In the insurance context, what is disintermediation? Thanks.
Exact definition from Glossary (G-8) in the notes: To withdraw funds from financial intermediaries for placement with another financial intermediation for higher returns or yields. You can find examples bottom of P336, R 21, Volume 2.
My understanding is that it’s when insurance policy holders cash out their policies in exchange for the surrender value. All whole life and universal life policies build up a “savings component” that the insurance policy holder can either borrow from or cancel the insurance policy altogether to get access to all the funds.
it happens when interest rates go up
Exactly… they take the cash surrender values out of their policies and invest and the higher rates available elsewhere.
Got this question about disintermediation with exam 2007. Why is fixed-rate annuity business with an insurance company more likely to subject to disintermediation, under high interest rate situation? I thought that fixed rate annuity is just life annuity — once kicked off (ie retirement starts), the policy holder cannot withdraw or cancel the policy. - sticky
sticky Wrote: ------------------------------------------------------- > Got this question about disintermediation with > exam 2007. > > Why is fixed-rate annuity business with an > insurance company more likely to subject to > disintermediation, under high interest rate > situation? I thought that fixed rate annuity is > just life annuity — once kicked off (ie > retirement starts), the policy holder cannot > withdraw or cancel the policy. > > - sticky If i recall correctly, question was about increased liquidity because of higher current payments to annutiy holders…
comp_sci_kid Wrote: ------------------------------------------------------- > If i recall correctly, question was about > increased liquidity because of higher current > payments to annutiy holders… that’s right but why are the annuities easily subject to disintermediation during high interest rates? - sticky
annuitiy are not subject to disintermediation AFAIK
In insurance terms, If you break up the word “dis-intermediation”, you will see what it means. Bascially the insurance company servers as intermediary between the retail investor and the capital market (making spread). When interest rate go up, investor sees thoes higher interest rate opporunity offer by the capital market (higher rates), so they dis-associate their money with insurance company, take the money and put it directly into the capitabl market===>Dis-intermediation.
Its talking about life insurance, different than annuities.
so what’s the answer to my question? I was asking WHY. - sticky
i could be wrong, but i think it’s the same problem that bonds face. if the coupon is fixed and interest rates become greater than the coupon, the value of the bond falls. likewise, if your annuity is fixed, but you could invest somewhere else at a higher rate, you would want to get out of the annuity. i don’t know if you are locked into that particular annuity or not, but if you can’t get out of the annuity, then disintermediation shouuld not be a problem.
sticky Wrote: ------------------------------------------------------- > comp_sci_kid Wrote: > -------------------------------------------------- > ----- > > > If i recall correctly, question was about > > increased liquidity because of higher current > > payments to annutiy holders… > > that’s right but why are the annuities easily > subject to disintermediation during high interest > rates? > > - sticky I wasnt aware that you can surrender your annuity.
In the real world, fix annuity is nothing but CD wrapped inside of a tax-deferral account. If you have a CD that is paying 4%, and you see market interest rate (new CD) is paying 5%, and you did you math: If I cancel/withdraw my money from this fix-annuity, I am paying $300 for the early withdraw, but I can invest in a higher rate, I will gain $1200, my gain is more than the penatly that I pay. I am going to call up my broker, and withdraw my money from this fix annuity.
ws Wrote: ------------------------------------------------------- > In the real world, fix annuity is nothing but CD > wrapped inside of a tax-deferral account. If you > have a CD that is paying 4%, and you see market > interest rate (new CD) is paying 5%, and you did > you math: If I cancel/withdraw my money from this > fix-annuity, I am paying $300 for the early > withdraw, but I can invest in a higher rate, I > will gain $1200, my gain is more than the penatly > that I pay. I am going to call up my broker, and > withdraw my money from this fix annuity. Cool, i didnt know that you can surrender your annuity! Are you sure that is the case?
^Deal with this kind of Sh*t everyday.
ws Wrote: ------------------------------------------------------- > ^Deal with this kind of Sh*t everyday. you mean life annuities? I am skeptical as to whether retirees are keen to switch out of their life annuities simply because they want to take advantage of interest rate difference of say 2%. I suppose life annuities holders are different from investors who hold general annuities just for investment purpose. - sticky
People do all kind of crazy things to chase yield. Big difference between what a finaincal product is designed for and how the financial product is sold in the real world. Now days, almost all annuity can be terminated early, as long as investor is OK with the fee.
ws Wrote: ------------------------------------------------------- > People do all kind of crazy things to chase yield. > Big difference between what a finaincal product > is designed for and how the financial product is > sold in the real world. Now days, almost all > annuity can be terminated early, as long as > investor is OK with the fee. is it what CFAI says :)??