Dec 1, 2015

As FIAs See Continued Growth, Are Insurers Properly Modeling their Risk?

Fixed Indexed Annuity sales have grown exponentially over the past 7 years, providing an earnings floor for protection during bear markets, and additional market upside when compared with traditional fixed products.  Moreover, the product guarantees of FIAs—especially the Guaranteed Minimum Withdrawal Benefit (GMWB)—enable customers to worry less about outliving their savings and less about ‘stock picking’ or sudden market downfalls.

However, navigating this vibrant growth market does not come without its challenges. Since these insurance guarantees are exotic in nature, they can often be very sensitive to modeling assumptions, as many practitioners have experienced firsthand. From Cliquets (Monthly Sum Caps), to Guarantees on exotic underlyings, such as Point-to-Point for FIA GLWB—and even more exotic modifications, such as GLWBs on Monthly Sum Caps on Vol Controlled indices—modeling these exotic insurance products is clearly no simple task.

So, how can practitioners create an effective liability model to manage risk while maintaining profits? How do modeling choices impact prices and risk metrics? As insurance carriers compete in this growing FIA marketplace, they’ll need to combine capital management skills, risk management processes and technology tools in a holistic manner in order to remain competitive. But how?

Our new info graphic, FIAs Flying High, outlines the growth trends of FIA products along with some best practices and things to consider when addressing these challenges.

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