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STATE-DEPENDENT FEES FOR VARIABLE ANNUITY GUARANTEES

Published online by Cambridge University Press:  19 May 2014

Carole Bernard ,
Mary Hardy  and
Anne Mackay
Carole Bernard
Affiliation:
Department of Statistics and Actuarial ScienceUniversity of WaterlooWaterloo, Ontario, Canada E-Mail: c3bernar@uwaterloo.ca
Mary Hardy
Affiliation:
Department of Statistics and Actuarial ScienceUniversity of WaterlooWaterloo, Ontario, Canada E-Mail: mrhardy@uwaterloo.ca
Anne Mackay*
Affiliation:
Department of Statistics and Actuarial ScienceUniversity of WaterlooWaterloo, Ontario, Canada
*
E-Mail: a3mackay@uwaterloo.ca
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Abstract

For variable annuity policies, management fees for the most basic guarantees are charged at a constant rate throughout the term of the policy. This creates a misalignment of risk and income – the fee income is low when the option value is high, and vice versa. In turn, this may create adverse incentives for policyholders, for example, encouraging surrenders when the options are far out-of-the-money.

In this paper, we explore a new fee structure for variable annuities, where the fee rate supporting the cost of guarantees depends on the moneyness of those guarantees. We derive formulas for calculating the fee rates assuming fees are paid only when the guarantees are in-the-money, or are close to being in-the-money, and we illustrate with some numerical examples. We investigate the effect of this new fee structure on the surrender decision.

Keywords

Variable annuitiespricingGMMBGMDBsurrender decision
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 44 , Issue 3 , September 2014 , pp. 559 - 585
Copyright
Copyright © ASTIN Bulletin 2014 

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