The rapid introduction of these solutions left little time for insurers to evaluate the optimal balance of risk management benefits against client perception of value. Subsequent performance highlighted the shortcomings in risk-control fund performance benchmarks and has fueled a client perception that these funds erode the “upside potential” of VAs. As a result, several manufacturers who embraced these solutions are now partially or completely unwinding their solutions with substantial impacts on balance sheet risk and economics.
This paper examines the properties of alternative volatility management solutions from the perspective of both policyholders and guarantee manufacturers, with a focus on the role of volatility-indexed fees in a potential “next generation” solution. Its purpose is to provide a framework for manufacturers to evaluate the trade-offs associated with each solution, as well as the implications of certain features.