Milliman, Inc. released an analysis of hedging program performance during the current capital markets crisis. Milliman's internal study shows that during the volatile months of September and October, the hedging programs developed to protect variable annuities (VAs) with guarantees were 93% effective.

This resulted in a saving of an estimated $40 billion in industry-wide assets for the insurance companies that write these products while protecting a much larger quantity of assets under management. This hedging performance stands in stark contrast to the results of other financial instruments during this time period.

"Since the last severe market downturn in 2001, many insurers have developed more robust guarantee hedging programs that are built to provide substantial protection against dramatic market declines," said Ken Mungan, co-author of the report and head of Milliman's financial risk management practice. "Today's hedging programs emphasize a transparent, liquid approach to asset protection. Our study shows that these hedging programs have held up well throughout the year, even during the recent capital market crisis, providing confidence at a time when it is otherwise in short supply. These programs are relatively simple compared to the complex structured financial products blamed for the crisis; their success is likely to spur new innovation, both among VA writers and among other financial product companies that are looking for a way to insulate themselves against market risk."

The report examines how hedging can be used to shore up new risks and looks beyond recent savings to consider future implications for variable annuities. Based on these positive results, variable annuities products are likely to become more attractive.