Put options power up variable annuities
Risk.net Insurance quants increase risk-adjusted profits using novel hedging technique But there is no standard way for insurance companies to hedge the risk of variable annuity contracts. Two industry practitioners have put forward a new hedging method using protective put options. They estimate that the technique can improve risk-adjusted profits for insurers’ variable annuity portfolios by 60%. The improvement comes from two sources: more efficient use of options as a hedging tool, and a reduction in the capital charges for insurers. The approach is based on the assumption that a variabl...