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Variable annuities: A unifying valuation approach

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  • Bacinello, Anna Rita
  • Millossovich, Pietro
  • Olivieri, Annamaria
  • Pitacco, Ermanno

Abstract

Life annuities and pension products usually involve a number of guarantees, such as minimum accumulation rates, minimum annual payments or a minimum total payout. Packaging different types of guarantees is the feature of so-called variable annuities. Basically, these products are unit-linked investment policies providing a post-retirement income. The guarantees, commonly referred to as GMxBs (namely, Guaranteed Minimum Benefits of type ‘x’), include minimum benefits both in the case of death and survival. In this paper we propose a unifying framework for the valuation of variable annuities under quite general model assumptions. We compute and compare contract values and fair fee rates under ‘static’ and ‘mixed’ valuation approaches, via ordinary and least squares Monte Carlo methods, respectively.

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Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 49 (2011)
Issue (Month): 3 ()
Pages: 285-297

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Handle: RePEc:eee:insuma:v:49:y:2011:i:3:p:285-297

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Web page: http://www.elsevier.com/locate/inca/505554

Related research

Keywords: Variable annuities; Post-retirement income; Risk management; Guarantees; Least squares Monte Carlo;

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Cited by:
  1. Gerber, Hans U. & Shiu, Elias S.W. & Yang, Hailiang, 2012. "Valuing equity-linked death benefits and other contingent options: A discounted density approach," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 51(1), pages 73-92.
  2. Mahayni, Antje & Schneider, Judith C., 2012. "Variable annuities and the option to seek risk: Why should you diversify?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(9), pages 2417-2428.
  3. Huang, H. & Milevsky, M.A. & Salisbury, T.S., 2014. "Optimal initiation of a GLWB in a variable annuity: No Arbitrage approach," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 56(C), pages 102-111.
  4. Carla Barracchini & M. Elena Addessi, 2014. "Cyber Risk and Insurance Coverage: An Actuarial Multistate Approach," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 57-69, Feburary.
  5. Hyndman, Cody B. & Wenger, Menachem, 2014. "Valuation perspectives and decompositions for variable annuities with GMWB riders," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 55(C), pages 283-290.
  6. Gan, Guojun, 2013. "Application of data clustering and machine learning in variable annuity valuation," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 53(3), pages 795-801.
  7. Feng, Runhuan & Volkmer, Hans W., 2012. "Analytical calculation of risk measures for variable annuity guaranteed benefits," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 51(3), pages 636-648.
  8. Cody B. Hyndman & Menachem Wenger, 2013. "Valuation Perspectives and Decompositions for Variable Annuities with GMWB riders," Papers, arXiv.org 1307.2562, arXiv.org, revised Dec 2013.

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