Trends in Crediting Methods
One of the most difficult tasks one can undertake in any market is comparing two different products. This can be an especially daunting task in the world of indexed products, given that they use numerous crediting methods in addition to different pricing levers (caps, participation rates, and spreads/asset fees). It is helpful to have an understanding of what the trends are in the various crediting methods when attempting to make an apples-to-apples comparison of one indexed life product to another.
When reviewing annual point-to-point crediting designs, one will almost always find one of two methods:
- 100% participation rate with a cap
- Less than 100% participation rate and no cap
With 100% participation rate methods, it is not uncommon for the participation rate to be guaranteed. Offering one or both of the above options is also common for term end point designs. Other point-to-point designs such as high watermark, two-year point-to-point and inverse annual point-to-point almost exclusively use 100% participation rate and a cap. It should be noted that one annual point-to-point product on the market today uses 100% participation, a cap, as well as a spread/asset fee.
Averaging designs use the most diverse methods as a group. Depending on the specific crediting method, you may find any of the following:
- 100% participation rate with a monthly cap
- 100% participation with a cap
- Greater than 100% participation rate and no cap
- Less than 100% participation rate and no cap
Monthly point-to-point crediting methods always use 100% participation rate and a cap on a monthly basis. Daily and monthly averaging crediting methods may use a variety of combinations utilizing participation rates or caps. All monthly averaging with multiple indices strategies use 100% participation and a cap. Note that there is a single monthly averaging product today that utilizes 100% participation rate, no cap, and a spread/asset fee; however the spread is currently 0%.
