Q1: why investment risk is a risk for guaranteed annuity product? If we go with fixed Interest security can not it reduced ? Plz explain this product and risk .
If you are offering to give a guarantee on an annuity to be paid in future, you do not know the investment conditions that will apply at that time. So you may have to pay more than in benefit than you would have had the guarantee not been given. The difficulty with fixed interest is getting the right rate.
My confusion is if company offers GAR as 8% per month and if we invest also in fixed Interest bonds @9% assuming 1% for expenses...Since in fixed Interest bonds ROI is fixed as 8% then there is no risk.Then in this case why there is aa high investment risk for the company?
The only other thing I can think at the moment is what then if interest rates in reality are say 6%. you haven't achieved a full match. So yes, you can mitigate but never eradicate the risk of having introduced a guarantee.
Guaranteed annuity rates can be added to unit-linked contracts. The policyholder chooses a unit-linked fund and invests for a number of years. At maturity the policyholder can either take the unit-linked fund as cash (and buy an annuity at current rates) or can use the fund to buy an annuity at the guaranteed rate. So the insurer has investment risk because the unit-linked fund will not be invested in the matching asset. Usually the policyholder will have chosen to invest in an equity based fund. Best wishes Mark
