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Participation Rates Up for Fixed Indexed Annuities

Following the Fed rate hikes, the Participation Rates, cap rates, in general, for fixed indexed annuities, from annual point to point all the way out to five year point to point in many cases have more than doubled in the last two years. Why is this?

Three main reasons are:

1) The bonds from the general account backing these guaranteed fixed products, regulated by 50 State Insurance commissioners, are now being purchased with new premium at higher interest rates. Thus the margin, or amount of excess premium available to the insurance company to budget or purchase on index options is higher.

2)More smart collaboration is going into building indexes that are off the beaten path. Indexes with lower option prices combined with lower volatility may give more bang for the buck. More options can be purchased if the price is lower. In the past most indexes were based on the S&P 500, for which options can get pricey compared to indexes following many sectors of the world economy. Criticism has been, back testing on these new indexes, often developed between wall street, and insurance companies don't have enough history yet to give enough assurances. On the other hand, these indexes because of the high participation rates, even if they deliver 3-6% a year with a zero floor, multiplied by their participation rates, is probably the main reason so much retirement money is pouring into them.

3) More and more, AI and smart algorithms are in the math, design and management of these indexes. Some have referred to these indexes as "smart beta". While no money in a fixed indexed annuity is in the stock market, there definitely are options on indexes tracking the market. More and more these indexes are very flexible, with the ability to maintain low volatility but follow momentum, even switch daily, in multiple sectors at one time. The indexes truly are high tech, and would be extremely difficult if not impossible for a retail investor to duplicate.


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