RILA Sales Surge Past $79B: Inside Carrier Cap-Rate Pricing Methodology

Registered index-linked annuity sales hit $79.5 billion in 2025, a 20% increase over 2024 and the segment's 11th consecutive year of growth. LIMRA's final U.S. retail annuity sales report, released in March 2026, confirmed total annuity sales of $464.1 billion for the year, with RILAs as the fastest-growing product line. LIMRA projects RILA sales will exceed $85 billion in 2026. With 22 carriers now offering structured annuities (up from three a decade ago) and the top five controlling roughly 80% of sales, the competitive battleground centers on one derived number: the cap rate. This article walks through the actuarial methodology that determines carrier cap rates, from general account earned-rate budgets through call-spread option pricing to the capital constraints that limit competitive generosity.

The $79.5 Billion Headline in Context

Fourth-quarter 2025 RILA sales reached $22.1 billion, 23% higher than the prior-year quarter and part of a year in which total annuity quarterly sales exceeded $120 billion for the first time in Q3 2025. Fixed indexed annuity sales hit $127.9 billion (a fifth consecutive record), while fixed-rate deferred annuities reached $165.3 billion. The combined $464.1 billion represents a 7% increase and the fourth consecutive record year for the U.S. retail annuity market.

The demand driver is demographic. The Alliance for Lifetime Income's Peak 65 analysis shows that 4.18 million Americans reached age 65 in 2025, the highest single-year figure on record, with similar volumes continuing through 2027. Only 24% of Boomers entering retirement have defined benefit pensions, and 52.5% of those turning 65 between 2024 and 2030 have investable assets of $250,000 or less. RILAs fill the gap between conservative fixed annuities and full market-risk variable annuities, offering capped upside participation with a defined downside buffer. From tracking this segment's growth over several years, the pricing question is no longer whether the market will expand, but whether carriers can sustain the cap-rate generosity that has fueled adoption.

The Pricing Spread Framework: From Earned Rate to Cap Budget

At its core, RILA cap-rate pricing solves a single equation. The carrier determines its gross earned rate on the general account portfolio backing RILA liabilities, subtracts the cost of hedging the embedded equity-linked guarantee, subtracts the required spread for expenses, profit, and capital charges, and sets the cap rate at the level that consumes exactly the remaining budget at current option market prices.

The gross earned rate reflects the yield on the asset portfolio backing RILA reserves. For most carriers, this portfolio consists of investment-grade corporate bonds, structured credit, and increasingly, private credit and CLO tranches. The Milliman white paper on RILA cap-setting methodologies (January 2023) distinguishes between two approaches to calculating this rate. The new money rate method uses the yield available on assets purchased today, meaning new premium flows get cap rates tied to current market rates. The book yield method uses the blended yield across the entire existing portfolio, smoothing cap rates over time but creating cross-subsidies between cohorts. Most carriers use a variant of the new money rate for competitive pricing, since it responds faster to rate-environment changes and avoids the legacy-book drag that suppresses cap rates when older, lower-yielding assets pull the blend down.

The required spread sits between 1.5% and 2.0% for most carriers, per the Milliman analysis. This margin covers distribution costs (typically 50 to 100 basis points in trail commissions), administrative expenses, DAC amortization, the target profit margin, and the cost of holding RBC capital against C-1 (asset/credit risk) and C-3 (interest rate and equity risk) charges. A contract priced with a 1.5% target spread has 50 basis points more option budget than one priced at 2.0%, which translates directly into higher cap rates offered to the policyholder.

Option Pricing: Call Spreads, Participation Rates, and Buffer Costs

The option budget funds the policyholder's upside crediting and downside protection simultaneously, and the allocation between these two components determines the product's risk-return profile.

Upside Crediting Structures

Three crediting methods are standard across the RILA market, each with a different option replication:

Cap rate: The carrier buys an at-the-money (ATM) call on the reference index and sells an out-of-the-money (OTM) call at the cap strike, creating a call spread. If the S&P 500 returns 18% and the cap is 14%, the policyholder receives 14%. If the index returns 8%, the policyholder receives 8%. The call spread's net cost is the price of the long ATM call minus the premium received for the short OTM call. A higher cap means the short call moves further out of the money, reducing the premium received and increasing the net cost.
Participation rate: The carrier buys a fractional position in an ATM call. An 80% participation rate means the carrier purchases 0.80 of an ATM call. If the index returns 12%, the policyholder receives 9.6%. There is no hard cap, but the partial participation dampens upside. The cost is simply the participation fraction multiplied by the ATM call premium.
Spread rate (margin): The policyholder receives the full index return minus a fixed deduction. If the spread is 2.5% and the index returns 10%, the policyholder receives 7.5%. This is replicated by buying an ATM call and funding the spread deduction separately.

As of May 2026, current market cap rates with 10% S&P 500 buffers range from roughly 12% to 18% across 75 tracked products, with Equitable, Brighthouse, and Lincoln all offering products near the top of that range on advisory share classes. Equitable's Structured Capital Strategies Plus 21 has held the number-one selling position for seven consecutive quarters.

Downside Protection: Buffers vs. Floors

Buffer and floor structures protect the policyholder on the downside, but their option mechanics and cost profiles differ substantially.

A buffer means the carrier absorbs the first specified percentage of index loss. With a 10% buffer, if the S&P 500 declines 25%, the carrier absorbs the first 10 percentage points and the policyholder bears the remaining 15% loss. In option terms, the carrier sells an OTM put at the buffer level (e.g., 90% of starting value). The premium received from selling this put partially funds the upside crediting budget. A wider buffer (20% vs. 10%) means selling a deeper OTM put, which generates more premium and therefore supports a higher cap rate, but exposes the carrier to a larger downside liability.

A floor sets a hard maximum loss regardless of how far the index falls. With a 10% floor, the policyholder can never lose more than 10%, even if the index drops 40%. The carrier replicates this by buying a put at the floor level and selling a deeper OTM put, creating a put spread. Floors are more expensive than buffers because the carrier retains the tail risk that buffers pass through to the policyholder. This cost difference directly compresses the cap rate: a floor product with the same index, term, and buffer level will offer a meaningfully lower cap than its buffer counterpart.

One efficiency that multi-product carriers exploit: when the same carrier offers both floor and buffer products on the same index and term, the short OTM put in the buffer structure and the long OTM put in the floor structure can offset each other in the hedge book. This netting can save upwards of 10 basis points in transaction costs, per Annuity Risk analysis. An additional 10 basis points of hedging budget purchases approximately 28 basis points of extra cap on the S&P 500 or 45 basis points on the MSCI EAFE, making this netting operationally meaningful. Research by Moenig (2022) in the Journal of Risk and Insurance estimated the average annual hedging cost for a RILA at approximately 0.17% of the investment amount, reflecting the near-perfect replicability of the embedded options when liquid exchange-traded contracts are available.

Volatility Surface and Yield Curve Effects on Cap Rates

Two market variables drive most of the quarter-to-quarter variation in RILA cap rates: the equity implied volatility surface and the term structure of interest rates. Patterns we have seen in recent cap-rate resets confirm that these inputs matter more than competitive strategy in determining the range of economically viable cap rates.

Implied volatility, measured by the VIX for S&P 500 options, directly determines option premiums. Higher implied vol raises the cost of the long ATM call in the call spread, compressing the cap rate the carrier can offer while maintaining its target spread. Volatility skew adds a further wrinkle: OTM puts (which price the buffer) trade at higher implied vol than equidistant OTM calls (which cap the upside), meaning buffer costs are disproportionately sensitive to volatility regime shifts. When the VIX spiked during the April 2025 tariff shock, the cost of replicating a 10% buffer increased faster than the cost of the upside call spread widened, temporarily squeezing the net cap-rate budget on both sides.

Interest rates work in the opposite direction. Higher yields on the general account portfolio expand the gross earned rate, enlarging the option budget before the required spread is deducted. The elevated rate environment of 2024 and 2025 supported historically generous RILA cap rates precisely because carriers could earn 5%+ on new money while hedging costs remained moderate with relatively low realized volatility. If rates decline materially, cap rates will compress even if equity vol stays flat, because the earned-rate side of the equation shrinks.

Index selection also matters. S&P 500 options have the tightest bid-ask spreads and deepest liquidity, minimizing execution slippage. Products linked to the Russell 2000 or MSCI EAFE trade on wider spreads, but these indexes also price differently on the volatility surface. A carrier offering an EAFE-linked RILA can sometimes offer a higher cap than an otherwise identical SPX product because the EAFE option surface prices differently relative to the earned-rate budget.

ALM Constraints, Capital Charges, and Regulatory Guardrails

The option budget framework operates within the constraints imposed by risk-based capital requirements and actuarial reserving standards.

C-3 risk charges capture the asset-liability mismatch exposure for products with embedded equity-linked guarantees. RILA terms of one, two, three, or six years create defined maturity points, which is an advantage over open-ended variable annuity guarantees: static hedging (buying matching options at term inception and holding to maturity) inherently achieves duration matching because the purchased options expire on the same date as the RILA term. The NAIC's RBC framework requires capital proportional to risk, and more aggressive cap rates (which require higher-cost hedge portfolios and expose the carrier to larger mark-to-market swings) attract higher C-3 charges. This capital cost feeds back into the required spread, creating a natural ceiling on cap-rate competitiveness.

NAIC Actuarial Guideline LIV addresses nonforfeiture requirements for index-linked variable annuity products, mandating daily interim values based on the market value of embedded options. Carriers must use Black-Scholes, Monte Carlo simulation, or other market-consistent option valuation methods to determine surrender values, which means the pricing actuary's cap-rate model and the valuation actuary's reserve model must be calibrated to the same volatility surface. Inconsistencies between pricing and valuation create either phantom profits at issue (if pricing uses lower vol assumptions than reserving) or unnecessary capital strain (if the reverse).

Carriers with existing variable annuity books benefit from a structural hedge offset. Milliman's analysis of RILA/VA synergies shows that VA guarantees lose value for the carrier when markets rise (the guarantee becomes less in-the-money), while RILA cap obligations increase (the carrier pays up to the cap). In falling markets, the pattern reverses. Hedging the combined book's net delta and vega exposure, rather than hedging each block independently, reduces total hedge costs and capital requirements, giving multi-line carriers a structural pricing advantage over RILA-only entrants.

Static Reset vs. Dynamic Hedging: Implications for Cap Stability

Most carriers use static hedging for RILA blocks: the hedge desk purchases the replicating option portfolio at term inception and holds it to maturity. At each term anniversary, the carrier reprices the next term's embedded options at current market conditions, establishing a new cap rate. This static-reset model means that in-force policyholders are insulated from intra-term volatility movements (their cap is locked in), but face repricing risk at renewal.

When volatility spikes between terms, existing cap rates remain unchanged because the static hedge is already in place. At the next reset, however, the new cap rate reflects the higher hedge cost environment. A policyholder who locked in a 16% cap during a low-vol period might see a 12% cap at renewal if the VIX has moved materially higher. This repricing dynamic is transparent but can create policyholder dissatisfaction and lapse pressure, particularly when competing carriers that reset on different dates offer temporarily higher caps because they locked in their hedges before the vol spike.

Milliman's backtesting of dynamic hedging for RILAs (December 2024) examined whether continuous delta-vega rebalancing can reduce hedge costs relative to static replication. The analysis found that dynamic hedging along simulated scenarios can be a reasonable indicator of resulting profit or loss, but introduces operational complexity and path-dependent risk that static hedging avoids. Carriers with sophisticated risk management infrastructure and existing VA dynamic hedge programs are better positioned to capture these efficiencies; smaller RILA writers generally default to static replication for its operational simplicity and guaranteed payoff matching.

Competitive Dynamics: How Five Carriers Drive Market-Wide Convergence

Equitable has held the number-one RILA market position for 15 years, having created the category in 2010 with the original Structured Capital Strategies product. Equitable held a 19.6% market share in Q4 2025, followed by Allianz Life, Prudential, Brighthouse Financial, and Lincoln National Life. These five carriers account for approximately 80% of total RILA sales.

Despite independent pricing decisions, cap rates across major carriers converge within a narrow band. This convergence is structural, not collusive: all five carriers face the same option market prices, the same implied volatility surface, and similar (though not identical) general account earned rates. The primary differentiator is the earned-rate side of the equation. Carriers with higher-yielding general account portfolios (often those with larger allocations to private credit, structured products, or longer-duration assets) can support higher cap rates while maintaining the same target spread. This is the same dynamic driving the CLO and private credit allocation trend across the life insurance industry more broadly.

Game-theoretic pressure cuts both ways. A carrier that boosts cap rates to gain distribution share may attract volume but compress margins below the level needed to cover capital costs. Full-service national broker-dealers, where RILA sales jumped 30% in 2025, are particularly rate-sensitive distribution channels. The result is a competitive equilibrium where carriers periodically overshoot on cap generosity to capture flows, then pull back at the next product refresh when the margin compression becomes evident in quarterly earnings. This pattern, visible across several product refresh cycles, is the RILA-specific version of the crediting-rate competition that has characterized fixed indexed annuities for two decades.

Why This Matters for Pricing Actuaries

The cap rate is a derived output of a multi-input optimization, not a competitive lever that carriers set in isolation. The gross earned rate, hedge cost, required spread, capital charge, and option market environment collectively determine the range of economically viable cap rates at any given moment. Pricing actuaries working in the RILA space need fluency in all five inputs simultaneously: general account portfolio construction, options pricing and the volatility surface, RBC capital modeling, competitive intelligence, and distribution economics.

As RILA sales approach $85 billion in 2026, regulatory attention will intensify. The NAIC's ongoing C-3 field test using the new Generator of Economic Scenarios (GOES) framework, targeted for year-end 2027 adoption, will recalibrate the capital charges that feed into the required spread, potentially compressing or expanding cap rates depending on the calibration. The GOES transition deserves close attention from any pricing actuary working on RILA product development. The margin between sustainable pricing and market-share-driven cap inflation will determine which carriers build durable RILA franchises and which end up repricing their way into policyholder lapse spirals.