Some financial professionals may eat, drink and breathe annuity contract provisions. They know everything about every annuity contract feature since the Egyptians developed hieroglyphics.
Some other people in and around the world of annuities, such as new agents, or people in support services roles, may just be trying to keep their heads down and not get into trouble.
Justin Jacquinot, a senior vice president for direct relationships at Security Benefit, a Topeka, Kansas-based annuity, helped out by answering a series of questions about one common annuity feature — indexed annuity strategy caps — through an email interview.
The purchasers of an indexed annuity can tie a portion of the crediting rate, or all of the crediting rate, to one or more indexes in the contract's index menu. A cap is a limit on the interest rate the issuer will pay in connection with an index strategy.
A cap may irk an annuity holder during a year when investment markets soar higher, but it may help the issuer structure the contract in a way that will make the math work over the entire life of the contract, which may include bad years and so-so years along with great years.
Here's what Jacquinot said about indexed annuity rate caps:
1. How often are capped strategies really used in indexed annuity products, at Security Benefit and in the market as a whole, in terms of what the insurers offer and what the customers actually buy?
The usage of capped strategies varies by consumer, and by product, due to a variety of factors including the crediting strategies that are available.
At Security Benefit, our FIA [fixed indexed annuity] products generally offer several crediting strategies to choose from, and we see a lot of diversification across strategies.
For example, our Strategic Growth products offer 14 crediting strategies, and with this type of product series we typically see lower allocation toward our capped strategy, but it still is a significant allocation.
2. What kinds of subtle (and not-so-subtle) variations in cap rates do you see out there that clients, especially, might not have noticed?
A capped strategy is popular because it is offered widely in the industry.
For example, the annual cap of the S&P 500 index is part of the simplicity of the design. It is easy for a consumer to grasp the concept and track the product themselves throughout the year.
Strategies like this are pretty universal in design throughout the industry, which makes it easy for consumers to compare cap rates for that particular strategy across other products.
Cap rates are just one feature of a product; however, a variety of other features/rates should be taken into consideration as well.
The underlying index that a capped strategy is using can also impact the level of the cap rate.
For example, an index that has some form of volatility control built into the index may have a higher cap rate than the cap rate on the S&P 500 index.
3. How do the cap rates fit in with the derivatives or other hedging arrangements insurers use? Are the cap rates just an adjusted version of what's in the hedging arrangement contracts?
For FIA products, we have a hedge budget that is set aside to purchase options for the crediting strategies. The hedge budget itself can be affected by many different functions including investment yield, policy reserves, administrative costs, interest rates, as well as other factors.
