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Impact of Flexible Periodic Premiums on Variable Annuity Guarantees

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  • Carole Bernard
  • Zhenyu Cui
  • Steven Vanduffel

Abstract

In this article, we study the fair fee of a flexible premium variable annuity (FPVA), in which the policyholder can choose to pay periodic premiums during the accumulation phase instead of a single initial premium. We are able to express fair fees using a fast and accurate approximation based on bounds on the price of the FPVA. We identify scenarios that are particularly costly for the insurer. Our study could help insurers estimate the magnitude of typical underpricing when offering flexible-premium variable annuities with the same fee as the corresponding single-premium variable annuity.

Suggested Citation

  • Carole Bernard & Zhenyu Cui & Steven Vanduffel, 2017. "Impact of Flexible Periodic Premiums on Variable Annuity Guarantees," North American Actuarial Journal, Taylor & Francis Journals, vol. 21(1), pages 63-86, January.
    • Handle: RePEc:taf:uaajxx:v:21:y:2017:i:1:p:63-86
    DOI: 10.1080/10920277.2016.1209119
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    Cited by:

    1. Michael A. Kouritzin & Anne MacKay, 2017. "VIX-linked fees for GMWBs via Explicit Solution Simulation Methods," Papers 1708.06886, arXiv.org, revised Apr 2018.
    2. Zhenyu Cui & J. Lars Kirkby & Guanghua Lian & Duy Nguyen, 2017. "Integral Representation Of Probability Density Of Stochastic Volatility Models And Timer Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(08), pages 1-32, December.
    3. Dong, Bing & Xu, Wei & Sevic, Aleksandar & Sevic, Zeljko, 2020. "Efficient willow tree method for variable annuities valuation and risk management☆," International Review of Financial Analysis, Elsevier, vol. 68(C).
    4. Xiao Wei & Xingchi Gu, 2024. "Conditional Moment Matching and Stratified Approximation for Pricing and Hedging Periodic-Premium Variable Annuities," Methodology and Computing in Applied Probability, Springer, vol. 26(2), pages 1-25, June.
    5. Kouritzin, Michael A. & MacKay, Anne, 2018. "VIX-linked fees for GMWBs via explicit solution simulation methods," Insurance: Mathematics and Economics, Elsevier, vol. 81(C), pages 1-17.
    6. Rupak Chatterjee & Zhenyu Cui & Jiacheng Fan & Mingzhe Liu, 2018. "An efficient and stable method for short maturity Asian options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1470-1486, December.

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