Variable annuities
At my most recent job, I became familiar with the variable annuities market. Here's what I learned about the product. Dynamic hedging and variable annuities Variable annuities are investment products aimed to provide retirement cash-flow to the purchasers (policyholders). The idea is simple: put the retirement money on the stockmarket, charge a large fee (3%-4% a year plus a 6% upfront acquisition charge), and offer pension payments starting, say, 10 year from now, in the amount of 5% of principal a year until the death of the policyholder. The sweet part for the purchaser of the annuity is that the payments will continue even after the account goes empty. The typical rationale is that the stockmarket will provide sufficient returns to support the guarantee given the long horizon. History has proven that rationale wrong and there were cases of annuity writers losing substantial amounts of money. As such, variable annuities contain complex investment guarantees which make liabilitie...