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The American Academy of Actuaries has a cool, quiet, mathematical effect on how every annuity works.
Its members have taken tests to show that they understand the equations and risk-management principles that help the life insurers that issue the contracts pay the benefits.
The academy members use their risk math skills to explain annuities to policymakers on Capitol Hill, at the Internal Revenue Service, and at other federal, state and local entities.
A team at the academy, the Index-Linked Variable Annuity Subcommittee, recently produced a policy paper on RILAs — which regulators often call ILVAs — to help actuaries understand RILAs well enough to apply state insurance regulators' "nonforfeiture requirements" for RILAs.
The nonforfeiture requirements affect what RILA buyers get if they take cash out early.
Regulators at the National Association of Insurance Commissioners wrote special rules for calculating RILA "interim" values because issuers tie a RILA's crediting rate to the performance of an investment index, not the kind of basket of stocks or bonds that drives the crediting rate for a traditional variable annuity.
The NAIC's RILA nonforfeiture requirements describe methods a company can use to calculate the value of a RILA at points other than the end of the original RILA term.
The academy paper is not an official statement about what actuaries should do, but it provides a description of what a RILA is, a description of typical RILA product features, a list of information sources, and a technical description of how an actuary should calculate a contract's interim value.
One section lists issues an actuary might consider when deciding whether a RILA contract is fair to consumers who take cash out early.
The authors of the paper suggest that, if any of the issues apply to a particular product design, the actuary who designs the product should consider explaining the thinking behind the product design and provide illustrations showing why the product is fair to both the issuer and the consumer.
The list might eventually affect whether RILAs are fair to a client who surrenders a contract before the end of the term.
For a look at the seven issues, see the gallery accompanying this article.
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