Hi there, it says among other in the risks ofbthebcomp with reg to the option. the gtee is more valuable if inv ret have beemln strong bc a larger annuity can be bought on adv terms. why do we care about this as a risk ? what we are interested is the gtee vs the yield achieved by our matching assets. if this is too high the option will be otm so no exercise. what am i missing ? thanks
This is a unit-linked endowment assurance with an option to convert the maturity value of the endowment into a temporary annuity at a guaranteed annuity rate. If the p/h takes the option, the amount of guaranteed annuity will be the product of the guaranteed annuity rate and the maturity value of the endowment. As it is a unit-linked product, the maturity value is unknown until the maturity date, and will depend on the investment returns earned on the assets held in the fund(s) in which the policyholder has chosen to invest. Very high such unit growth rates will lead to a high maturity value and therefore also a more expensive guarantee (if the annuity rates are in the money). You mention 'our matching assets'. These will not be matching the guaranteed annuity, they will simply be the assets within the linked funds that the policyholder has chosen. Many are likely to be equity-based, so a combination of high equity returns and low interest rates would be doubly costly for the company (the latter can bring the annuity guarantee into the money, the former would make the amount of fund value to which the rates are applied higher and thus result in a higher guaranteed annuity in payment). If the funds are invested in bonds, low interest rates (which bring the option into the money) will tend to increase the price of bonds and therefore the overall investment returns on them - so we have the same issue. Hope that has made this clearer.
