Renewed interest in investment guarantee products

Recent market downturn has created renewed interest in equity linked guarantee products, according to research by global consulting and actuarial firm Milliman.

Milliman practice leader Wade Matterson said market events in the past year have highlighted a significant gap existing in the Australian market when it comes to managing risks faced by Australians approaching retirement.

“Demand for investment guarantee products really arose out of the last major downturn in the market in 2001.

“What this study shows is that for those insurers, the guarantees have fared well in their first big test. Robust hedging programs are behaving as anticipated.”

Milliman practice leader Ken Mungen said people are so used to thinking about this problem from the perspective of a 30 year old who is accumulating assets, rather than a retiree.

“For someone in that position, one bad year is irrelevant. But for someone who is 55 and up, who is just about to retire or has just retired, one bad year coupled with a withdrawal can be toxic. It’s almost like reaching critical mass in a nuclear explosion,” he said.

“You get to a point where market declines and the withdrawal together push an account towards a path of depletion. And once you get on that path we see it’s mathematically impossible to get off it, even if there is a subsequent market recovery.”

According to Wade, there was a clear need for wider use of risk management products in Australia.

“Over the last decade we have seen a dramatic evolution in the way organisations manage financial risk. Technology has caught up to long standing risk management principles, making it possible to dynamically manage even the most sophisticated investment platform,” Matterson said.

“Whilst demand for these products and services in Australia is still emerging, it is expected to grow rapidly over the next few years, especially in light of current market conditions.”