Valuation and optimal surrender of variable annuities with guaranteed minimum benefits and periodic fees

J. Lars Kirkby and Jean-Philippe Aguilar

Scandinavian Actuarial Journal, 2023, vol. 2023, issue 6, 624-654

Abstract: This work studies the valuation and optimal surrender of variable (equity-linked) annuities under a Lévy-driven equity market with mortality risk. We consider a practical periodic fee structure which can vary over time and is assessed as a proportion of the fund value. At maturity, the fund value is returned to the policyholder according to a guaranteed minimum accumulation benefit (GMAB). Mortality risk is also modeled discretely, and the contract offers a guaranteed minimum death benefit (GMBD) prior to maturity. The benefits accommodate caps on the growth of funds (in addition to the rising floor) to reduce the fee level and as a disincentive to early surrender. Interest rates are modeled via a deterministic discounting term structure, which can be calibrated (bootstrapped) to the rates market, according to market convention. An efficient and accurate valuation framework is developed, along with closed form pricing formulas in the case where policy surrender is not permitted. Numerous experiments are conducted to illustrate the interplay between contract parameters and the decision to surrender, and we provide an extensive analysis that investigates how to structure contracts to disincentivize early surrender.

Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://hdl.handle.net/10.1080/03461238.2022.2141656 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:sactxx:v:2023:y:2023:i:6:p:624-654

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/sact20

DOI: 10.1080/03461238.2022.2141656

Access Statistics for this article

Scandinavian Actuarial Journal is currently edited by Boualem Djehiche

More articles in Scandinavian Actuarial Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().