The Impact of management fees on the pricing of variable annuity guarantees

Jin Sun, P.V. Shevchenko, Man Chung Fung

Research output: Contribution to journalArticle

Abstract

Variable annuities, as a class of retirement income products, allow equity market exposure for a policyholder’s retirement fund with optional guarantees to limit the downside risk of the market. Management fees andguarantee insurance fees are charged respectively for the market exposure and for the protection from the downside risk. We investigate the pricing of variable annuity guarantees under optimal withdrawal strategies when management fees are present. We consider from both policyholder’s and insurer’s perspectives optimal withdrawal strategies and calculate the respective fair insurance fees. We reveal a discrepancy where the fees from the insurer’s perspective can be significantly higher due to the management fees serving as a form of market friction. Our results provide a possible explanation of lower guarantee insurance fees observed in the market than those predicted from the insurer’s perspective. Numerical experiments are conducted to illustrate the results.
Original languageEnglish
Article number103
Number of pages20
JournalRisks
Volume6
Issue number3
DOIs
Publication statusPublished - Sep 2018

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Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

Keywords

  • pricing
  • variable annuity guarantees
  • management fees
  • dynamic programming

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