Valuation of general GMWB annuities in a low interest rate environment

DOI10.1016/J.INSMATHECO.2023.07.003zbMATH Open1528.91062arXiv2208.10183OpenAlexW4385357185MaRDI QIDQ6072272FDOQ6072272

Authors: Claudio Fontana, Francesco Rotondi 

Publication date: 12 October 2023

Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)

Abstract: Variable annuities with Guaranteed Minimum Withdrawal Benefits (GMWB) entitle the policy holder to periodic withdrawals together with a terminal payoff linked to the performance of an equity fund. In this paper, we consider the valuation of a general class of GMWB annuities, 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 we address here by dynamic programming techniques. Adopting a Hull-White interest rate model, correlated with the equity fund, we propose an efficient tree-based algorithm. We perform a thorough analysis of the determinants of the market value of GMWB annuities and of the optimal withdrawal strategies. In particular, we study the impact of a low/negative interest rate environment. Our findings 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.

Full work available at URL: https://arxiv.org/abs/2208.10183

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zbMATH Keywords

variable annuityguaranteed minimum withdrawal benefitmortality riskstochastic interest rateHull-White modelsurrenderdynamic withdrawalstep-up feature

Mathematics Subject Classification ID

Actuarial mathematics (91G05) Interest rates, asset pricing, etc. (stochastic models) (91G30)

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Cited In (2)

• Risk-neutral valuation of GLWB riders in variable annuities
• Valuation of guaranteed lifelong withdrawal benefit with the long-term care option

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