R-Ratio / R-Factor
- In essence, the model regulation <Universal Life Model Regulation> assumes that at issue, all universal life policies are permanent plans.
- The r-ratio is meant to measure the extent to which the policy is on track" as a permanent plan.
Statutory Valuation of Individual Life and Annuity Contracts | 5th Edition, Claire, Lombardi and Summers
The funding level affects:
- 1. Universal life commissioners reserve valuation method reserves -- In particular the r factor is the ratio of the actual fund value to the guaranteed maturity fund.
- Since r is capped at I00%, using a ratio based on the average fund for all policies may not produce the actual reserve.
- 2. Cash values -- The funding level affects cash values since 100% of the surrender charge may not be available on minimally funded policies.
- 3. Premium Assumptions -- Different funding levels will have different premium payment patterns, which range from a term level premium to fully funded premium to dump-in premiums. Premium persistency may also vary by funding level.
- 4. Future earnings -- As a result of a combination of the above items, future earnings may differ by funding level.
1994 - VALUATION ACTUARY SYMPOSIUM PROCEEDINGS SESSION 8 Life and Deferred Annuity Liability, Society of Actuaries