The question was: What is the potential effect of low interest rates and market volatility on indexed interest strategies in fixed indexed annuities, and how do I position fixed indexed annuities when economic conditions are driving the stock indexes lower?”
The answer is: To answer the first part of the question, fixed indexed annuities typically offer the client a choice of allocating their premium amongst one or more indexed interest strategies and a fixed interest rate option.
As regards the indexed interest strategies, there is a correlation between current interest rates and market volatility and the caps or spreads associated with the indexed interest strategies (typically referred to as the “moving parts”).
Caps and spreads are driven by a combination of interest rates and market volatility. In general terms, as interest rates decline and market volatility increases, caps tend to go lower and spreads tend to increase.
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Therefore, in times of low interest rates and market volatility, you can generally expect to see current caps decrease and current spreads increase, reflecting the “cost” to the insurer to support the indexed interest strategy and provide the underlying guaranteed minimum contract value. Conversely, when things improve in the form of higher interest rates and/or less market volatility, you can generally expect to see caps increase and spreads decrease.