Historical Returns Distort the Analysis of Annuities
October 26, 2021 by David Blanchett
If you use historical interest rates to analyze options-based annuities, you will mislead clients as to the benefits of those products.
Low interest rates present a challenge to all investors, retail and institutional alike. Certain financial products, such as fixed indexed annuities (FIAs) and registered index-linked annuities (RILAs), have lower caps because of lower interest rates.
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Wink’s Note: David Blanchett and I had our relationship start on the basis that I did not agree with one of his articles.
I saw that he recently wrote an article, based upon a post I made a couple of weeks ago. In that post, I was criticizing illustration software vendors that illustrate indexed annuities using current rates for historical periods.
Not surprisingly, David agreed. As a result, I was not surprised to find myself nodding in affirmation throughout much of this article.
“Caps evolve with interest rates over time; therefore, a cap based on a current rate environment should not be ‘back tested’ in previous yield environments where the yield was significantly different.”
Yes, yes, and YES!
However, as it relates to GIGO, is the fact that the average indexed annuity S&P 500 cap today is 3.49%, and not 5.0%, basis for questioning these methods of estimating historical cap rates?
You tell me. -sjm