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Systematic mortality risk: An analysis of guaranteed lifetime withdrawal benefits in variable annuities

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  • Fung, Man Chung
  • Ignatieva, Katja
  • Sherris, Michael

Abstract

Guaranteed lifetime withdrawal benefits (GLWB) embedded in variable annuities have become an increasingly popular type of life annuity designed to cover systematic mortality risk while providing protection to policyholders from downside investment risk. This paper provides an extensive study of how different sets of financial and demographic parameters affect the fair guaranteed fee charged for a GLWB as well as the profit and loss distribution, using tractable equity and stochastic mortality models in a continuous time framework. We demonstrate the significance of parameter risk, model risk, as well as the systematic mortality risk component underlying the guarantee. We quantify how different levels of equity exposure chosen by the policyholder affect the exposure of the guarantee providers to systematic mortality risk. Finally, the effectiveness of a static hedge of systematic mortality risk is examined allowing for different levels of equity exposure.

Suggested Citation

  • Fung, Man Chung & Ignatieva, Katja & Sherris, Michael, 2014. "Systematic mortality risk: An analysis of guaranteed lifetime withdrawal benefits in variable annuities," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 103-115.
    • Handle: RePEc:eee:insuma:v:58:y:2014:i:c:p:103-115
    DOI: 10.1016/j.insmatheco.2014.06.010
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    References listed on IDEAS

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    More about this item

    Keywords

    Variable annuity; Guaranteed lifetime withdrawal benefits (GLWB); Systematic mortality risk; Parameter risk; Model risk; Static hedging;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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