Seminar by Thorsten Moenig

Please Note: This seminar will be given online.

Basis Risk in Variable Annuities

Variable annuities are popular personal savings and investment products with long-term guarantees that expose U.S. life insurers to extensive financial risks. Hedging these guarantees is critical but complicated by basis risk, i.e. the discrepancy in returns between the underlying mutual funds and suitable hedging instruments. Enhancing classical fund mapping methods with data analytic techniques, we document in a comprehensive empirical analysis that basis risk significantly impairs hedging effectiveness: at the fund level, even under the most favorable conditions, at least 20% of the insurer's loss volatility cannot be eliminated through hedging.