Revisiting the Risk-Neutral Approach to Optimal Policyholder Behavior: A Study of Withdrawal Guarantees in Variable Annuities

2021 ◽  
Author(s):  
Thorsten Moenig ◽  
Daniel Bauer
Keyword(s):  
Variable Annuities ◽  
Risk Neutral

scholarly journals A Universal Pricing Framework for Guaranteed Minimum Benefits in Variable Annuities

2008 ◽  
Vol 38 (02) ◽  
pp. 621-651 ◽  
Author(s):  
Daniel Bauer ◽  
Alexander Kling ◽  
Jochen Russ
Keyword(s):  
Monte Carlo ◽  
Monte Carlo Methods ◽  
General Framework ◽  
Variable Annuities ◽  
Minimum Income ◽  
Academic Literature ◽  
Extensive Analysis ◽  
The Us ◽  
Risk Neutral ◽  
Guaranteed Minimum Income

Variable Annuities with embedded guarantees are very popular in the US market. There exists a great variety of products with both, guaranteed minimum death benefits (GMDB) and guaranteed minimum living benefits (GMLB). Although several approaches for pricing some of the corresponding guarantees have been proposed in the academic literature, there is no general framework in which the existing variety of such guarantees can be priced consistently. The present paper fills this gap by introducing a model, which permits a consistent and extensive analysis of all types of guarantees currently offered within Variable Annuity contracts. Besides a valuation assuming that the policyholder follows a given strategy with respect to surrender and withdrawals, we are able to price the contract under optimal policyholder behavior. Using both, Monte-Carlo methods and a generalization of a finite mesh discretization approach, we find that some guarantees are overpriced, whereas others, e.g. guaranteed annuities within guaranteed minimum income benefits (GMIB), are offered significantly below their risk-neutral value.

scholarly journals A Universal Pricing Framework for Guaranteed Minimum Benefits in Variable Annuities

2008 ◽  
Vol 38 (2) ◽  
pp. 621-651 ◽  
Author(s):  
Daniel Bauer ◽  
Alexander Kling ◽  
Jochen Russ
Keyword(s):  
Monte Carlo ◽  
Monte Carlo Methods ◽  
General Framework ◽  
Variable Annuities ◽  
Minimum Income ◽  
Academic Literature ◽  
Extensive Analysis ◽  
The Us ◽  
Risk Neutral ◽  
Guaranteed Minimum Income

Variable Annuities with embedded guarantees are very popular in the US market. There exists a great variety of products with both, guaranteed minimum death benefits (GMDB) and guaranteed minimum living benefits (GMLB). Although several approaches for pricing some of the corresponding guarantees have been proposed in the academic literature, there is no general framework in which the existing variety of such guarantees can be priced consistently. The present paper fills this gap by introducing a model, which permits a consistent and extensive analysis of all types of guarantees currently offered within Variable Annuity contracts. Besides a valuation assuming that the policyholder follows a given strategy with respect to surrender and withdrawals, we are able to price the contract under optimal policyholder behavior. Using both, Monte-Carlo methods and a generalization of a finite mesh discretization approach, we find that some guarantees are overpriced, whereas others, e.g. guaranteed annuities within guaranteed minimum income benefits (GMIB), are offered significantly below their risk-neutral value.

Risk-Neutral and Physical Jumps in Option Pricing

2007 ◽  
Author(s):  
Jian Chen ◽  
Xiaoquan Liu ◽  
Chenghu Ma
Keyword(s):  
Option Pricing ◽  
Risk Neutral
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