Direction: Read and analyze the following cases in paragraph form

The 2007 financial crisis is the breakdown of trust that occurred between banks the year before the 2008 financial crisis. It was caused by the subprime mortgage crisis, which itself was caused by the unregulated use of derivatives. Despite these efforts, the financial crisis still led to the Great decline.

Moreover, financial crisis in 20072008 have caused losses to life insurance companies issuing variable annuities with guarantees. This is partly due to failure of variable annuity (VA) issuers to anticipate the large variations in asset prices during the financial crisis times in their pricing framework and setting a higher guaranteed rate. Over the past two decades, guarantees that protect variable annuities balances when their underlying investments perform poorly have become quite accepted. Cooperatively, these guarantees can pose a considerable risk to life insurers. This article explores the different types of variable annuity guarantees, the extent of the risk they pose to insurers, and the practices used by insurers to militate against such risk.

Answer the following using your own words:

Q1: Explain how the Financial Crisis Affected Pensions and Insurance and Why the Impacts Matter. (5 Marks)

Q2: How much risk do variable annuity guarantees pose to life insurers? How large are liabilities associated with guarantees? (5 Marks)