While current VAs have key differences than those issued before the financial crisis, many have embedded risk management features that reduce volatility and the cost of hedging living benefit guarantees.
In this feature story published in Best's Review Alex Marion, vice president of product management for Numerix explains:
“During the ’90s there was sort of an arms race in VA companies offering very rich guarantees...but through the bear market, a lot of these guarantees turned out to be under priced. The hedging programs in place only worked to a certain extent. A lot of companies have since exited the business and the companies that are still offering VAs have modified product designs significantly, either by reducing benefits or increasing fees.”
Today, newly popular designs include investment-only VAs and structured hybrid products that include features of fixed index annuities.
“The living benefits are now being offered on fixed-index annuity products. I think a good chunk of current FIA sales now have some form of a living benefit rider,” Marion said. “So I think that is one of the factors that’s driving the increase in fixed-index annuity sales. At the same time, there are more FIA writers than VA writers, so there’s a bit more competition from the sales perspective.”
Despite the introduction of these risk management measures, Marion said he believes that VAs still involve risk to some extent.
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