Coping with longevity via hedging: Fair dynamic valuation of variable annuities

Ze Chen, Runhuan Feng, Hong Li and Tianyu Yang

Insurance: Mathematics and Economics, 2024, vol. 117, issue C, 154-169

Abstract: This paper introduces a fair valuation framework for pricing variable annuity liabilities and their embedded guarantee riders within a dynamic multi-period context. We focus on variable annuities featuring the Guaranteed Lifetime Withdrawal Benefit (GLWB) rider, which exposes policyholders to both financial and longevity risks. We employ a fair dynamic valuation method that is market-consistent, actuarially-consistent, and time-consistent. Our findings demonstrate that this approach effectively establishes fair management fee rates, aligning with prior research and industry surveys. Furthermore, we highlight the potential for significant reductions in liability valuation, and consequently, GLWB rider pricing, through effective management of longevity risk within the insurer's net liability.

Keywords: Fair dynamic valuation; Market-consistency; Variable annuity; Longevity risk; Convex hedging (search for similar items in EconPapers)
JEL-codes: C61 G13 G22 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:117:y:2024:i:c:p:154-169

DOI: 10.1016/j.insmatheco.2024.04.005

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