It's RILA time: An introduction to registered index‐linked annuities

Abstract

AbstractRegistered index‐linked annuities (RILAs) are increasingly popular equity‐based retirement savings products offered by US life insurance companies. They combine features of fixed‐index annuities and traditional variable annuities (TVAs), offering investors equity exposure with downside protection in a tax‐deferred setting. This article introduces RILAs to the academic literature by describing the products' key features, developing a general pricing model, and deriving the providers' hedging strategy by decomposing their liabilities into short‐term European options. Numerical illustrations show that RILAs offer investors similar risk profiles (in the long run) as TVAs with maturity guarantees, and that many products currently sold appear to be priced quite favorably for investors. For providers, RILAs may be a preferable alternative or complement to TVAs as they greatly simplify the management of the embedded equity risk and can naturally reduce the TVA capital requirements. These features position RILAs as a viable long‐term solution for this product space.