A Respectful, Scientific Perspective on Index Construction in Annuities

Setting the Stage: A Respectful Perspective

Let us begin with humility.

We are not here to criticize, diminish, or challenge the value that managed volatility indices have brought to the annuity space. In fact, we acknowledge that many of these indices were developed with genuine creativity and care, and some have produced noteworthy results, particularly in periods where volatility control supported smoother returns.

We've had the privilege of working alongside designers, actuaries, and firms who've poured substantial thought into these mechanisms, and we want to be very clear: our goal is not to invalidate their work. Rather, it is to explain why our team has chosen a different path — one grounded in data, rooted in scientific stress testing, and ultimately intended to create long-term durability for the entire value chain: clients, advisors, IMOs, and carriers.

Why We Chose Not to Use Managed Volatility Indices

It's Not About the Concept — It's About the Foundation

We do not object to managed volatility because we think they are inherently flawed.

We simply believe that the data record for most of these indices is too limited, and the return behavior too inconsistent when compared to long-established, real-market indices like the S&P 500, Nasdaq-100, and Dow Jones Industrial Average.

Many managed volatility strategies depend on rules that were built using backfitted or hypothetical history — and while that approach may serve a purpose in academic modeling or risk reduction, we've chosen to only build and test our designs on actual, observable market behavior.

We see this as a safeguard — for clients, and for the institutions who stand behind the product.

A Comparison We Pose (But Never Answer for the Audience)

Imagine you've just retired. You're meeting with two investment professionals.

Now ask yourself — without bias or judgment —

“Which one would you entrust with your retirement savings?"

We don't answer that question for anyone.
We simply ask it. And let the logic do the talking.

This mirrors the philosophical difference between a live, real-market index like the S&P — which is constantly reweighted, reviewed, and adjusted based on actual company performance — and a managed volatility index, which by design operates within a static algorithm regardless of changing global conditions.

We respect the elegance of these algorithms.
We simply prefer live reality over theoretical control.

Our Core Scientific Concern: The Limits of Hypothetical History

Many indices in the market today contain impressive-looking performance charts — often dating back 10 or even 20 years. But a closer look reveals that the index itself only came into existence recently — meaning its early returns are entirely hypothetical.

Here is our belief:

It is illogical to expect meaningful insight about the future from a hypothetical version of the past — especially when that past is reconstructed using algorithms that were not exposed to the unknowns of real-time economic behavior.

This logic can be illustrated by another real-world decision:

We see this as equivalent to choosing between a live index with decades of history, and a managed volatility strategy based on simulated assumptions. The second may prove effective someday, but we believe the burden of proof lies in actual performance — not projections.

And yet, much of the industry continues to rely on hypothetical backtests to tell the story of how a strategy “would have" behaved.

At Paragon, we respectfully decline to do this.

We only test and validate using real data, with live market indices, and actual price paths — because we believe the best way to prepare for an uncertain future is to understand the full complexity of how real markets have behaved under real-world pressure.

How We Compare Products Without Using Hypothetical Data

When it comes time to compare our designs to products using managed volatility indices, we take a simple, objective, and respectful approach:

1. 1. We identify the index's real inception date.
2. 2. We calculate its real-world performance from that point forward.
3. 3. We compare that actual return behavior to broad benchmarks like the S&P 500.
4. 4. If needed for extrapolation, we scale forward based only on observed performance, not on hypothetical or backfilled data.

We do not ignore the hypothetical record.
We simply choose not to depend on it for scientific validation.

In short:

We measure performance based on what the index has proven itself capable of, not what it was expected to do in theory.

How We Create Value Without Proprietary Indices

Another question we're often asked is:

“If you don't use your own proprietary index, how do you create design value?"

It's a fair question — and the answer is fundamental to our philosophy:

We redesign the chassis.

Rather than starting with a custom index, we rebuild the entire structure — crediting methods, account mechanics, performance triggers, and spread controls — around tested real data, using standard indices with transparent pricing and proven market function.

We see FIA design the same way.
We take the same index options — the same budget — and through intelligent structuring, extract more value.

We call it design efficiency — and it's how we deliver better results for:

• • Clients, through improved accumulation
• • Agents, through referral-worthy performance
• • IMOs, through organic AUM growth
• • Carriers, through in-force asset growth without acquisition cost

We don't need a proprietary index to do that.
We just need sound engineering, rigorous testing, and a relentless commitment to performance that can last.

Our Commitment to Permanence

Bringing a product to market is not cheap — and we respect that deeply.

• • Carriers invest capital, actuarial resources, and administrative infrastructure.
• • IMOs build training, recruiting, and campaign systems around new launches.
• • Advisors stake their reputations on products they believe in.

That's why we design with permanence in mind.

We insist on building products that can hold their ground under regulatory reform, across market cycles, and even when the marketing spotlight moves on. Because when a product is grounded in reality and performance — not in engineered expectation — it doesn't need to be replaced. It endures.

And that, ultimately, is what we strive to offer:
Designs that last. For everyone they touch.

Final Thoughts: Different Paths, Shared Goals

We know we're in a room filled with brilliant people — many of whom have developed some of the most creative and important innovations in our industry.

We're not here to take a side.
We're here to offer our side — and explain why we've built the way we have.

And if something we've shared here sparks a question, a dialogue, or even a reconsideration — we'd consider that a privilege.

At Paragon Product Design, we stand firmly on data.
But we walk humbly with anyone who wants to build a better future for annuities.

Let's keep building. Let's keep asking questions. And let's make sure the work we do stands the test of time.