On the Interaction between Transfer Restrictions and Crediting Strategies in Guaranteed Funds

Guaranteed funds with crediting rates for fixed periods determined by a Pension Provider or Insurance Company are common features of accumulation annuity contracts. Policyholders can transfer money back and forth between these accounts and Money Market accounts which give them features similar to demand deposits and yet they frequently credit a higher rate than the Money Market. Transfer restrictions are commonly employed to prevent arbitrage. In this paper, we model the interaction between company and policyholder as a multiperiod game in which the company maximizes risk-neutral expected present value of profits and the policyholder maximizes his expected discounted utility. We find that the optimal strategy on the part of the company is to credit a rate higher than money market rate in the first period to entice the policyholder to invest in the guaranteed fund. The company then credits the floor in the remaining periods as the policyholder transfers out the maximum amount. This does better for the policyholder in low interest rate environments and worse in high interest rate environments and acts as a type of “interest rate insurance” for the policyholder

The Effect of Labor Income and Health Uncertainty on the Valuation of Guaranteed Minimum Death Benefits

We examine the effect of labor income and health uncertainty on the optimal choices of policyholders with Guaranteed Minimum Death Benefits embedded in Variable Annuities. These choices are determined in the context of a utility-based life cycle model including bequest motives and optimal term life purchases. We then determine risk-neutral prices from the perspective of the issuing financial institutions. In contrast to previous studies which do not include income and health uncertainty, we find that very risk-averse policyholders in weak job markets would be willing to pay the risk-neutral price in order to receive these benefits. This occurs because an unemployed individual with a low account balance would be unwilling to pay for term insurance, but has precommitted to pay the now small GMDB fees in exchange for the death benefits

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

The paper presents a review of structural models of policyholder behavior in life insurance. We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The paper should provide a foundation for future studies, and we describe some important directions for future research in the conclusion

Rapid Calculation of the Price of Guaranteed Minimum Death Benefit Ratchet Options Embedded in Annuities

This paper presents a new method of obtaining quick and accurate values and deltas for discrete look back options using Taylor series expansions. This method is applied to the case of ratchet guaranteed minimum death benefits attached to annuity contracts, and the method is extended to include annuities where a fixed fund is attached to the variable account. Finally, both the speed and the accuracy of the method are compared to Monte Carlo simulation and the exact analytic solution. The Taylor expansion method is shown to be faster and, in most cases, more accurate than the alternative methods

The Effect Of The Real Option To Transfer On The Value Of Guaranteed Minimum Death Benefits

Variable annuity contracts frequently have many options and option-like features embedded in the contracts. Some are obvious, such as guaranteed minimum death benefits (GMDBs), while others are less obviously option-like. In this article, we consider the effect of the real option to transfer funds between fixed and variable accounts. If a GMDB rider is considered in isolation, it is sometimes in the policyholder\u27s interest to transfer to the fixed fund if the fixed fund earns less than the variable fund in a risk-neutral world. On the other hand, the option to transfer will not be used if the entire annuity and rider are considered together. © The Journal of Risk and Insurance, 2006

Influences on Sponsor Voluntary Contributions to Defined Benefit Pension Plans in the US

Many financially insolvent private pension funds have put Defined Benefit (DB) plans under a microscope over the last few decades. Despite government imposed rules to ensure minimum required funding, sponsors might choose to underfund the plans for short term benefits. This paper investigates the influences— plan and firm specific characteristics, and enforcement of full funding limits— on sponsor contributions (1991-2016) to DB pension plans in the US private sector. We apply Heckman model to the voluntary contributions to eliminate sample selection bias resulting from decisions to contribute only the legally required minimum. Allowing tax deductible contributions up to a full funding limitation has a positive marginal effect on voluntary contributions. Sponsors are less likely to contribute when the S&P stock return increases, but more likely when the 10-year treasury rate does. A lower pension plan funding ratio than required increases the likelihood of contribution