Registered index-linked annuities, or RILA contracts, are still as hot a devil pepper, partly because life insurers believe they are easier to "hedge against risk."
Cameron Ellis, a University of Iowa finance professor, and three colleagues gave clear, detailed descriptions of some of the forces that may keep RILAs stable in a new paper about how companies' in-house solvency reviews improve risk management.
The Ellis team suggested that the reviews improve life insurers' risk management by encouraging them to emphasize sales of RILA contracts, rather than variable annuities.
A traditional fixed annuity ties the contract crediting rate, or interest rate, to the performance of the issuer's own investment portfolio.
A traditional variable annuity lets the owner tie part or all of the crediting rate to the performance of funds that resemble mutual funds.
A fixed indexed annuity lets the owner connect part or all of the crediting rate to the performance of investment indexes. The issuer promises to protect a buyer who follows the contract rules against market-related loss of principal.
A RILA is an indexed annuity that's registered with the U.S. Securities and Exchange Commission. Because it's registered with the SEC, the issuer can expose the owner to the risk of market-related loss of premium contribution value. The issuer can charge the owner separately to provide either a value floor, which limits how far the value can fall, or for a buffer, that provides a specified level of protection against loss of value.
For five reasons the Ellis team researchers think RILA contracts are easier than traditional variable annuities to hedge, see the gallery accompanying this article.
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