Life insurers probably will be better off if they design variable annuities (VAs) carefully rather than rely on complicated hedging programs to manage VA risk, rating analysts say.
The analysts, at Moody's Investors Service, New York, write about the merits of hedging programs and product design in a set of answers to frequently asked questions about variable annuities.
The market turmoil that started in 2008 has scared some insurers away from the
VA market and helped others build sales for what should be lower-risk products, the analysts say.
"Certain products automatically dampen risk by changing asset allocation according to market conditions or by linking guarantees to the capital markets and interest rates," the analysts say.
The analysts cite the example of a VA guaranteed withdrawal benefit with a withdrawal amount linked to the current interest rate.
Rather than simply guaranteeing a fixed payment stream, "the new product will pay more when interest rates are high (i.e., when it is cheaper for the company to provide the lifetime benefit) and less when they are low," the analysts say.
Insurers also seem to be making good use of sophisticated risk hedging programs, the analysts say.
