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Study shows variable annuity hedging programs 94 percent effective

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Between November and March, hedging programs at variable annuity providers maintained a high level of effectiveness – 94 percent compared to 93 percent in the prior period, according to a new study from independent actuarial and consulting firm Milliman.

“The success of hedging programs has caused companies to look more closely at their unhedged risk and to determine how to use hedging to better manage those risks,” says Ken Mungan, who heads Milliman’s financial risk management practice. “Many companies have explored and implemented refinement and expansion to their financial risk management programs based on the success of the hedges in place and also based on companies’ experience in the last year with their unhedged business.”

Milliman says there’s been a big shift since last quarter of 2008 as providers are no longer so focused on product design but fees and benefit richness. Of the 33 companies modifying their VA product offerings through May 16, 29 have planned a fee increase and 19 have planned to scale back product designs, according to the study.

“After a period of intensely focusing on product design in the interest of winning new business, companies are instead looking at their pricing and benefit richness and returning to the original variable annuity value proposition, which holds that VAs offer a floor upon which people can build their retirement security,” said study author Peter Sun.