SVIA

What risks does the insurer bear for providing the guarantees?

By declaring a rate that can never fall below the guaranteed minimum interest rate in advance, the insurance company assumes certain risks such as:


Duration or Interest Rate Risk - Longer duration assets expose the insurance company to potentially larger price fluctuations as interest rates move.


Investment Risk - Lower than expected returns on investments, risk of default, credit impairment, underperformance, pre-payments or extension risk.


Liquidity Risk - Certain portfolio allocations may not be readily tradable under certain market conditions.


Cash Flow Risk - Actual plan and participant cash flows may be significantly different than what was anticipated when the crediting rate was declared.


Capital Risk - If assumptions used while declaring the rate were incorrect and actual earnings are insufficient to cover risks the insurer bears, capital is reduced.