In today’s edition of Investment News, Darla Mercado has an article titled [Annuities provide boost to investment portfolio: Study]. She leads with the statement “Combining a variable annuity with a guaranteed-minimum-withdrawal benefit in conjunction with a traditional portfolio can help boost income - even in the face of the 2008 decline.” She then lays out the results of an Ibbotson Associates Inc., study that looks at various hypothetical scenarios going back to 1979.
The study did find that the outlook for the combination of VA and GMWB may not be as good for those with a time horizon shorter than 30 years.
One thing that caught my eye was the final statement: “Further, the study doesn’t consider the possibility that the insurer may default on the annuity contracts, but it does note that the likelihood of that is low.” Given some of the statements by regulators about these benefits and the strain they could place on insurers, it would have been interesting to see an analysis of that risk and whether the existence of the benefit has any impact on the possibility that the insurer might default.
The analysis of the benefits is interesting as is the finding that while a diversified portfolio and the VA with GMWB both had steep losses in 2008, the portfolio experiences a 19.4% loss, while the combination “only” 18.4%.