Semi-static hedging of variable annuities

Carole Bernard and Minsuk Kwak

Insurance: Mathematics and Economics, 2016, vol. 67, issue C, 173-186

Abstract: This paper focuses on hedging financial risk in variable annuities with guarantees. We show that insurers should incorporate the specificity of the periodic payment of variable annuities fees to best hedge embedded guarantees and should focus on hedging the net liability. We develop a new hedging strategy based on semi-static hedging techniques, which takes into account the periodically collected fees, and confirm that it is more effective than delta-hedging with same rebalancing dates, as well as traditional semi-static hedging strategies that do not consider the specificity of the payments of fees in their optimization. It is also verified that short-selling or using put options as hedging instruments allows more effective hedging.

Keywords: Effective hedging; Variable annuities; Semi-static hedging; Periodic fees; Embedded guarantees (search for similar items in EconPapers)
JEL-codes: G22 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:67:y:2016:i:c:p:173-186

DOI: 10.1016/j.insmatheco.2016.01.004

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