Can i ask why the cost of the guarantee on vesting annuities necessarily increases under the stress?
I thought that for annuities, companies would typically try and back them with corporate bonds. Reason being that if they can suitably match the cashflows then they can get a liquidity premium benefit.
If corporate bond yield has increased (and this is mostly driven by a liquidity issue and not default effect), then couldn't this offset the decrease in the risk free yield and hence increase the overall discount rate for the annuity cashflows? If so, wouldnt this decrease the cost of the annuity guarantee? Also factoring in that the value of the fund is also likely to decrease if its backed by equities?
I thought that for annuities, companies would typically try and back them with corporate bonds. Reason being that if they can suitably match the cashflows then they can get a liquidity premium benefit.
If corporate bond yield has increased (and this is mostly driven by a liquidity issue and not default effect), then couldn't this offset the decrease in the risk free yield and hence increase the overall discount rate for the annuity cashflows? If so, wouldnt this decrease the cost of the annuity guarantee? Also factoring in that the value of the fund is also likely to decrease if its backed by equities?