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Annuities are insurance contracts which establish regular payments to an individual by the insurance company, typically lasting until said individual's end of life.

Usually, the individual gives the company a large cash sum, and in return receives these payments subsequently. Annuities are made feasible by returns from investing that initial cash sum.

Obviously this works very well to the insurance company's benefit as long as investment profits are high. However, what will happen in a long bear market?

The companies providing the annuities will end up losing money on all their existing annuity obligations. This seems especially risky since they may go out of business, leaving their insured without income or capital to support themselves in retirement.

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The companies providing the annuities will end up losing money on all their existing annuity obligations.

There are different kinds of annuities: Fixed, Variable, and a many varieties of Structured Index products, etc.

While I can't say that it's true for every Structured Index product, in general, the insurance company has zero risk and collects their fee throughout the life of the product. The annuitant gets what the market rises or drops, subject to caps and some loss limits which are controlled by the underlying options used to create synthetic equivalents. There's no market risk to the insurance company.

During the investment phase of a variable annuity, the insurance company also bears no risk since the proceeds are invested in sub-accounts which is just a mutual fund equivalent. The risk here is when the annuitant starts withdrawing funds (post 59-1/2), usually around 6% a year and the annuitant outlives the accrued money (plus additonal market gains if not annuitized).

I surmise that you although not mentioned, your question refers to a Fixed Annuity. In a bear market, funds in the market will lose value and the insurance company may incur losses. But they're not very likely to go bankrupt because insurance companies are not monolithic. They offer various types of annuities and some may also offer offer other types of insurance (life, health, Medicare supplements, long term care, auto and home, liability, etc.). If one product incurs losses, rates can be raised in other products.

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  • "If one product incurs losses, rates can be raised in other products." -> the problem is whether the company can remain competitive that way? Suppose there are two insurance companies, A and B. A offers annuities + all other types of insurance, B offers the same but without annuities. The market goes beat. A is losing on annuity contracts and must raise rates in other areas. However, now its rates are higher than B in all those other areas. So raising the rates won't help. – Jin Long Feb 19 at 17:40
  • @Jin Long - On paper, that sounds rational. Consider in isolation auto insurance. In my state, one provider's rates may be very competitive. A few years later, their rates are much higher and they are no longer competitive. I can't tell whether they are de-risking their exposure or simply raising rates for another reason but they are certainly not concerned about becoming less competitive in that area. Quite possibly the reason for this is that they are increasing their exposure in a different, yet more profitable insurance product that they offer. – Bob Baerker Feb 19 at 17:53
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    @Jin Long - A more on point example would be variable annuities. I don't know the exact number currently but when I have looked at them, the guaranteed deferred accrual rate for better policies has been 5 to 6%. A company offering a 6% guarantee could stop offering that and new products would only offer 5%. While the insurance company's profit per contract remains the same, the potential payout decreases, reducing future exposure, thereby offsetting some of the payout exposure of current contracts referenced in the OP's question. Insurance companies play long ball. – Bob Baerker Feb 19 at 17:54

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