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Valuation Perspectives and Decompositions for Variable Annuities with GMWB riders

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  • Cody B. Hyndman
  • Menachem Wenger

Abstract

The guaranteed minimum withdrawal benefit (GMWB) rider, as an add on to a variable annuity (VA), guarantees the return of premiums in the form of peri- odic withdrawals while allowing policyholders to participate fully in any market gains. GMWB riders represent an embedded option on the account value with a fee structure that is different from typical financial derivatives. We consider fair pricing of the GMWB rider from a financial economic perspective. Particular focus is placed on the distinct perspectives of the insurer and policyholder and the unifying relationship. We extend a decomposition of the VA contract into components that reflect term-certain payments and embedded derivatives to the case where the policyholder has the option to surrender, or lapse, the contract early.

Suggested Citation

  • Cody B. Hyndman & Menachem Wenger, 2013. "Valuation Perspectives and Decompositions for Variable Annuities with GMWB riders," Papers 1307.2562, arXiv.org, revised Dec 2013.
    • Handle: RePEc:arx:papers:1307.2562
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    References listed on IDEAS

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    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. Jingjiang Peng & Kwai Sun Leung & Yue Kuen Kwok, 2012. "Pricing guaranteed minimum withdrawal benefits under stochastic interest rates," Quantitative Finance, Taylor & Francis Journals, vol. 12(6), pages 933-941, October.
    3. Levy, Edmond, 1992. "Pricing European average rate currency options," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 474-491, October.
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