Asset Allocation within Variable Annuities: The Impact of Guarantees By:

The latest generation of variable annuity (VA) contracts contain equity put options plus longevity insurance. Much of the marketing material for these products, claim that these new riders should induce investors to take-on more financial risk. In this paper we examine whether this is indeed the case. Using a unique database we document that policyholders are in fact adopting higher equity exposures when these riders are selected. We also examine the theoretical merits of this advice by deriving the optimal asset allocation in the presence of these guarantees. Our main conclusion is that more aggressive equity allocations can indeed be justified in many, although not all product structures