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April 23, 2018 at 07:48 PM
Analysts at Cannex Financial Exchanges Ltd. have come up with data to support a common belief about indexed annuities: that limits on the amount of index gains an annuity owner can keep are a big deal.
The issuer of a non-variable indexed annuity guarantees that the holder will earn a minimum, fixed rate of return. The issuer then adds an adjustment to the return if a stock market index, a bond market index or other specified index does well.
In practice, many issuers manage their risk by putting limits, or caps, on the index-related increases in the crediting rate. Some insurers have emphasized high rate caps when introducing new annuities.
(Related: Something Unusual Happened to Q4 Annuity Sales: IRI)
The Cannex analysts — Branislav Nikolić, Tamiko Toland and Damian Baboolal — tried to measure how much participation caps, and some other common indexed annuity features, affect returns by comparing the performance of 14 indexed annuities from issuers of similar multi-year guarantee annuities.
An issuer of a multi-year guarantee annuity promises to pay a fixed rate for a period of two or more years.
The analysts used data from the Cannex annuity comparison system to study how the indexed annuities and the otherwise similar multi-year guarantee annuities might perform in a wide range of scenarios.
The analysts looked at the formulas, or crediting strategies, used to calculate the index-based adjustments, along with other annuity characteristics. The analysts also looked at the contract rate cap, and the participation rate, or the percentage of the index return used in crediting calculations.
The analysts found that, over a seven-year period, seven of the indexed annuities studied would do noticeably better than the comparable multi-year guarantee annuities in 60% to 80% of the scenarios tested.
