For fixed annuities, who bears the investment risk?

• A. Investor
• B. Government
• C. Insurance company
• D. Pool of investors

Answer: (C)

In a fixed annuity, the investor does not face market ups and downs—the insurer guarantees a fixed rate and fixed payments. That means the investment risk is on the insurance company. The company must fund those guarantees by investing premiums in its general account; if returns on those investments are lower than expected, the shortfall is absorbed by the insurer (via reserves or other gains), not by the contract holder. The holder is protected against changes in market performance, though their credit risk hinges on the insurer’s solvency. By contrast, in a variable annuity the investor bears the investment risk because payouts depend on the performance of the underlying investments.