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What if Variable Annuity Policyholders With Guaranteed Lifelong Withdrawal Benefit Were Rational?

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  • Gabriella Piscopo
  • Philipp Rüede

Abstract

This article examines the lapse risk inherent to the guaranteed lifelong withdrawal benefit option embedded in a variable annuity product valuated from a pure derivatives perspective, that is, as a Bermudian option given to the policyholder. We assume rational behavior and quantify the potential impact of the lapse risk, defined as the difference between no lapse and optimal lapsing. We develop a sensitivity analysis that shows how the value of the product varies with the key parameters, and calculate the fair fee using Monte Carlo simulations. Empirical analyses are performed and numerical results are provided.

Suggested Citation

  • Gabriella Piscopo & Philipp Rüede, 2018. "What if Variable Annuity Policyholders With Guaranteed Lifelong Withdrawal Benefit Were Rational?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(1), pages 203-217, March.
    • Handle: RePEc:bla:jrinsu:v:85:y:2018:i:1:p:203-217
    DOI: 10.1111/jori.12146
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    Cited by:

    1. Moenig, Thorsten, 2021. "Variable annuities: Market incompleteness and policyholder behavior," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 63-78.

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