Scoring Methodology of QDAP (Retirement)

Introduction
Retirement annuity is generally used as an income stream for retirees. An individual would pay the insurer a one-off premium or a series of regular premium to accumulate wealth, which would be annuitised and be paid back to the individual during the retirement life. As retirees look for a stable income replacement after retirement, they may seek annuities providing high guaranteed income with or without potential non-guaranteed income.

Note that buying an annuity is exchanging liquid assets into stable future income, surrendering it for urgent use may incur a significant loss. The insured may also suffer financial losses if the unfortunate event of death occurs early during the policy. 10Life calculates the score for each retirement annuity product by its guaranteed return, projected return, early surrender coverage.

There is a large variety of Qualifying Deferred Annuity Policy (QDAP), with different premium term, annuity income start age and annuity income term. 10Life separates available products into three main categories based on target customer segment.

  1. QDAP (Savings), focusing on the return of savings in the medium term (annuity income starts far earlier than the general retirement age)
  2. QDAP (Retirement), focusing on mid- to long-term retirement planning (annuity income starts at retirement age; annuity income term of 10 years or 20 years can be selected)
  3. QDAP (Longevity), focusing on hedging longevity risk (annuity income starts at retirement age; annuity income term as long as possible)

Assumptions (QDAP Retirement)

  • Issue age 45, Male
  • Premium payment term: 10 years (or nearest)
  • Annual premium amount: US$7,800 (equivalent to HK$60,000)
  • Annuity income start: age 65
  • Annuity income term: 10 years or 20 years

Guaranteed Return Score

Insurers are obligated to pay the guaranteed income as a living benefit to the policyholder. 10Life calculates the guaranteed cash flow by considering the premium paid and guaranteed income in the scenario that the policyholder is alive at the age of 85.

10Life calculates the present value (PV) of income received versus premium paid discounted by the risk-free rates assuming the policy commences today. Risk-free rates of different currencies are determined by the long-term yields of the respective government bonds.

  • USD: United States Treasury Bonds
  • HKD: Hong Kong Exchange Fund Notes

The risk-free rates may be updated from time to time to reflect changes in the market.

The Guaranteed Return Score is calculated by the ratio of PV of income received and PV of premium paid, compared against the benchmark. 


Ratio =  PV(Guaranteed income received at age 85)   , using risk free rate as discount factor
PV(Premium paid)


Projected Return Score

Some products offer a non-guaranteed income for the policyholder in the policy projection, which is subject to change by the insurer. 10Life calculates the projected cash flow by considering the premium paid and projected income in the scenario that the policyholder is alive at the age of 85.

10Life calculates the present value (PV) of income received versus premium paid discounted by the market rates assuming the policy commences today. Risk-free rates of different currencies are determined by the long-term yields of the respective government bonds.

  • USD: United States Treasury Bonds
  • HKD: Hong Kong Exchange Fund Notes

We then use the Capital Asset Pricing Model (CAPM) to derive market rates of the respective currency. The risk-free rates and market risk assumptions may be updated from time to time to reflect changes in the market.

The Projected Return Score is calculated by the ratio of PV of income received and PV of premium paid, compared against the benchmark. 


Ratio =  PV(Projected income received at age 85)   , using market rate as discount factor
PV(Premium paid)


Since the implementation of GL16 in early 2017, insurers are required to disclose fulfillment ratios of non-guaranteed dividends or bonuses. However, current published data available in the market mainly cover the fulfillment ratios of the first few policy years, making it insufficient to determine the ability of insurers fulfilling these long-term non-guaranteed returns. Moreover, products and market assumptions are constantly changing, making it difficult to predict future returns based on past returns. Therefore, 10Life does not take published fulfillment ratios into the calculations of the Projected Return Score.

Early Surrender Coverage Score

While the intended use of annuity insurance is not for early cash out, there may be cases where an urgent unexpected use of cash is required after purchasing the product. 10Life calculates the Early Surrender Coverage Score based on the guaranteed benefit per premium paid in the following scenarios:

  1. Surrender at the 10th policy year
  2. Surrender at the 20th policy year

Guaranteed benefit per premium paid is calculated by the following formula. 


Guaranteed benefit per premium paid = 
Guaranteed income received (if any) + Guaranteed cash value
Total premium paid


The Early Surrender Coverage Score is based on the average of these 2 scenarios.

Overall Score

As the main purpose of retirement annuity is to cover longevity risk while providing stable income after retirement, 10Life puts the most emphasis on guaranteed return in scoring retirement annuity products, the score weighting is presented in the following table. 

Overall Score
100%
Guaranteed Return Score
70%
Projected Return Score
20%
Early Surrender Coverage Score
10%

10Life Product Ratings and Scores are mathematical calculations based on public product information and assumptions for generic customer segments. The Product Ratings and Scores do not reflect your personal needs. 10Life hereby excludes any liability arising from using the information and will not make warranty or guarantee on the accuracy, completeness and timeliness of the information or for any claims and / or losses caused thereby. You should seek independent professional advice and review the insurance product information carefully before purchasing any insurance products. The information shown in the communications placed on 10Life does not constitute an offer or solicitation for the purchase or sale of any banking or insurance products or services. If you have any questions or suggestions on the methodology, please email us at enquiries@10Life.com.

Updated on 9 March 2021 
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