Economic woes and regulation add to VA hedging challenge

Uncertain global economic conditions mean that consumer demand for variable annuity products remains high. Yet these same economic conditions make the hedging of the embedded guarantees more challenging, while the steps taken by regulators to constrain the risks of derivatives have brought additional layers of complexity to the hedging process. Insurers, as a result, are becoming more sophisticated in how they manage their exposures.

Variable annuities (VAs) have always posed challenges, both to those that issue them and to the regulators that oversee the market. Insurers must design and hedge the products in such a way that they can meet their long-term liabilities. Regulators must assess whether the products – and the promises they make in terms of their in-built guarantees – present a risk to the overall financial system.

While the debate around the systemic risk of VAs continues, the current difficult and uncertain