Читать книгу Risk Management and Financial Institutions - Hull John C. - Страница 33

Many life insurance companies also offer annuity contracts. Where a life insurance contract has the effect of converting regular payments into a lump sum, an annuity contract has the opposite effect: that of converting a lump sum into regular payments. In a typical arrangement, the policyholder makes a lump sum payment to the insurance company and the insurance company agrees to provide the policyholder with an annuity that starts at a particular date and lasts for the rest of the policyholder's life. In some instances, the annuity starts immediately after the lump sum payment by the policyholder. More usually, the lump sum payment is made by the policyholder several years ahead of the time when the annuity is to start and the insurance company invests the funds to create the annuity. (This is referred to as a deferred annuity.) Instead of a lump sum, the policyholder sometimes saves for the annuity by making regular monthly, quarterly, or annual payments to the insurance company.

There are often tax deferral advantages to the policyholder. This is because taxes usually have to be paid only when the annuity income is received. The amount to which the funds invested by the insurance company on behalf of the policyholder have grown in value is sometimes referred to as the accumulation value. Funds can usually be withdrawn early, but there are liable to be penalties. In other words, the surrender value of an annuity contract is typically less than the accumulation value. This is because the insurance company has to recover selling and administration costs. Policies sometimes allow penalty-free withdrawals where a certain percentage of the accumulation value or a certain percentage of the original investment can be withdrawn in a year without penalty. In the event that the policyholder dies before the start of the annuity (and sometimes in other circumstances such as when the policyholder is admitted to a nursing home), the full accumulation value can often be withdrawn without penalty.

Some deferred annuity contracts in the United States have embedded options. The accumulation value is sometimes calculated so that it tracks a particular equity index such as the S&P 500. Lower and upper limits are specified. If the growth in the index in a year is less than the lower limit, the accumulation value grows at the lower limit rate; if it is greater than the upper limit, the accumulation value grows at the upper limit rate; otherwise it grows at the same rate as the S&P 500. Suppose that the lower limit is 0 % and the upper limit is 8 %. The policyholder is assured that the accumulation value will never decline, but index growth rates in excess of 8 % are given up. In this type of arrangement, the policyholder is typically not compensated for dividends that would be received from an investment in the stocks underlying the index and the insurance company may be able to change parameters such as the lower limit and the upper limit from one year to the next. These types of contracts appeal to investors who want an exposure to the equity market but are reluctant to risk a decline in their accumulation value. Sometimes, the way the accumulation value grows from one year to the next is a quite complicated function of the performance of the index during the year.

In the United Kingdom, the annuity contracts offered by insurance companies used to guarantee a minimum level for the interest rate used for the calculation of the size of the annuity payments. Many insurance companies regarded this guarantee – an interest rate option granted to the policyholder – as a necessary marketing cost and did not calculate the cost of the option or hedge their risks. As interest rates declined and life expectancies increased, many insurance companies found themselves in financial difficulties and, as described in Business Snapshot 3.1, at least one of them went bankrupt.