US

More robust hedging saves insurers $40.0bn

Consulting and actuarial firm Milliman said an internal study showed that during the volatile months of September and October, the hedging programs developed to protect variable annuities (VAs) with guarantees resulted in a saving of an estimated $40.0bn in industry-wide assets for insurance companies that write these products while, at the same time, protecting a much larger quantity of assets under management. Ken Mungan, co-author of the report and head of Milliman’s financial risk management practice, described the hedges protecting variable annuities with guarantees as having been 93% effective. He said that since the last severe market downturn in 2001, many insurers have developed more robust guarantee hedging programs that are built to provide substantial protection against dramatic market declines. Mr. Mungan said this was in stark contrast to the results of other financial instruments during this time period. “Today’s hedging programs emphasize a transparent, liquid approach to asset protection. Our study shows that these hedging programs have held up well throughout the year, even during the recent capital market crisis, providing confidence at a time when it is otherwise in short supply. These programs are relatively simple compared to the complex structured financial products blamed for the crisis; their success is likely to spur new innovation, both among variable annuity writers and among other financial product companies that are looking for a way to insulate themselves against market risk,” Mr. Mungan explained.