Index Fund Overview

OIPA contains the architecture required to administer Equity Indexed Life (IUL) and Annuity products (EIA). These types of polices give companies the option of allowing policyholders to use a Stock Market Index rather than individual funds as a basis for account value growth. Many customers prefer this strategy as it reduces exposure to market risk while at the same time provides limited stock market participation. The performance is based on an underlying index such as the S&P 500 or Russell 2000. Other factors that impact the calculation of the credit to the policy, called the Index Credit, are variables such as the Cap, Floor and Participation rate.

The Index Prototype Company in the Prototype Company of the Rules Palette demonstrates some common design features that are characteristic of index funds.

Common Index Fund Characteristics

Sweep Date

Many index funds use a Sweep Date. Sweep dates, in this context, restrict the addition of money into the Indexed tracking funds to certain times, such as a particular day of the month. In order to accommodate that restriction the concept of an Interim or Holding Fund is introduced. Money received prior to a given date will be held in the interim fund and credited with a fixed rate of interest. When the Sweep date arrives that deposit plus the interest earned is added to the Indexed Fund. In OIPA, a combination of plan data can be configured to set a standard Sweep Date and then math configuration for calculating any needed logic to figure out the actual business day the sweep date can occur is reused to support this portion of Index fund design.

Index Segment Period

Indexed funds also use an Index Segment Period, which is the length of time money allocated to an indexed fund must remain in the fund in order to receive the full value of the Index Credit. This is also known as the Index Period. Through transaction configuration, premiums are swept into indexed funds according to allocations. A configurable feature called buckets provide a means of tracking multiple premiums to ensure index segment period requirements are met.

There are several common methods that can be used to credit the policy account. The three common types are listed and summarized below:

Annual Point to Point: this is where the beginning equity index value is recorded and compared to the ending equity index value at the end of the index period. If the ending index value is higher, then interest is credited annually subject to the participation rate and growth cap or spread. If the ending index value is lower, then no interest is credited.
Averaging Method: this takes the average daily indexed value over the entire index period and compares this average with the beginning index value at the first day of the index segment. If the average indexed value over the entire index period is greater than the beginning index value, then interest is credited. (While stated as daily, can also be monthly.)
High Water Mark: this uses the difference between the starting value of the index and the highest value achieved by the index during the crediting period.

For each of these methods, OIPA rate tables are used to store index daily rate values, which can be easily called from configuration. Configuration logic can figure out if an ending index value is higher, compare averages or figure out a difference, which is all supported by the OIPA math syntax.

Valuation for index funds is not done in unit values, but rather an Index or Index Value is stored in AsRate and updated. A range of these values is then used to determine the percentage that will be used as the main component for the Index Credit or credit.

Some other product design items use the Rate table for information that isn't technically a rate, but because it is easy to call the Rate table from configuration, it is stored there. These values are applied to the Index Credit to arrive at the final Index Credit that is used to update the policy’s value. The product’s specification will determine which of these should be used.

Participation Rate:this determines how much of the index’s gain the policy will receive.
Growth Cap:this limits the interest rate to a certain percentage.
Growth Floor: this sets the minimum interest rate that could be credited (usually 0%).
Spread or (sometimes) Asset Fee: this is a fee.
Minimum Guarantee: this sets a minimum return value for the policy, most of the time a percentage of the total premium plus an interest credit.

Buckets

Buckets are used to uniquely identify, value and track one or more deposits into an indexed fund that must be valued separately from the fund as a whole. In OIPA, a bucket is represented by an integer value in the AsBucket database table. The bucket links a bucket and its Effective Date with a policy and the actual values of premium and the associated bucket in the AsValuation table, using the BUCKET column.

The maximum number of buckets for an indexed fund is dependent on how often a new Index Segment can begin and the duration of the Index Segment, which can then be configured in the Plan Data page of the Rules Palette. For example, if a new Index Segment can begin once a month and the duration is one year, there could be a maximum of 12 buckets. If the duration is 5 years, then there could be up to 60 buckets.

The bucket value is updated when deposits are transferred (“swept”) into an indexed fund. It is common to use the calendar month as the integer value for twelve month tracking periods. For example, a deposit may be received on February 15. If the Sweep day is the 28th of each month, then on February 28 the net deposit is transferred to the user allocation. The bucket is updated to 2 if any money is allocated to an indexed fund in that transfer.

In assignment processing, there are two attributes in the Assignment tag that relate to buckets.

BUCKET: identifies the bucket number that money will be assigned to or removed from when money movement occurs.
BUCKETEFFECTIVEDATE: Specifies the effective date when money can be assigned to a bucket for the following assignment types: Apply, ApplyByFund, Transfer (To Side), Switch (To Side).

When working with arrays, the following math operations relate to buckets.

There is a math operation for TYPE="INTEGERARRAY" called OPERATION="FILLBY-BUCKETLIST. This accepts a FundGUID as the MathVariable element’s text and assigns to the MathVariable an array of bucket numbers for the given fund.

When pulling values into buckets, keep the following information in mind.

There is a math variable TYPE=”FIELD” with the following syntax Valuation:Fund:MyFundGUID:Bucket:MyBucketNumber:CashValue

High Level Steps to Configure Indexed Funds

Create a plan.
Create and configure a FundScreen override.
Create interim funds to hold premiums until the Sweep date.
Create index funds.
Configure allocations to allow policy owners the option to select index funds via the OIPA interface.
Configure the InterestRateCalculation business rule to calculate the interest that should be credited to the premium in interim funds.
Create Rate Groups and enter initial rates for the index funds.
Create Rate Groups and load initial rates for the Growth Cap, Growth Floor, Participation Rate and Spread.
Configure static values.
Configure reusable configuration.
Configure transactions to take in money, move money into the interim account, move money from interim account into index funds, apply index credits and other design features according to the product design.
Configure the ValueScreen business rule.