Defined terms for the annuity market and lifetime income landscape.
Spread compression is the narrowing of the difference between an insurance carrier's investment yield and the rate it credits to the contracts that yield supports, typically driven by rate changes that affect new-money asset yields more than the rates already promised to in-force owners.
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.
The spread-based business model is the carrier business model in which the insurer earns its margin by investing premium dollars at a yield above what it credits to or pays under the contract, with that yield differential funding the carrier's costs, capital charges, and profit.
The St. Petersburg paradox is Daniel Bernoulli's 1738 problem: a hypothetical gamble with infinite expected value that no reasonable person would pay much to play, used historically as a foundational case for distinguishing expected value from optimal decision-making.
A stable value fund is a defined contribution plan investment vehicle that seeks to preserve principal and produce steady returns by holding a portfolio of high-quality fixed-income securities together with wrap contracts issued by insurance companies or banks that support book-value accounting.
