Structured Product Based Variable Annuities
The Journal of Retirement (Winter 2014) Vol. 1, No. 3, pp. 97-111 DOI: 10.3905/jor.2014.1.3.097
21 Pages Posted: 1 May 2012 Last revised: 1 Feb 2014
Date Written: September 11, 2013
Recently, a new type of variable annuity has been marketed to investors which is based on structured product-like investments instead of the mutual fund-like investments found in traditional variable annuities. Embedding a structured product into a variable annuity introduces substantial complexity into an investment typically considered conservative. In this paper, we describe structured product based variable annuity (spVA) crediting formulas and how they differ from traditional VAs, value the embedded derivative position for a range of example parameters, and calculate the fair cap levels required to fairly compensate investors for the derivative position. We also provide extensive backtests of spVA crediting formulas using our calculated cap levels and compare the results to their underlying indexes. Our findings suggest that the complexity of spVAs can be used to hide fees and reduce the comparability of variable annuities to other investments in the market.
Keywords: annuity, variable annuity, structured product, hybrid annuity, retirement,
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