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

See all articles by Geng Deng

Geng Deng

Wells Fargo

Tim Dulaney

Securities and Exchange Commission

Tim Husson

Securities and Exchange Commission

Craig J. McCann

Securities Litigation and Consulting Group

Date Written: September 11, 2013

Abstract

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,

Suggested Citation

Deng, Geng and Dulaney, Tim and Husson, Tim and McCann, Craig J., Structured Product Based Variable Annuities (September 11, 2013). The Journal of Retirement (Winter 2014) Vol. 1, No. 3, pp. 97-111 DOI: 10.3905/jor.2014.1.3.097. Available at SSRN: https://ssrn.com/abstract=2049513 or http://dx.doi.org/10.2139/ssrn.2049513

Geng Deng

Wells Fargo ( email )

1753 Pinnacle Dr
7th Floor
Mc Lean, VA Virginia 22102
United States

Tim Dulaney

Securities and Exchange Commission ( email )

100 F Street, NW
Washington, DC 20549-1105
United States

Tim Husson (Contact Author)

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC Washington, DC 20549
United States
202-551-6803 (Phone)

Craig J. McCann

Securities Litigation and Consulting Group ( email )

3998 Fair Ridge Drive, Suite 250
Fairfax, VA 22033
United States

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