Variable Annuities - Variable annuity providers embrace volatility hedging

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US life companies significantly changed their approach to valuing and hedging their variable annuity (VA) portfolios in 2007, in what was for many a struggle to keep up with sharp increases in market volatility. Unlike traditional life products, variable annuity guarantees are hedged at the outset using derivatives, minimising the level of capital needed to support the products. However, changes in market assumptions or customer behaviour can result in abrupt hits to reserves or capital levels.