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A Study on Natural Hedging Effect to the Risk of Portfolio in Equity-Indexed Annuity and Minimum Guarantees of Variable Annuity
Journal of Insurance and Finance
2014, 25(1),
pp.75-107
Publisher : Korea Insurance Research Institute
Research Area : Business Management
Publisher : Korea Insurance Research Institute
Research Area : Business Management
-
Since its introduction to Korean market in 2002, variable annuity has recorded fast growth and has become one of the typical annuity products. However, there is a need for more expert knowledge and research on the risk management of the guaranteed minimum option that characterizes variable annuity compared to competing financial products. In this study, we suggest using equity-indexed annuity as a risk management tool for the guaranteed minimum option of variable annuity, because Ratchet option of the equity indexed annuity provides a natural hedging effect to the GMAB option of the variable annuity. Specifically, simultaneous sales of equity-indexed annuity and variable annuity products can bring a natural hedging effect to the whole portfolio. As a result of this natural hedging effect, required amount of reserves and capital can be reduced. In addition, this study shows that insurers can save costs of dynamic hedging and consequently improve profitability using this kind of portfolio.
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