Hedging Will Open Up
Variable Product Design
The overwhelming trend in the variable annuity marketplace, and to a lesser extent in the variable life marketplace, over the past 5 years has been policy guarantees.
These guarantees have taken the form of VA minimum death benefit guarantees (MDBGs), VA guaranteed living benefits (GMIBs, GMABs and GMWBs), and moderate no-lapse guarantees on variable universal life contracts.
Over the last several years, insurers have discovered hedging as a mechanism to manage the risk associated with these guarantees.
Today, hedging programs are becoming a common tool to provide comfort to senior management, to produce earnings stability, to address concerns of rating agencies and regulators, and to lower levels of required surplus.
Hedging programs usually involve the use of futures, options, or swaps, or a combination of the above. The instruments used will depend upon the benefits backed by the hedging assets, the current market environment and the financial implications of the hedges. Although some carriers are more sophisticated than others in their use of hedging, the overall evolution of hedging will produce future opportunities in the designs of variable and related products. Here are a few examples:
Variable guaranteed benefits will become more heterogeneous. Recent VA guaranteed benefits have tended to be rather homogeneous, with a relatively common feel to them, and differences around the edges. As insurers develop greater expertise in hedging, various kinds of hedges will themselves suggest new, innovative product concepts. Accordingly, carriers at the forefront of hedging today could become the product innovators of tomorrow.