The Impact of Management Fees on the Pricing of Variable Annuity Guarantees

Jin Sun, Pavel V. Shevchenko and Man Chung Fung
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Jin Sun: Faculty of Sciences, University of Technology Sydney, Ultimo 2007, Australia
Pavel V. Shevchenko: Department of Actuarial Studies and Business Analytics, Macquarie University, North Ryde 2109, Australia
Man Chung Fung: Data61, CSIRO—Commonwealth Scientific and Industrial Research Organisation, Canberra 2601, Australia

Risks, 2018, vol. 6, issue 3, 1-20

Abstract: Variable annuities, as a class of retirement income products, allow equity market exposure for a policyholder’s retirement fund with optional guarantees to limit the downside risk of the market. Management fees andguarantee insurance fees are charged respectively for the market exposure and for the protection from the downside risk. We investigate the pricing of variable annuity guarantees under optimal withdrawal strategies when management fees are present. We consider from both policyholder’s and insurer’s perspectives optimal withdrawal strategies and calculate the respective fair insurance fees. We reveal a discrepancy where the fees from the insurer’s perspective can be significantly higher due to the management fees serving as a form of market friction. Our results provide a possible explanation of lower guarantee insurance fees observed in the market than those predicted from the insurer’s perspective. Numerical experiments are conducted to illustrate the results.

Keywords: pricing; variable annuity guarantees; management fees; dynamic programming (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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