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Don’t Make Me Say I Told You So 196

How Can Insurance Companies Provide

Guarantees?

Let’s look at how the insurance company handles the corresponding

risk they face:

Reinsurance – This means buying insurance from another

insurance company, which means that, for a price, the insurer
is transferring responsibility for some of the guarantees to other

insurers.

Hedging strategies – These help limit an insurance company’s risk

in down markets, through the purchase of financial instruments or

derivatives that will increase in value when the market falls. This
offsets increased liabilities for the guarantees the company has
offered.

Product design – Insurance companies design annuities to make
sure that guarantees and other benefits offered will not expose

the company to excessive risk. It’s important that the contract

offers guarantees and benefits for the investor, but not to the point
where perks negatively affect the financial stability of the insurer.
After all, if the company can’t make good on the guarantees, they

are worthless to the investor.

Chapter 4: Annuities

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