Optimal fee structure of variable annuities

Gu Wang and Bin Zou

Insurance: Mathematics and Economics, 2021, vol. 101, issue PB, 587-601

Abstract: We study the design of fee structures of variable annuities as a stochastic control problem, in which an insurer is allowed to choose the fee structure in any form that satisfies the budget constraint, and seeks an optimal one to maximize its business objective. Under the no surrender assumption, we show that the optimal fee structure is of barrier type with a time-dependent free boundary. The insurer's optimal strategy is to charge fees if and only if the account value of variable annuities hits the free boundary from below.

Keywords: Barrier strategy; Free boundary; Hamilton-Jacobi-Bellman equation; Quasi-variational inequalities; Reflected stochastic differential equations (search for similar items in EconPapers)
JEL-codes: C61 G22 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:101:y:2021:i:pb:p:587-601

DOI: 10.1016/j.insmatheco.2021.10.003

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