Analysis of fair fee in guaranteed lifelong withdrawal and Markovian health benefits (Q6076759)

In this paper, the authors introduce a novel product, namely the variable annuity product contingent on the health status and with the guaranteed lifelong withdrawal benefit (GLWB). They propose a mixed discrete-continuous time model for fair valuation of the proposed product based on an equilibrium condition balancing premium and benefits. They assume that the stock price dynamics are described by a geometric Brownian motion. They also suppose that the volatility and the rate of interest are constant. However, both health status benefits and hospitalization coverage are considered. A numerical study and sensitivity analysis are conducted to illustrate the proposed product and explore possibilities for improvements. In Section 2, the mixed discrete-continuous time model for valuing the proposed project is presented. Specifically, changes in the health status over time are described by a continuous-time, finite-state, Markov chain. The payoff structure of the proposed product is also discussed. The calculations of the expected life and death benefits are presented. Specifically, Proposition 1 gives a matrix formula for the expected life benefits. Numerical results and sensitivity analysis are provided in Section 3. They find that changes in age and guaranteed withdrawal amount impact the fair fee of the proposed product.