Analytic valuation of guaranteed lifetime withdrawal benefits with a modified ratchet

DOI10.1016/J.INSMATHECO.2024.06.001MaRDI QIDQ6607484zbMATH OpenFDO

Authors Darcy Harcourt, Toby Daglish, Eric R. Ulm

Publication date 18 September 2024

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

Full work available at URL https://doi.org/10.1016/J.INSMATHECO.2024.06.001

zbMATH Keywords

analytic solutiongeometric Brownian motion with affine driftguaranteed lifetime withdrawal benefitsvariable annuities

Mathematics Subject Classification ID

Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Actuarial mathematics (91G05)

Review text

The authors consider guaranteed lifetime withdrawal benefits (GLWBs) -- an increasingly popular add-on to variable annuities, offering a guaranteed stream of payments for the remainder of the policyholder's life. GLWBs have typically been priced using numerical methods such as finite difference schemes or Monte Carlo simulations. Obtaining accurate and precise solutions using these methods can be very computationally expensive.\N\NThe authors extend an existing method for analytic pricing of these policies and introduce a novel variation on the commonly offered ratchet rider that more directly addresses policyholder motivation around lapse-and-reentry behaviour. The proposed pricing method is modified to accommodate this new rider and to compare it to the existing annual ratchet with respect to a policyholder's incentive to lapse such a policy.

Recommendations

• Indifference pricing of a GLWB option in variable annuities
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Cites work

• A Universal Pricing Framework for Guaranteed Minimum Benefits in Variable Annuities
• An identity of hitting times and its application to the valuation of guaranteed minimum withdrawal benefit
• Analytic solution for ratchet guaranteed minimum death benefit options under a variety of mortality laws
• Analytical valuation and hedging of variable annuity guaranteed lifetime withdrawal benefits
• Equator. A function calculator
• Fitting combinations of exponentials to probability distributions
• On approximation of functions by exponential sums
• The Laplace transform of hitting times of integrated geometric Brownian motion

Cited in

(3)

• Analysis of fair fee in guaranteed lifelong withdrawal and Markovian health benefits
• Valuing Lifetime Withdrawal Guarantees in RILAs
• Valuation of guaranteed lifelong withdrawal benefit with the long-term care option

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