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Rating Firm Worried About Equity-Indexed Annuities

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NU Online News Service, Nov. 16, 12:15 p.m. – Moody’s Investors Service, New York, has published a report by Arthur Fliegelman warning about possible problems with sales and management of equity-indexed annuities.

An equity-indexed annuity is an annuity with a return tied to the return on a stock index, such as the S&P 500 index. Issuers usually offer holders a minimum guaranteed rate of return of at least 1%, to protect the holders against market slumps.

One problem is that carriers and their sales representatives may have done a poor job of telling customers about the risk of market downturns, Fliegelman writes in his report.

Life insurers that sell EIA products also have to worry about how they will come up with the cash to pay the guaranteed return rates during periods when the market is down.

Several Japanese life insurers have gone out of business in recent years because of problems with living up to the return guarantees included in their retirement savings products.

Large U.S. EIA sellers have improved the design of the products, to increase the ability of investment managers cope with market slumps, but some existing equity-indexed annuity contracts shave designs that continue to make them “extremely difficult to hedge,” Fliegelman says.


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