There’s a new buzz phrase in the world of variable annuities. It’s “reduced volatility.” In other words, insurance companies now offer fewer investment choices in an effort to mitigate risk in a choppy stock market. Some industry experts say it’s the wave of the future.
Quite a change from a few years ago, when variable annuities with income guarantees were hot sellers. Back then, insurance companies compiled a long list of investment vehicles: emerging markets, commodities, small stocks, and funds run by star stock pickers.
Now, there are fewer options. Why? When the stock market crashed in 2007-09, minimum guarantees in variable annuities became more valuable to investors, but costly to insurers. Insurers responded by either refusing to offer guarantees, increasing prices or proposing less generous terms.
In an effort to limit the potential of taking a big loss from these guarantees, insurance companies now require annuity investors to hold a conservative mix of stocks and other assets rather than putting 100 percent of the account balance into riskier tech stocks or emerging market shares.