Eight Important Questions Practitioners Should Ask When Managing Equity-linked Insurance Guarantee Risks

Kannoo Ravindran

The risk management practice associated with the hedging of variable annuity (VA) related risks was generally non-existent until the late 1990s due to the fact that the VA writers (both direct and reinsurers) of that era used to operate with the mindset that long-term returns were unlikely to be negative and that market risks (like mortality risks) are diversifiable. As a consequence of this mind-set the wrong conclusion, that the capital required to write this business is no different from the capital required to write a traditional life insurance business, was drawn.

Once the regulators, rating agencies and analysts started to question the sanity and validity of these assumptions, and impose stricter guidelines on the required reserve and capital, the management of risks inherent in these products became an important ingredient in the product-development process that writers had to go through internally before bringing such products to the retail marketplace.

As is well known (and discussed in other chapters of this book), writers of VA and other equity-linked insurance products are typically exposed to an assortment of risks, ranging across various asset classes such as