Annuity Companies: Companies in the Business of "Managing Risk"

Annuity contracts are provided by companies which are in the business of financial risk management. Although you can purchase an annuity from some bankers, your policy is underwritten (signed for and liability accepted) by an insurance company whose job it is to manage the financial risk — the bank where you may have purchased the annuity does not accept this risk.

You can also sometimes purchase annuities from your stock broker, such as a variable annuity, but once again, an insurance company whose job it is to manage risk also underwrites (signs and accepted liability for) the funds in your policy.

This may seem like common sense. Then again, it begs reminding us of the fundamentals as there is enough hyperbole in the financial-sphere. Annuities are designed, priced, disseminated, marketed, and delivered directly from insurance companies that manage risk through insurance agents, financial brokers, banks, credit unions, and other financial agencies.

Why are insurance companies largely behind this unique product? After all, Costco sells gasoline in competition to Shell and Mobile. The Girl Scouts sell their cookies in competition to Nabisco's Oreo Cookies. McDonald's even sells fancy coffees in competition to you know who!

Why don't banks, credit unions, mutual funds etc sell annuities on their own and just get rid of the middle man? Here is the simple answer:

The world is an uncertain place and the future is even more uncertain than it is even today, if that were possible. This creates an opportunity for a business that has the capacity to reduce the risk of unknowns.

The insurance industry is an industry that compiles and analyze statistics pertaining to the risks of the unknown, and then devises premium amounts (payments) that can be charged to other businesses or individuals as a useful service to mitigate those same risks.

These laborious processes are completed by actuaries, hired exclusively by insurance companies. Actuaries are very sharp people, and they typically get paid a lot.

First, if you wanted to design your own annuity, you would have to hire a lot of actuaries to design them properly and that would cost a bundle since they get paid so well.

Second, if you were able to do that, then you would have to come up with a lot of bucks to back up the promises that your actuaries are making in the annuity. So you would need a lot of investors to buy a lot of bonds, namely investment grade bonds such as treasuries and highly rated corporations. Bonds typically comprise most of the secure portfolios within insurance companies.

Third, you would have to apply and register with the state(s) in which you wish to do business and begin the process of putting aside reserves to back up the promises in the contracts you are writing and selling. Then you would begin a wait for an approval, which may be long.

Fourth, then you would have to let the world know that you are in business.

Insurance Companies have a unique position in society as the foundation for all financial planning as they are the entities to whom we "transfer all risk" — because no one else manages financial risk as well as your good-ole insurance company.