Asset Allocation within Variable Annuities: The Impact of Guarantees

The latest generation of variable annuity contracts contains equity put options plus longevity insurance. The marketing material for these products often claims that these new riders should induce purchasers to take on more financial risk. This chapter examines whether this is indeed the case. Using a unique database, we document that policyholders do in fact adopt higher equity exposures when these riders are selected. We also examine the theoretical merits of the marketing advice, by deriving the optimal asset allocation in the presence of these guarantees. We conclude that more aggressive equity allocations can indeed be justified in many, although not all, product structures.