Valuation of Variable Annuity Guarantees
Kirk Evans
Low Interest Rate Environments and Consequences
Risks Faced by Writers of Investment Guarantees
Variable Annuity in Asia post-2008
How did Variable Annuities Fare in the Crisis?
Traditional Life Insurance Products are Under Pressure
An Overview of Regulatory Requirements
Simulations
Economic Scenario Generators and Variable Annuities
Modelling and Managing Policyholder Behavioural Risks
Modelling and Managing Mortality and Longevity Risks
Valuation of Variable Annuity Guarantees
Understanding and Using Reinsurance Treaties for Guaranteed Products
Hedging of Long-term Fund-linked Exotic Options
Overview of Commonly Used Risk Management Strategies
Taxonomy of Equity, Interest Rate, Hybrid and Customised Derivatives Used for Risk Management
Managing Risks Underlying Variable Annuity Liabilities
Basis Risk
Measuring Hedge Effectiveness
Measuring and Reporting Hedge Efficiency
Eight Important Questions Practitioners Should Ask When Managing Equity-linked Insurance Guarantee Risks
As seen in the preceding chapters, variable annuity (VA) products contain elements that are similar to capital market options and those similar to traditional insurance products. This dual nature needs to be considered when valuing VA guarantees. Only then can we gain an accurate assessment of the risk VA guarantees impose to the seller, and thus be able to determine the appropriate charge for VA guarantees.
In this chapter, the focus will be on the guarantee elements of VA products. The VA guarantee’s similarity to capital market options derive from the fact that its value is tied asymmetrically to the VA’s underlying fund performance. Most VA guarantees (guaranteed minimum death benefit, GMDB; guaranteed minimum income benefit, GMIB; guaranteed minimum accumulation benefit, GMAB; guaranteed minimum withdrawal benefit, GMWB; and guaranteed lifetime withdrawal benefit, GLWB) are similar to capital market put options, and provide a payout to the VA guarantee holder if the performance of the underlying funds (net of fees) does not meet some minimum level of return over a specified period of time. However, there are some less popular VA guarantees, such as the enhanced earnings
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