Retirement savings product invested in market supports, with floor income or capital guarantees costly to hedge.
The variable annuity with guarantees is a retirement savings product, very widespread in the United States and Japan, in which savings are invested in market supports like unit-linked, but with optional guarantees called floors: a minimum lifetime income guarantee, a minimum death benefit, or a guaranteed withdrawal amount independent of market performance. These guarantees, designated by the GMxB family of acronyms, protect the policyholder against market declines while leaving them the upside potential. For the insurer, they represent a complex commitment akin to a very long-term financial option, whose value rises when markets fall, creating a market risk hard to hedge and capital-intensive. Managing these guarantees requires sophisticated dynamic hedging programmes, whose failure caused heavy losses during financial crises. These products illustrate the interweaving of life insurance and financial engineering, and the difficulty of pricing and hedging long-term market guarantees combined with policyholder behaviour risk.
A minimum lifetime income guarantee on a variable annuity becomes very costly for the insurer during a market crash, like an option whose value soars.
variable annuity, rente variable, GMxB, GLWB, garanties planchers