Optimal Static Hedging of Variable Annuities with Volatility-Dependent Fees

Junsen Tang ()
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Junsen Tang: Department of Mathematics, University of St. Thomas, 2115 Summit Avenue, Saint Paul, MN 55105, USA

Risks, 2023, vol. 12, issue 1, 1-20

Abstract: Variable annuities (VAs) and other long-term equity-linked insurance products are typically difficult to hedge in the incomplete markets. A state-dependent fee tied with market volatility for VAs is designed to contribute the risk-sharing mechanism between policyholders and insurers. Different from prior research, we discuss several aspects on a fair valuation, fee-rate determination and hedging with volatility-dependent fees from the perspective of a VA hedger. A method of efficient hedging strategy as a benchmark compared to other strategies is developed in the stochastic volatility setting. We illustrate this method in guaranteed minimum maturity benefits (GMMBs), but it is also applicable to other equity-linked insurance contracts.

Keywords: variable annuity; volatility-dependent fee; efficient hedging; Heston model (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2023
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