How did Variable Annuities Fare in the Crisis?

Peter H Sun and Sam Nandi

The global financial crisis of 2008 and 2009 changed fundamentally many practices in the financial services industry. The effect of the crisis on how variable annuities (VAs) in the US are priced, developed, sold and managed has also been very significant. This chapter will therefore examine the VA industry landscape before and after the financial crisis, and review the key trends post-crisis.

In the period leading up to the financial crisis, the US VA industry was characterised by:

• • VA sales driven largely by minimum guarantee (GMxB) riders;
• • multiple VA writers in the VA market;
• • VA writers engaged in a product feature “arms race” to provide increasingly rich guarantee benefits; and
• • hedging programmes being established in many, although not all, of the major VA writers.

The financial crisis hit the VA industry by surprise. Due to the dramatic fall of asset prices, almost all GMxB riders became in-the-money in a very short space of time, creating a large increase in reserve and required capital on VA writers’ balance sheets. Fortunately, the hedging programmes already in place proved to be around 93% effective on average