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EIA (Basic design (AV (GMAV (Formula (Old SNFL (Flexible prem EIA (FY prem…

- - - - Standard Non-Forfeiture Law
      - Formula
        
        Old SNFL
        
        Fixed premium EIA: GMAV = 0.9 x single prem x (1+.03)^n
        
        Flexible prem EIA
        
        FY prem: GMAV = 0.65 x single prem x (1+.03)^n
        
        Renewal prem: GMAV = 0.875 x single prem x (1+.03)^n
        
        New SNFL
        
        all EIA: GMAV = 0.875 x single prem x (1+i)^n
        
        i: (5-yr CMT - 1.25%);
        => within [1%, 3%];
        => allow another 100 bps reduction
      - S&P
  - - - results in smaller growth
  - - - Floor return
      - Margin (spread) => cred rate = earned - margin
      - Participation rate
      - Cap
      - "Avg index growth" lowers GMAV costs
      - Annual resets => reset cap, floor, margin
      - Flexible prem => lower GMAV requirements
- - - - Pricing spread
        
        Profits
        
        GMAV costs
      - Hedging budget
        
        Option Budget
  - - - hold a portfolio that replicates all payoffs
      - If perfectly replicate payoff => ZERO Hedging cost
      - if gains or losses => PV is cost of delta hedging
    - - Buy call ATM
      - Sell call OTM
      - Buy/sell options to replicate payoffs
      - No gain for insurer over the cap