When a company offers a guaranteed annuity option does it have to provide the annuity (if the option is in the money and exercised) or can it just fund the shortfall by adding to the maturity payout and the policyholder can then buy an annuity from another provider and be in the same position? For example, if the maturity amount is £1000 and on the open market the policyholder can get an annuity of £50, but the GAO would give an annuity of £60, can the insurer just pay out £1000+£200 so that the policyholder can get £60 on the open market?
Usually, if a company has offered a GAO then it would provide the annuity if the option was exercised. I've not seen your approach used in practice, but I see no reason why it couldn't be used. As long as policyholders are able to purchase the guaranteed annuity for 1,200 then it would meet TCF and PRE considerations. The policyholder would be entitled to refuse the offer though and stay with the original insurer. Best wishes Mark
