Assessing guaranteed minimum income benefits and rationality of exercising reset options in variable annuities

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Ocejo Monge, A., & Jones, R. F. (2019). Assessing guaranteed minimum income benefits and rationality of exercising reset options in variable annuities. International Journal Of Statistics And Probability. https://doi.org/doi:10.5539/ijsp.v8n5p13
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Description

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.

Details
Title

Assessing guaranteed minimum income benefits and rationality of exercising reset options in variable annuities

Author(s)

Ocejo Monge, Adriana
Jones, Riley F.

UNC Charlotte Affiliate Type

Faculty

Place of Publication

International journal of statistics and probability

Publisher

Canadian Center of Science and Education

Extent

1 online resource

Date Published

2019-08-06

Material Type

Journal article

Genre

articles

Resource Type

text

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.

Subjects--Topics

Variable annuities
Risk (Insurance)

Is Part Of

International journal of statistics and probability

Volume

8

Issue

5

Beginning Page Number

13

Ending Page Number

24

Language

English

Published Version (Please cite this version)

doi:10.5539/ijsp.v8n5p13

Publisher's Version

https://doi.org/10.5539/ijsp.v8n5p13

Permalink

http://hdl.handle.net/20.500.13093/work:66

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