White Paper
Registered index-linked annuity cap-setting methodologies
Implications of common industry practices
31 January 2023
Registered index-linked annuity (RILA) carriers seek to maximize the spread between asset earned rates and the cost of hedging, which is primarily affected by the cap rate and the method used to set it. In this paper, we explain common industry practices for cap rate-setting and quantitively compare outcomes of several methodologies using historical asset and option pricing models. We cover topics such as:
- Background on registered index-linked annuities
- Spread product mechanics
- Structured funds
- Comparison of RILAs and structured funds
- Common frameworks for cap-setting
- Methodology for generating historical cap rates
- Differences in hedging costs and net cap rates