Journal Article

Revisiting the Risk-Neutral Approach to Optimal Policyholder Behavior: A Study of Withdrawal Guarantees in Variable Annuities

Thorsten Moenig and Daniel Bauer

in Review of Finance

Volume 20, issue 2, pages 759-794
Published in print March 2016 | ISSN: 1572-3097
Published online May 2015 | e-ISSN: 1573-692X | DOI: https://dx.doi.org/10.1093/rof/rfv018
Revisiting the Risk-Neutral Approach to Optimal Policyholder Behavior: A Study of Withdrawal Guarantees in Variable Annuities

More Like This

Show all results sharing these subjects:

  • Insurance
  • Household Behaviour and Family Economics
  • Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling

GO

Show Summary Details

Preview

Policyholder exercise behavior presents an important risk factor for pricing Variable Annuities. However, approaches presented in the literature—building on value-maximizing strategies akin to pricing American options—do not square with observed price and exercise patterns for popular withdrawal guarantees. We show that including taxes into the valuation closes this gap between theory and practice. In particular, we develop a subjective risk-neutral valuation methodology that takes into consideration differences in the tax structure between investment opportunities. We demonstrate that accounting for tax advantages significantly affects the value of the guarantees and produces results that are in line with empirical patterns.

Keywords: G22; D14; C61

Journal Article.  15217 words.  Illustrated.

Subjects: Insurance ; Household Behaviour and Family Economics ; Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.