Systematic mortality risk: An analysis of guaranteed lifetime withdrawal benefits in variable annuities

Man Chung Fung, Katja Ignatieva and Michael Sherris

Insurance: Mathematics and Economics, 2014, vol. 58, issue C, 103-115

Abstract: Guaranteed lifetime withdrawal benefits (GLWB) embedded in variable annuities have become an increasingly popular type of life annuity designed to cover systematic mortality risk while providing protection to policyholders from downside investment risk. This paper provides an extensive study of how different sets of financial and demographic parameters affect the fair guaranteed fee charged for a GLWB as well as the profit and loss distribution, using tractable equity and stochastic mortality models in a continuous time framework. We demonstrate the significance of parameter risk, model risk, as well as the systematic mortality risk component underlying the guarantee. We quantify how different levels of equity exposure chosen by the policyholder affect the exposure of the guarantee providers to systematic mortality risk. Finally, the effectiveness of a static hedge of systematic mortality risk is examined allowing for different levels of equity exposure.

Keywords: Variable annuity; Guaranteed lifetime withdrawal benefits (GLWB); Systematic mortality risk; Parameter risk; Model risk; Static hedging (search for similar items in EconPapers)
JEL-codes: G13 G22 G23 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:58:y:2014:i:c:p:103-115

DOI: 10.1016/j.insmatheco.2014.06.010

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