GMWB Riders in a Binomial Framework - Pricing, Hedging, and Diversification of Mortality Risk

Cody B. Hyndman and Menachem Wenger

Papers from arXiv.org

Abstract: We construct a binomial model for a guaranteed minimum withdrawal benefit (GMWB) rider to a variable annuity (VA) under optimal policyholder behaviour. The binomial model results in explicitly formulated perfect hedging strategies funded using only periodic fee income. We consider the separate perspectives of the insurer and policyholder and introduce a unifying relationship. Decompositions of the VA and GMWB contract into term-certain payments and options representing the guarantee and early surrender features are extended to the binomial framework. We incorporate an approximation algorithm for Asian options that significantly improves efficiency of the binomial model while retaining accuracy. Several numerical examples are provided which illustrate both the accuracy and the tractability of the binomial model. We extend the binomial model to include policy holder mortality and death benefits. Pricing, hedging, and the decompositions of the contract are extended to incorporate mortality risk. We prove limiting results for the hedging strategies and demonstrate mortality risk diversification. Numerical examples are provided which illustrate the effectiveness of hedging and the diversification of mortality risk under capacity constraints with finite pools.

Date: 2014-10, Revised 2016-07
New Economics Papers: this item is included in nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1410.7453 Latest version (application/pdf)

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:arx:papers:1410.7453

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().