What is market risk in a variable annuity?

• A. It is guaranteed and cannot lose value
• B. The insurer solvency risk
• C. Market risk can cause subaccount losses and can affect guarantees
• D. It has no impact on guarantees

Answer: (C)

Market risk in a variable annuity is the risk that the value of the contract’s underlying subaccounts will move up or down with the financial markets. Since those subaccounts are invested in stocks, bonds, and other assets, their value isn’t fixed and can decline if markets fall. That decline directly affects the contract’s account value, and it can also affect any guarantees attached to the policy (such as minimum withdrawals or death benefits) because those guarantees are built on the performance and value of the underlying investments. So market movements can erode account values and in some cases influence the level or viability of the guarantees.

Insurer solvency risk is a separate concern, related to whether the insurer has enough capital to meet promises. And guarantees aren’t completely insulated from market moves; they’re designed to provide protection, but their effectiveness and funding can be influenced by how the subaccounts perform. The statement that market risk cannot cause losses or that it has no impact on guarantees is incorrect, because market performance is the fundamental driver of both the account value and the guarantees tied to it.