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What if Variable Annuity Policyholders With Guaranteed Lifelong Withdrawal Benefit Were Rational?
Author(s) -
Piscopo Gabriella,
Rüede Philipp
Publication year - 2018
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12146
Subject(s) - annuity , actuarial science , economics , monte carlo method , variable (mathematics) , econometrics , product (mathematics) , life annuity , mathematics , finance , statistics , mathematical analysis , pension , geometry
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.