$26,000 Market adjustment on a fixed account at surrender of annuity

[Jim Chad]

A Client with $300,000 in a 20 year old Plan is moving from Ohio National to another carrier. They were notified that their $146,000 fixed account will be decreased to about $120,000. This is called a market adjustment, not a withdrawel charge.

I have seen market adjustments in fixed accounts before, but this seems way too high. Does anyone have any suggestions?

[RCK]

In a former life, I created market value adjustment formulas for Guaranteed Investment Contracts (GICs). I think that the formula should be in the contract or policy, and they should be able to walk you through it.

It's too late now, but you should be looking for a formula that is nearly symmetric. That is, it should provide a credit if rates have moved down, and a charge if rates have moved up. And in a perfect world, the credit for a 1% decrease would be the same as the charge for a 1% increase, and any surrender charge would be shown separately. But it's not a perfect world, so all you can hope for is for those to be close.

RCK

[david rigby]

Leave it alone?

Ask when the surrender charge (that's what it is) will be reduced to a much lower level or even zero?

[MGB]

I was once an expert witness against J. Hancock on their market value adjustment of a group annuity contract. The methodology made sense (ratio of PVs of a stream of payments using two different interest rates). However, the methodology for determining the current "market" interest rate is where I went ballistic.

They adjusted current rates for their future administration, expenses (e.g., amortized sales expenses), and profit. (E.g., instead of using 5% now, they would use 7%, or something similar.)

The result of the market value adjustment was not only to cover them on having to liquidate invested bonds, but it also would immediately recoup all future amounts that they would have made off of the contract.

This was detailed in the contract as purely a market value adjustment, not a surrender charge. Note that this was standard practice on hundreds of millions of dollars in J. Hancock contracts.

(This was one of these cases where the "principle of the situation" was driving it, and not the money. The adjustment was $11,000, but the client spent many times that on attorneys and actuaries fighting it. He REALLY hated what the insurance company was trying to pull.)