Valuation of general GMWB annuities in a low interest rate environment
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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.
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.
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Cited in
(7)- Risk-neutral valuation of GLWB riders in variable annuities
- Valuation of guaranteed lifelong withdrawal benefit with the long-term care option
- Efficient pricing and greeks estimation for variable annuities under a multivariate OUSV model
- Enhancing valuation of variable annuities in Lévy models with stochastic interest rate
- Guaranteed minimum income benefit valuation via a numéraire transformation approach
- Pricing and optimal surrender strategies of variable annuities with correlated interest rates and jump-diffusion equity
- Reverse mortgages with long-term care cost coverage: the role of health state granularity in valuing prepayment options
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