The valuation of GMWB variable annuities under alternative fund distributions and policyholder behaviours. Issue 5 (27th May 2016)

• Record Type: Journal Article
• Authors: Bacinello, Anna Rita; Millossovich, Pietro; Montealegre, Alvaro
• Is Part Of: Scandinavian actuarial journal. Volume 2016:Issue 5(2016)
• Page Start: 446
• Page End: 465
• Publication Date: 2016-05-27
• Subjects: variable annuities -- GMWB -- dynamic approach -- Lévy processes -- policyholder's behaviour; Insurance, Life -- Mathematics -- Periodicals; Insurance -- Mathematics -- Periodicals; 368.01
• DOI: 10.1080/03461238.2014.954608
• Languages: English
• ISSNs: 0346-1238

Abstract

Abstract : In this paper, we present a dynamic programming algorithm for pricing variable annuities with Guaranteed Minimum Withdrawal Benefits (GMWB) under a general Lévy processes framework. The GMWB gives the policyholder the right to make periodical withdrawals from her policy account even when the value of this account is exhausted. Typically, the total amount guaranteed for withdrawals coincides with her initial investment, providing then a protection against downside market risk. At each withdrawal date, the policyholder has to decide whether, and how much, to withdraw, or to surrender the contract. We show how different policyholder's withdrawal behaviours can be modelled. We perform a sensitivity analysis comparing the numerical results obtained for different contractual and market parameters, policyholder behaviours and different types of Lévy processes.