Insurers look to volatility controls to support long-term guarantees

As insurers look for ways to offer long-term guarantees to customers despite the challenging investment environment, some are turning to volatility control mechanisms to reduce the cost of hedging the guarantees. Louie Woodall examines how these mechanisms could form the basis of the next generation of unit-linked products with guarantees

In the current ultra-low interest rate environment, insurers are grappling with the question of what, if any, long-term guarantees can be offered to customers. In recent years, some insurers have been badly burned by products promising guarantees that were impossible to meet when markets tanked. Aegon’s ‘Five for Life’ variable annuity (VA) was one such product, a package that pledged to pay out 5% of a policyholder’s initial investment each year from the age of 60 until death. Launched in 2006