By declaring a rate in advance that can never fall below the guaranteed minimum interest rate, the insurance company assumes certain risks[i] such as:
DURATION OR INTEREST RATE RISK
Longer duration assets expose the insurance company to potentially larger price fluctuations as interest rates move.
INVESTMENT RISK
Lower than expected returns on investments, risk of default, credit impairment, underperformance, pre-payments or extension risk.
LIQUIDITY RISK
Certain portfolio allocations may not be readily tradable under certain market conditions.
CASH FLOW RISK
Actual plan and participant cash flows may be significantly different than what was anticipated when the crediting rate was declared.
CAPITAL RISK
State insurance regulators oversee insurer reserves and investments through regulation and regular audits.
[i] For separate accounts whose crediting rate is determined by the performance of segregated assets, some of the risks described are borne by the plan, not the insurance company.
