A review and analysis of Equity Indexed Annuities [1], which have become incredibly popular among insurance agents in the last few years (because no securities license is needed to sell them).
After outlining various types of Equity Indexed Annuity [2] [EIA] contracts, the article discusses reasons why both direct contract comparisons and ex ante performance estimates are difficult. It then explores three types of performance evaluation metrics: (1) option payoffs; (2) historical payoffs; and (3) simulation-based payoffs. Using the lower and upper bound dollar payoffs set by the EIA’s contract provisions, the article quantifies the likelihood that a contract owner either benefits from the downside protection or regrets the cap on the upside payoff. The probability of regret is explored over a spectrum of investment portfolio [3] alternatives that might appeal to both conservative and aggressive investors. This discussion suggests that EIAs should be evaluated in both ‘dollar-wealth’ space and ‘utility-of-wealth’ space. It concludes by noting that the utility theory underlying classical economics cannot explain the popularity of EIAs among retail investors.
This article was co-written by Patrick Collins, Huy Lam, and Josh Stampfli.
| Attachment | Size |
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| Safety First.pdf [4] | 175.67 KB |