A unified pricing of variable annuity guarantees under the optimal stochastic control framework

Pavel V. Shevchenko and Xiaolin Luo

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Abstract: In this paper, we review pricing of variable annuity living and death guarantees offered to retail investors in many countries. Investors purchase these products to take advantage of market growth and protect savings. We present pricing of these products via an optimal stochastic control framework, and review the existing numerical methods. For numerical valuation of these contracts, we develop a direct integration method based on Gauss-Hermite quadrature with a one-dimensional cubic spline for calculation of the expected contract value, and a bi-cubic spline interpolation for applying the jump conditions across the contract cashflow event times. This method is very efficient when compared to the partial differential equation methods if the transition density (or its moments) of the risky asset underlying the contract is known in closed form between the event times. We also present accurate numerical results for pricing of a Guaranteed Minimum Accumulation Benefit (GMAB) guarantee available on the market that can serve as a benchmark for practitioners and researchers developing pricing of variable annuity guarantees.

Date: 2016-05
New Economics Papers: this item is included in nep-pke
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Citations: View citations in EconPapers (17)

Published in Risks 2016, 4(3), 22:1-22:31

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