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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 language | English |
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Article number | 103 |
Number of pages | 20 |
Journal | Risks |
Volume | 6 |
Issue number | 3 |
DOIs | |
Publication status | Published - Sep 2018 |
Bibliographical note
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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