In this article, we suggest how insurers can save on hedging costs for RILA by taking advantage of the naturally synergistic relationship between RILA Buffer and RILA Floor product design.
Hedging a RILA Buffer annuity requires selling an out-of-the-money put, while hedging a RILA Floor annuity requires buying out-of-the-money put. If the insurer can offset these two puts (long + short) internally, then trading them might not be required, potentially saving the insurer over a dozen basis points which can be put to work elsewhere. There are other strategic advantages to this hedge design, which are discussed below.
Conditions # 1 and #2 are easily and automatically met given the current design of RILA products at most insurers. Condition # 3 can be met by offering Floor and Buffer allocations together via a packaged deal, and/or by offering an additional discount for assigning equal capital into each of the two allocations (Floor and Buffer). Transactions can still be minimized by making the allocations approximately similar, if not completely equal.
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