The National Association of Insurance Commissioners has adopted a principle-based reserving (PBR) statutory framework for non-variable annuities under Valuation Manual (VM-22), effective January 1, 2026. Affected companies need to think about how the new framework embraces the risks and opportunities of their business. This regulatory shift introduces significant changes for insurers across products, with the management and modeling of risk for fixed-index annuities (FIAs), as it represents one of the largest product lines affected by VM-22. FIAs present an opportunity to reevaluate derivative usage to manage both the equity risk present in the product features, as well as the asset-liability management (ALM) due to the asset-intensive nature of the product. This paper dives into the role of hedging within the new VM-22 framework.

Key takeaways

• VM-22 puts additional spotlight on effective risk management for FIA business—especially with guaranteed lifetime withdrawal benefit (GLWB) riders—by directly recognizing equity and interest rate exposure across a wide range of scenarios in the reserve calculation.
• Now is a good time to analyze the optimal hedging strategy for offsetting equity risks between the FIA index crediting and GLWB rider features.
• VM-22 requires sophisticated ALM modeling approaches to appropriately analyze costs and benefits of hedging across scenarios.
• Companies should invest in these ALM capabilities to tighten risk exposures and optimize economics, which will in turn enhance VM-22 balance sheet outcomes and reduce volatility.