Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksMedium
A client is considering an investment in a variable annuity. They are concerned about the investment performance of the underlying separate account and how it might impact their future retirement income. What type of risk is the client primarily concerned about?
- AMarket risk
- BLongevity risk
- CInflation risk
- DInterest rate risk
Show answer & explanationAnswer & explanation
Correct answer: A. Market risk
A variable annuity's value and payout are directly tied to the performance of the subaccounts, which are invested in the market. Therefore, the client's concern about the 'investment performance of the underlying separate account' directly relates to market risk, as poor market performance would negatively impact their retirement income.
Why the other options are wrong
- B. Longevity risk is the risk of outliving one's savings, which variable annuities can help mitigate with lifetime income options, but it's not the primary concern here about separate account performance.
- C. Inflation risk is the risk that inflation will erode purchasing power; while a concern for any long-term investor, the question specifically points to the performance of the separate account, which is market-driven.
- D. Interest rate risk primarily affects fixed-income investments; while a variable annuity might have bond subaccounts, the concern is about overall investment performance, not just interest rates.
Market Risk (Variable Annuity)
The risk that the value of the underlying investments (subaccounts) within a variable annuity will decline due to adverse market movements, directly impacting the annuity's value and future income payments.
- borne by the annuitant, not the insurer.
- Tied to the performance of the separate account's investments.
- Can lead to fluctuations in account value and income payments.
Memory trick: Variable Values are Vulnerable to Volatile Markets.