![]() ![]() Working with an experienced financial advisor that can help assist clients in managing their portfolio through various market cycles, as well as the various different financial stages of their lives, is critical to successfully navigating the appropriate strategies.Ĩ. We can never be fully certain what future market conditions will hold, but we know from experience that offering clients crediting strategy flexibility, allowing them to diversify between multiple strategies within a product is beneficial, especially when the market fluctuates. In that context, does offering people a choice between uncapped and capped strategies really make sense? Many economists say no one can make useful predictions about what investment markets will do. However, we feel the extra investment of time is more than worth it in order to deliver a comprehensive FIA product to our customers that gives them the ability to choose to allocate among crediting strategies that may offer capped choices, uncapped choices with a participation rate, or uncapped choices with a spread.Įach strategy can perform better in different environments, and we feel it is important to provide our customers with the flexibility that will allow them to diversify between multiple strategic constructs within one product.ħ. It takes a higher level of detail and attention when initially building the product and requires extra administrative maintenance and an ongoing review of rates. ![]() How hard or easy is it to offer capped and uncapped strategies in the same product? How do you handle it when too many people choose one type of strategy over the other?įrom our standpoint, it is not overly difficult to offer capped and uncapped strategies within the same product. However, for options hedging capped strategies, index volatility has a muted impact on the cost of the options due to how a cap is priced in the market.Ħ. Ups and downs in the stock market typically introduce higher volatility expectations for an index. There are a variety of factors that can influence a cap rate, including index volatility, option costs, interest rates and investment earned rates. How do ups and downs in the stock market and other investment markets affect cap provisions? Generally, higher caps will attract more allocations to that strategy, similar to how higher interest rates on a fixed annuity will often lead to an increase in sales.ĥ. How do ups and downs in cap strategies affect cap provision offerings and customer take-up rates? For a particular crediting strategy and the hedge budget available, more expensive option costs would result in a lower cap.Ĭonversely, if option costs were to decrease, assuming the same hedge budget is available, would result in a higher cap.Ĥ. ![]() The second piece of the puzzle is the option costs. The hedge budget itself can be affected by many different functions including investment yield, policy reserves, administrative costs, interest rates, as well as other factors. How do the cap rates fit in with the derivatives or other hedging arrangements insurers use? Are the cap rates just an adjusted version of what’s in the hedging arrangement contracts?įor FIA products, we have a hedge budget that is set aside to purchase options for the crediting strategies. The underlying index that a capped strategy is using can also impact the level of the cap rate.įor example, an index that has some form of volatility control built into the index may have a higher cap rate than the cap rate on the S&P 500 index.ģ. Strategies like this are pretty universal in design throughout the industry, which makes it easy for consumers to compare cap rates for that particular strategy across other products.Ĭap rates are just one feature of a product however, a variety of other features/rates should be taken into consideration as well. It is easy for a consumer to grasp the concept and track the product themselves throughout the year. What kinds of subtle (and not-so-subtle) variations in cap rates do you see out there that clients, especially, might not have noticed?Ī capped strategy is popular because it is offered widely in the industry.įor example, the annual cap of the S&P 500 index is part of the simplicity of the design. At Security Benefit, our FIA products generally offer several crediting strategies to choose from, and we see a lot of diversification across strategies.įor example, our Strategic Growth products offer 14 crediting strategies, and with this type of product series we typically see lower allocation toward our capped strategy, but it still is a significant allocation.Ģ. ![]()
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