10Life Immediate Annuity Scoring Methodology

1. Overview

Guaranteed Return

Including the guaranteed annuity income, the score is based on the guaranteed cashflows up to age 105.

Projected Return

Including the projected annuity income, the score is based on the projected cashflows up to age 105.

Longevity Protection

Based on the guaranteed annuity income period, with whole life annuity having the highest score.

Early Surrender Value

Calculate based on the guaranteed cash value paid to the policyholder upon surrendering the policy at specified years.

Early Death Benefit

Calculate based on the guaranteed benefits (death benefit + annuities received) paid upon the death of the life insured.

2. Score Weighting

3. Assumptions

Close to age 65 male (going to retire soon)
Total payment HKD1,000,000
Annuity commencement: age 65

4. Guaranteed Return Score Details

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 105.

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 105)	，using risk free rate as discount factor
	PV (Premium paid)

5. Projected Return Score Details

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 105.

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 Guaranteed 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 105)	，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.

6. Longevity Coverage Score Details

Retirees face the risk of their assets being exhausted during their lifetime, which is more likely to happen if the individual lives longer than expected. Hence, annuity coverage is particularly important at later ages.

Based on the coverage term, 10Life scores longevity coverage based on the following scale.

Coverage until	10Life Score
Lifetime	10
Age 100	9
Age 85	6
Below age 85	0

7. Early Surrender Coverage Score Details

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:

Surrender at the 10th policy year
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.

8. Early Death Coverage Score Details

The main purpose of immediate annuity products is to mitigate longevity risk. However, in the unfortunate event that the insured dies during the early policy years before breaking even, most annuity products offer a death benefit either as a lump sum payout or a guaranteed continued annuity payout to the beneficiary. 10Life calculates the Early Death Coverage Score based on the guaranteed benefit per premium paid in the following scenarios:

Death at the 10st policy year
Death 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 death benefit
	Total premium paid

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

Updated on 27 April 2021

Disclaimer

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