Defined terms for the annuity market and lifetime income landscape.
Real interest rate is the interest rate that remains after removing the effect of expected inflation, expressing the rate of return in terms of purchasing power rather than dollar amounts.
Real yield is the yield on a bond after adjustment for inflation, expressing the return the investor earns in units of purchasing power rather than nominal dollars; it is directly observable on Treasury Inflation-Protected Securities.
Reinvestment risk is the risk that coupon income and maturing principal from a fixed income portfolio must be reinvested at yields lower than the yields at which the assets were originally acquired, compressing portfolio yield and the spread on insurance carrier contract liabilities.
Rising rate environment effects on annuity pricing are the changes in payout rates on newly issued contracts, mark-to-market position of existing bond portfolios, and in-force contract dynamics that occur when prevailing nominal interest rates move higher over a sustained period.
Spread widening is the dynamic in which the yield gap between credit-risky bonds and comparable-maturity Treasury securities increases, typically during periods of market stress or reassessment of credit risk, changing carrier general account yields and product pricing for newly issued annuities.
