How to Build the Optimal Portfolio
Registered index-linked annuities (RILAs) offer a balance of growth potential and downside protection. But while they have gained popularity as retirement and investment products, they also present capital, liquidity and asset-liability management challenges to insurance companies.
These complex products appeal to consumers because they provide exposure to market gains while limiting losses – a benefit that is particularly attractive during periods of extreme market turbulence. However, RILAs are also complex, making it difficult for consumers, their financial planners and the insurance companies issuing these annuities to estimate their overall portfolio impact.
Chief risk officers of insurance companies certainly have their share of concerns about RILAs. These products not only impact insurers’ capital and liquidity ratios but can also potentially cause ALM mismatches. Indeed, sudden changes in the market environment may prove hedges to be either inadequate – because of increased correlations – or excessive – because, say, early withdrawals overwhelm embedded penalties.
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