Definition
Daily averaging is an indexed annuity calculation method that takes the daily closing values of an underlying index across a crediting period, averages them, and uses the percentage change between the starting value and the period average as the basis for the credit applied to the contract.
Why it matters
Daily averaging is the calculation method that smooths most aggressively over the path of the index — by replacing the period-end value with an average of all daily values during the period, it both dampens the gain in a sharply rising market and softens the loss-of-credit risk from a sharp end-of-period decline. Naming the method directly is what makes its structural smoothing visible alongside the more end-point-sensitive point-to-point method.
How it works
In a daily averaging strategy, the index's closing value is recorded each business day across the crediting period — typically a year. The average of those daily values is computed, and the percentage difference between the starting index value and the daily average is treated as the period's index gain. The participation rate, cap rate, and crediting spread are then applied to that gain to produce the credit. Because the average always sits below a steadily rising end value and above a steadily falling end value, daily averaging structurally reduces the gain measured in strongly upward markets and reduces the depth of the no-credit zone in weakly upward markets. Some carriers compute the average across business days only; others use a different interval — the contract specification governs in each case.
In practice
For an individual evaluating an indexed annuity that offers daily averaging as one of its crediting strategies, the relevant comparison is to point-to-point on the same underlying index. Daily averaging typically produces lower credits in strongly trending upward markets (because the average lags the rising end value) and higher credits in markets that finish lower than the average daily value during the period (because the average sits above the depressed end value). A professional should provide a back-test of the strategy across recent historical periods that include both trending and choppy index behavior. Daily averaging tends to be structurally most attractive when the reader expects volatile or range-bound markets and structurally least attractive when the reader expects sustained upward trends.
In the Longevity Standard Framework
Daily averaging is supporting vocabulary in the Longevity Standard framework — a calculation-method component of the crediting parameter drag cost structure that smooths over the index path within the crediting period. Crediting parameter drag is one of five values that the cost-structure claim property can take, alongside none, explicit fee, embedded spread, and guarantee charge. The cost-structure property determines how much of the structural pooling benefit reaches the participant; in daily averaging strategies, the substitution of a path average for the period-end value means the relationship between underlying index behavior and credited return depends on the specific path the index follows during the period rather than on its start-to-end change alone.
Related terms
- Point-to-point crediting
- Monthly sum crediting
- Cap rate
- Participation rate
- Spread (crediting)
- Annual reset
- Index crediting strategy
- Fixed indexed annuity