Variable annuities in a Lévy-based hybrid model with surrender risk

Laura Ballotta, Ernst Eberlein, Thorsten Schmidt and Raghid Zeineddine

Quantitative Finance, 2020, vol. 20, issue 5, 867-886

Abstract: This paper proposes a market consistent valuation framework for variable annuities (VAs) with guaranteed minimum accumulation benefit, death benefit and surrender benefit features. The setup is based on a hybrid model for the financial market and uses time-inhomogeneous Lévy processes as risk drivers. Further, we allow for dependence between financial and surrender risks. Our model leads to explicit analytical formulas for the quantities of interest, and practical and efficient numerical procedures for the evaluation of these formulas. We illustrate the tractability of this approach by means of a detailed sensitivity analysis of the fair value of the VA and its components with respect to the model parameters. The results highlight the role played by the surrender behaviour and the importance of its appropriate modelling.

Date: 2020
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Citations: View citations in EconPapers (7)

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Working Paper: Variable annuities in a L\'evy-based hybrid model with surrender risk (2019)
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DOI: 10.1080/14697688.2019.1687929

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