described in further detail below.
As used herein the term “automated” indicates that at least some part of a step associated with a process or service is performed with little or no human intervention. By way of examples only, the distribution fee management server 110, administrator device 120, and client devices 130 might be associated and/or communicate with a Personal Computer (PC), a notebook computer, a Personal Digital Assistant (PDA) an enterprise server, and/or a database farm.
Any of the devices described in connection with the system 100 may access information in one or more databases, such as a contract database 118 (although client devices 130 will typically not have direct access to any such data). The databases may include, for example, information about contracts for which distribution fees are to be assessed. Moreover, any of the devices may exchange information via a communication network. As used herein, devices (including those associated with the distribution fee management server 110 and any other device described herein) may exchange information via any communication network, such as a Local Area Network (LAN), a Metropolitan Area Network (MAN), a Wide Area Network (WAN), a proprietary network, a Public Switched Telephone Network (PSTN), a Wireless Application Protocol (WAP) network, a Bluetooth network, a wireless LAN network, and/or an Internet Protocol (IP) network such as the Internet, an intranet, or an extranet. Note that any devices described herein may communicate via one or more such communication networks.
The devices of
Although a single central distribution fee management server 110 is shown in
Method 200 begins at 202 where the server 110 operates to initiate distribution fee calculation processing. For example, the process may be triggered on a scheduled basis (e.g., as a batch process scheduled for regular execution), or based on instructions received from an administrator operating an administrator device 120. Processing continues at 204 where the server identifies a contract having an upcoming contract anniversary. For example, processing at 204 may include the distribution fee engine 114, interacting with contract engine 112, generating a query for one or more records in the contract database 118 which meet specified criteria (e.g., such as contracts having an anniversary date within a specified date range).
Processing continues at 206 where the server operates on a selected contract to identify a premium payment associated with the selected contract. As discussed briefly above, individual variable annuity contracts may have one or more premium payments associated with them. Pursuant to some embodiments, each premium payment may have a separate distribution fee associated with it (and, as discussed further below, each premium payment may have a separate distribution fee schedule associated with it). Processing at 206 includes identifying one of the premiums associated with the contract (subsequently, other premiums associated with the contract will also be processed).
Processing continues at 208 where a determination is made whether the currently selected premium has passed the end of its distribution fee schedule. In some embodiments, each premium is associated with eight (8) years of distribution fees (i.e., each premium, in some embodiments, is assessed a distribution fee each of the eight years after the date of the premium payment). Those skilled in the art will appreciate that other distribution fee schedules may be used (e.g., where the length of the schedule is based on the amount of acquisition costs to be recouped and the typical term of the instrument). If processing at 208 indicates that the currently selected premium has passed the end of its distribution fee schedule, processing reverts to 206 where a next premium associated with the contract is identified.
If processing at 208 indicates that the currently selected premium has not yet passed the end of its distribution fee schedule, processing continues at 210 where the server operates to add the premium payment to the a total amount of qualifying premium payments for the contract. The total amount may be stored in a temporary memory store and incremented as each premium payment associated with the contract is added to the total.
Processing continues at 212 where a determination is made whether the contract has additional premiums for analysis. If so, processing reverts to 206 where additional premiums are analyzed and (if appropriate), their premium payments are added to the total amount of qualifying premium payments for the contract.
Processing continues at 214 where the server operates to calculate a distribution fee based on the total qualifying premium payments totaled above. Pursuant to some embodiments, processing at 214 may involve the application of one or more distribution fee rules that may be selected based on the type of contract analyzed. In some embodiments, the rule may be that all premium payments that have been invested for eight (8) years or less will be assessed a distribution fee of 0.75% (75 basis points), and that the distribution fee will be assessed annually (on the contract anniversary). The rules may also specify how the distribution fee is to be assessed (for example, the rule may specify that the total distribution fee will be deducted from the contract value on the contract anniversary based on the remaining gross premiums).
Other distribution fee rules may also be specified. For example, in some embodiments, the distribution fee rules may specify that a proportionate amount of the charge may be deducted for any portion of a premium payment that is subject to the charge, but that is not held for a full contract year (e.g., rules may be provided specifying how to treat premium payments made during the course of a contract year). As another example, the distribution fee rules may specify that, in the event of an early withdrawal of some portion of premium, some “free out” amount may be withdrawn without triggering a distribution fee. For example, a contract may specify that a contract holder may withdraw up to $5,000 of premium without triggering a distribution fee charge. As a simple illustrative example, assume that the process 200 is performed on an annuity contract which was issued on Jun. 1, 2008, and which has the following premium payments associated with it: a $50,000 payment on Jun. 1, 2008, a $40,000 payment on Jul. 15, 2009, and a $10,000 premium payment on Nov. 1, 2010. If the process 200 is run on this specific example annuity contract on Jun. 1, 2011 (the 3d anniversary of the contract), the distribution fee will be calculated as follows: first, the distribution fee for the first premium payment is equal to 0.75% of $50,000 (or $375), next the distribution fee for the second premium payment is equal to 0.75% of $40,000 (or $300) and the distribution fee for the third premium is equal to 0.75% of $10,000 and prorated for the portion of the year it was held (or $43.36, since the third payment was made during the year of the calculation, and is prorated).
As another illustrative example, assume that an annuity contract, issued pursuant to the present invention, is issued with an initial premium payment of $100,000 on Feb. 26, 2009. The first distribution fee payment is made on Feb. 26, 2010 (for 75 bps of $100,000 or $750), and a second distribution fee payment is made on Feb. 26, 2010 (again, for $750) but then the insured dies in April 2011, with a due proof of death on Apr. 15, 2011. Also assume that there are two named beneficiaries of the contract (each receiving 50% of the benefits). The distribution fee due upon due proof of death is calculated as (($100,000*0.75%)*(48/365)) or $98.63 (where the fee is prorated for the 48 days between Feb. 26, 2011 and Apr. 15, 2011). One of the named beneficiaries withdraws her $50,000 (plus any accrued earnings) on the date of due proof of death (or Apr. 15, 2011), while the other waits until Aug. 25, 2012. Since the first beneficiary claimed her benefits as of the date of due proof of death, there is no additional distribution fee for that distribution. However, the second beneficiary will be responsible for two more distribution fees—one due on the third contract anniversary of Feb. 26, 2012, and one due on receipt of the claim (on Aug. 25, 2012). The distribution fee charged on the third contract anniversary is calculated as (($50,000*0.75%)*(317/365)=$325.68 (with the 317 days equal to the number of days since the proof of death). The distribution fee charged on withdrawal of the second beneficiary amount is calculated as (($50,000*0.75%)*181/365)=$185.96 (with the 181 days equal to the number of days between the third contract anniversary and the withdrawal date). Those skilled in the art will appreciate that other distribution fee rules may be used.
Upon completion of process 200, the data associated with the calculated distribution fee for a given contract may be output using the reporting engine (e.g., to cause a statement to be provided to the holder of the contract). Further, the distribution fee server 110 may cause the amount of the distribution fee to be deducted from the contract value on the anniversary date of the contract and credited to the issuer (or to an agent of the issuer). In addition, the distribution fee server 110 may cause information associated with the calculated distribution fee to be updated in the contract data 118 associated with the contract.
Process 200 may be repeated for each contract in the contract database 118, or based on other information provided, for example, by an administrator operating administrator device 120.
The processor 310 is also in communication with an input device 340. The input device 340 may comprise, for example, a keyboard, a mouse, or computer media reader. Such an input device 340 may be used, for example, to enter information about distribution fees or fees (including specifying a fee structure, or rules associated with different fee structures), specify premium payments or premium information, or otherwise interact with or administer the process of the present invention. In some embodiments, individual contract holders or their agents may be able to access reports or status information by interacting with the system. The processor 310 is also in communication with an output device 350. The output device 350 may comprise, for example, a display screen or printer. Such an output device 350 may be used, for example, to provide reports and/or display information associated with contracts or distribution fees computed pursuant to the present invention.
The processor 310 is also in communication with a storage device 330. The storage device 330 may comprise any appropriate information storage device, including combinations of magnetic storage devices (e.g., hard disk drives), optical storage devices, and/or semiconductor memory devices such as Random Access Memory (RAM) devices and Read Only Memory (ROM) devices. The storage device 330 stores a program 315 for controlling the processor 310. The processor 310 performs instructions of the program 315, and thereby operates in accordance any embodiments of the present invention described herein. For example, the processor 310 may, for each of a plurality of contracts (such as variable annuity contracts), identify contracts having an upcoming contract anniversary, and calculate a distribution fee associated with each of those contracts. In some embodiments, the processor calculates these distribution fees on a regular or scheduled basis. In other embodiments, the processor calculates the distribution fees on an as needed basis.
As used herein, information may be “received” by or “transmitted” to, for example: (i) the distribution fee apparatus 300 from other devices; or (ii) a software application or module within the distribution fee apparatus 300 from another software application, module, or any other source.
As shown in
The contract identifier 402 might be, for example, an alphanumeric code that uniquely identifies a specific contract (such as a variable annuity contract). The contract identifier 402 might be assigned, for example, by an underwriting system or device (not shown) when the contract is issued so that the contract may be uniquely identified. The contract anniversary 404 might indicate, for example, month, date and year of the issuance of the contract (for example, a contract that was originally issued on Jan. 1, 2007 has an anniversary date of Jan. 1, 2007). The contract value 406 is a numeric field that represents the current value of the contract on any valuation date (the value may vary during the life of a contract, particularly with a variable annuity contract). The annual withdrawal amount 408 is a value based on a contractual term specifying the amount a holder may surrender each contract year without incurring a deferred sales charge (which may apply in the event of a full or partial surrender).
Pursuant to some embodiments, some or all of the contract data in contract database 400 may be retrieved for use in process 200 described above so that distribution fees to be applied to individual contracts in the database 400 may be identified, calculated and assessed. In some embodiments, the contract database 400 may be updated upon completion of process 200 (e.g., updated to reflect any distribution fees that may have been applied as a result of process 200).
The premium identifier 502 might be, for example, an alphanumeric code that uniquely identifies individual or specific premium payments that have been made to contracts identified by contract identifier 504. As shown, each contract may have a number of premium payments associated with it. The premium date 506 is the date on which the premium identified by premium identifier 502 was made. The premium payment 508 is the amount of the premium payment. For example, as shown in the example data in table 500, the premium payment identified as premium “P1003—1” (and associated with contract “C—1003”) was made on Jun. 1, 2008 (the issuance date of the contract) in the amount of $50,000.
The distribution fee schedule 510 includes a series of scheduled distribution fee dates associated with each premium identified by premium identifier 502. In the example shown, the issuer has elected to use a fixed number of years in which distribution fees will be assessed (each premium has a schedule of eight years of distribution fees to be assessed). Those skilled in the art will appreciate that other lengths and rules may be used. As shown, each premium identifier 502 has its own distribution fee schedule based on the premium date 506 and the contract anniversary (item 404 of
As a result of the embodiments described herein, the application of the distribution fees provides more predictability in the expense and amortization of deferred acquisition costs, thereby providing greater certainty and efficiency to both the issuers of such contracts. Further, embodiments provide improved clarity and predictability for holders of such contracts.
In some embodiments, a distribution fee management system may be provided, which includes reporting, accounting, and other administrative functionality. Reference is now made to
Insurance processing system 810 includes a number of other devices, including, for example, a distribution fee engine 830 which includes rules and computer program code to calculate and administer distribution fees, a contract data warehouse 840 storing insurance contract data, an accounting system 850 (which operates to perform administrative and accounting functions for insurance contracts issued by the insurer), a reporting system 860 (which operates to generate reports, statements, and other notices relating to insurance contracts and transmit those notices to policyholders and other interested parties), and one or more administrator terminals 870 (operated by system administrators to input, edit, and otherwise interact with components of system 810). In some embodiments, the accounting system 850 receives information calculated or generated by the distribution fee system 810 such as updates to account values associated with individual contracts. The accounting system 850 may apply updates to account values pursuant to one or more accounting rules. The reporting system 860 may receive data from the accounting system 850, contract data warehouse 840, and distribution fee server 810 and transmit statements to holders. For example, in some embodiments, the reporting system 860 may cause regular statements of accounts to be generated and transmitted to holders using electronic mail, regular mail, or updates to online accounts accessible to holders of contracts.
Some or all of the components of system 810 may have a number of functions other than those described herein. For example, accounting system 850 may support a wide variety of different insurance contracts, in addition to those having a distribution fee feature.
System 810 also interacts with remote terminals 890 via a network 880. For example, system 810 may interact with current (and potential) policyholders, by allowing the policyholders to communicate with and interact with data provided by system 810. Remote terminals 890 may receive and display graphical representations of policy forms, statements, and other notices generated by reporting system 860, accounting system 850 or the like. Remote terminals 890 may also be operated by agents or brokers to perform a policy-related action (e.g., to create a policy, to obtain a quote, or the like). Remote terminals 890 (and other components of system 800) may have other features as described above in conjunction with
The following illustrates various additional embodiments of the invention. These do not constitute a definition of all possible embodiments, and those skilled in the art will understand that the present invention is applicable to many other embodiments. Further, although the following embodiments are briefly described for clarity, those skilled in the art will understand how to make any changes, if necessary, to the above-described apparatus and methods to accommodate these and other embodiments and applications.
Although specific hardware and data configurations have been described herein, note that any number of other configurations may be provided in accordance with embodiments of the present invention (e.g., some of the information associated with the databases and engines described herein may be split, combined, and/or handled by external systems).
Applicants have discovered that embodiments described herein may be particularly useful in connection with variable annuity contracts, although embodiments may be used in connection other types of annuities or contracts which are associated with deferred acquisition costs (and which may be subject to deferred acquisition cost treatment).
The present invention has been described in terms of several embodiments solely for the purpose of illustration. Persons skilled in the art will recognize from this description that the invention is not limited to the embodiments described, but may be practiced with modifications and alterations limited only by the spirit and scope of the appended claims.