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Assessing Guaranteed Minimum Income Benefits and Rationality of Exercising Reset Options in Variable Annuities

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Listed:
  • Riley Jones
  • Adriana Ocejo

Abstract

A variable annuity is an equity-linked financial product typically offered by insurance companies. The policyholder makes an upfront payment to the insurance company and, in return, the insurer is required to make a series of payments starting at an agreed upon date. For a higher premium, many insurance companies offer additional guarantees or options which protect policyholders from various market risks. This research is centered around two of these options: the guaranteed minimum income benefit (GMIB) and the reset option. The sensitivity of various parameters on the value of the GMIB is explored, particularly the guaranteed payment rate set by the insurer. Additionally, a critical value for future interest rates is calculated to determine the rationality of exercising the reset option. This will be able to provide insight to both the policyholder and policy writer on how their future projections on the performance of the stock market and interest rates should guide their respective actions of exercising and pricing variable annuity options. This can help provide details into the value of adding options to a variable annuity for companies that are looking to make variable annuity policies more attractive in a competitive market.

Suggested Citation

  • Riley Jones & Adriana Ocejo, 2019. "Assessing Guaranteed Minimum Income Benefits and Rationality of Exercising Reset Options in Variable Annuities," International Journal of Statistics and Probability, Canadian Center of Science and Education, vol. 8(5), pages 13-24, September.
    • Handle: RePEc:ibn:ijspjl:v:8:y:2019:i:5:p:13
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    References listed on IDEAS

    as
    1. Bacinello, Anna Rita & Millossovich, Pietro & Olivieri, Annamaria & Pitacco, Ermanno, 2011. "Variable annuities: A unifying valuation approach," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 285-297.
    2. Pavel V. Shevchenko & Xiaolin Luo, 2016. "A Unified Pricing of Variable Annuity Guarantees under the Optimal Stochastic Control Framework," Risks, MDPI, vol. 4(3), pages 1-31, July.
    3. Pavel V. Shevchenko & Xiaolin Luo, 2016. "A unified pricing of variable annuity guarantees under the optimal stochastic control framework," Papers 1605.00339, arXiv.org.
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    More about this item

    Keywords

    guaranteed minimum income benefit; Monte Carlo; pricing; reset option; variable annuity;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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