Foreign & Colonial is offering guaranteed annuities through a derivative-based service to insurance ...
Foreign & Colonial is offering guaranteed annuities through a derivative-based service to insurance companies looking to avoid another Equitable Life-type debacle.
The tailor-made service will effectively neutralise the impact of interest rate movements on guaranteed annuity options in what is designed to be a cheaper and more effective method than used by insurers at the moment.
Currently, to match their liabilities insurers generally buy interest rate options which are expensive and limited in supply. This means that there is no real cap on the liability.
The uncertainty over guaranteed annuities for insurers is generally considered to be a result of the fact that the ultimate size of the guaranteed is unknown because of the inpact of market performance, policyholder increments and the cost of providing the guarantee.
All of these factors are impacted on by interest rate changes and as such can create a potential black hole for insurers similar to that which hit Equitable Life.
F&C, which is offering the new service in conjunction with specialist actuaries Intersolve, claim to have had a high level of interest from insurance companies already.
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