Valuation of general GMWB annuities in a low interest rate environment (Q6072272)

The authors consider the valuation of a general class of variable annuities with guaranteed minimum withdrawal benefits (GMWB), allowing for step-up, bonus and surrender features, taking also into account mortality risk and death benefits. When dynamic withdrawals are allowed, the valuation of GMWB annuities leads to a stochastic optimal control problem, which is addressed here by dynamic programming techniques. Adopting a Hull-White interest rate model, correlated with the equity fund, the authors propose an efficient tree-based algorithm and perform a thorough analysis of the determinants of the market value of GMWB annuities and of the optimal withdrawal strategies. The findings of the authors indicate that low/negative rates profoundly affect the optimal withdrawal behaviour and, in combination with step-up and bonus features, increase significantly the fair values of GMWB annuities, which can only be compensated by large management fees.