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Coping with longevity via hedging: Fair dynamic valuation of variable annuities

Author

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  • Chen, Ze
  • Feng, Runhuan
  • Li, Hong
  • Yang, Tianyu

Abstract

This paper introduces a fair valuation framework for pricing variable annuity liabilities and their embedded guarantee riders within a dynamic multi-period context. We focus on variable annuities featuring the Guaranteed Lifetime Withdrawal Benefit (GLWB) rider, which exposes policyholders to both financial and longevity risks. We employ a fair dynamic valuation method that is market-consistent, actuarially-consistent, and time-consistent. Our findings demonstrate that this approach effectively establishes fair management fee rates, aligning with prior research and industry surveys. Furthermore, we highlight the potential for significant reductions in liability valuation, and consequently, GLWB rider pricing, through effective management of longevity risk within the insurer's net liability.

Suggested Citation

  • Chen, Ze & Feng, Runhuan & Li, Hong & Yang, Tianyu, 2024. "Coping with longevity via hedging: Fair dynamic valuation of variable annuities," Insurance: Mathematics and Economics, Elsevier, vol. 117(C), pages 154-169.
    • Handle: RePEc:eee:insuma:v:117:y:2024:i:c:p:154-169
    DOI: 10.1016/j.insmatheco.2024.04.005
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    More about this item

    Keywords

    Fair dynamic valuation; Market-consistency; Variable annuity; Longevity risk; Convex hedging;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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