One use of swaptions is by insurance companies who wish to offer policyholders guaranteed annuity options. So I guess the insurance company would receive fixed income under the swap, which they would then pass onto annuitants. But what would they receive? I'm just not clear on how exactly a swaption would help protect them against overly-generous annuity rates and people living longer than expected.
A swaption is basically an option on interest rates. Sell the policy with guaranteed annuity rates, and buy a swaption. At time to convert policy to annuity: if interest rates are low, ie worse that assumed for minimum rates, exercise the swaption and no loss. if interest rates are high, ignore the swaption, and there is scope to offer the policyholder a higher rate (than guaranteed minimum) and make some profit on the higher interest rates. Your choice on how to split the benefits between yourself and the policyholder. It just helps with the interest rate risk not longevity.
