Which type of annuities is the assumed interest rate (AIR) relevant for establishing unit value?

The assumed interest rate (AIR) is a critical factor in the context of variable annuities because it serves as a benchmark for calculating the performance of the investment. In variable annuities, the cash value, as well as the death benefit, can fluctuate based on the underlying investments, which may include equity and bond markets. The AIR establishes a target rate of return that is used to determine how unit values change in relation to actual investment performance.

When the actual performance of the underlying funds exceeds the AIR, the value of the annuity units will increase accordingly; conversely, if the performance lags behind, the unit values will decrease. This mechanism allows policyholders to compare actual performance against a standard rate, thereby impacting their payouts and overall experience with the annuity.

In contrast, fixed single premium immediate annuities (SPIAs), index annuities, and fixed multi-year guarantee (MYG) annuities do not use the AIR for establishing unit value because their returns are either fixed or linked to specific indices without the need for a variable performance calculation. Thus, variable annuities uniquely incorporate the AIR to reflect their variable nature and investment-based value changes.