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November 09, 2005 at 07:00 PM
Insurance products tied to the Consumer Price Index first appeared in 1968, with the introduction of The Cost of Living Policy. This was just in time for the arrival of a period of high inflation (1969-1982).
From that simple start, the insurance products world has moved ever deeper into offering contracts that take advantage of indexing. As will be seen, this indexing is going somewhere.
Many variations of the cost of living policy came on the market after that first debut in the 1960s, some as chassis products and some as riders. (Similar developments occurred in many foreign countries). Sales tended to track the upticks and downticks in the CPI. But when the period of low inflation arrived in 1983, the product seemed to go out of favor.
Or did it? Chart 1 shows that products indexed to the CPI still exist. Most widely popular are the CPI riders on long term care insurance policies.
As soon as CPI products were developed in the late 1960s, the idea immediately arose of tying products to stock market indexes. This idea took a long time to become a reality, but the insurance industry now has the result–the index annuity products, which first debuted in the mid-1990s and which have been making sales headway in the 2000s.
In the meantime, S&P 500 clone mutual funds arose as did many other index funds, which now number 700 or so.
The S&P index funds attempt to duplicate the performance of the stocks in the index. I’ve been following eight such funds. On Nov. 1, 2005, they showed an average year-to-date yield of + 0.85%, with little variation from fund to fund. The S&P 500 Index itself had decreased .41% for the year to date. So, the difference, 1.26%, would represent the cash dividends on the stocks. (This cash yield seems reasonable.) It would seem that these eight clone funds have done a very good job of actually tracking the S&P 500.
The eight funds are all associated with large investment firms that are not historically connected to the insurance industry. But “convergence” of financial products does exist these days, so the development is worth following.
On another note: 2005 has not been a good year for stocks. (Chart 2 shows results since 2000.) This impacts performance of equity indexes and of the financial products that rely upon or link to those indexes.
Now is the time to mention that the Chicago Mercantile Exchange and the Chicago Board of Trade offer financial futures in the S&P Composite Index, the Dow Jones Industrials Index and the NASDAQ 100 Index. This financial futures market may be of some use to companies in the pricing and management of stock market indexed products, such as the index annuity.
