Question: So, with the volatile US markets, they are a plethora of risks with ULG's that derive from across the pond. Do the experts still trust in the US market?
Colin Bell - Aegon
It's important that advisers understand the nature of the risks of these products and how providers are managing these risks.
The risks associated with capital markets (e.g. movements in underlying asset values, interest rates, equity volatility etc) are controlled by the provider by investing the guarantee charges in financial instruments such as index futures (puts) and interest rate swaps which will increase in value if the guarantees increase in value. Each investment fund that is made available in a guaranteed product is mapped to hedgeable indices / assets. UK equities will be hedged using FTSE futures; US equities by S&P 500 futures; European stocks to a European index say and so on. The futures markets need to be large and liquid to allow hedge positions to be altered readily - which impacts on the types of funds which are offered. But there is no fundamental risk for ULGs relating to the state of the US economy in particular
Milliman Actuaries and Consultants recently concluded that hedging by US companies had been 94% effective in achieving their goals during the crisis at the end of 2008, and for European companies they were 95% effective. Where losses have arisen, it has generally been due to insufficient hedging scope.
Clearly, the hedging process of valuing the liabilities and regularly adjusting hedge positions needs to be robust. Providers take great care to ensure that this is the case.
There are other risks that the providers manage. Some of these can be controlled by robust product design to avoid the risk of unexpectedly large proportions of particular consumer segments taking the guarantees. Other risks involve making assumptions about longevity; mortality; lapse rates; how people will take income withdrawals in practice etc and then regularly reviewing experience. The insurers offering ULGs are very experienced in this.
Succeeding co-founder Simon Rogerson
Janus Henderson Global Dividend Index
More than 10 million shares allocated
Long-term strategic holding
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