Best’s Review (subscription required) looks at the question of how to shore up equity-market risk, and how insurance-linked products have improved in this respect. Here is an excerpt:
In terms of equity-market risk, insurers fared better during the financial crisis that started in 2008 than during the market collapse in 2002, said Scott Hawkins, vice president and annuity analyst at Conning Research & Consulting. In 2008, separate accounts in individual annuities decreased by 21%, and general reserves increased by $75 billion. By contrast, in 2002, when fewer contracts were in force and account values fell by 13%, general reserves had to be increased by $92 billion. “What happened between those years was that insurers created hedging programs,” he said. “Milliman did a study of those hedging programs and concluded that more than 90% of those they evaluated were successful.”
In a recent white paper on financial risk management, Prudential Annuities identifies common risks as market, actuarial and investor behavior. Market risk includes equity, interest-rate and credit risks. Actuarial risk includes both longevity risk–that the policyholder may live longer than expected–and mortality risk–that the individual will die sooner and that the company will have to pay a guaranteed minimum death benefit. Investor behavior risk has to do with how investors utilize product features, such as when to begin drawing a GLWB, and asset allocation risk, the chance that an investor will choose an aggressive allocation that could cause a big difference between contract value and the protected withdrawal value.