New Rules Could Prevent Annuity Derivatives Blight
November 22, 2018 by Allison Bell
State insurance regulators are moving ahead with a project that could help keep variable annuities on the shelves — by keeping decreases in the theoretical value of derivatives contracts from making their financial statements look like a blighted soybean leaf.
Publicly traded insurers, especially, fear that “non-economic” changes in derivative contract values could make their earnings look terrible, and force them to narrow, or eliminate, their variable annuity product offerings.
Life insurers use derivatives contracts, or contracts with other financial services companies, to back up variable annuity benefits guarantee promises.
Through many of the contracts, the other companies, or counterparties, have promised to pay cash to the insurers if interest rates fall below a specified level, or rise above a specified level. The derivatives contract promises help a life insurer make sure it can, for example, provide a minimum crediting rate of at least 1% on a customer’s variable annuity account value.
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