408 research outputs found
Valuation and hedging of the ruin-contingent life annuity (RCLA)
This paper analyzes a novel type of mortality contingent-claim called a
ruin-contingent life annuity (RCLA). This product fuses together a
path-dependent equity put option with a "personal longevity" call option. The
annuitant's (i.e. long position) payoff from a generic RCLA is \$1 of income
per year for life, akin to a defined benefit pension, but deferred until a
pre-specified financial diffusion process hits zero. We derive the PDE and
relevant boundary conditions satisfied by the RCLA value (i.e. the hedging
cost) assuming a complete market where No Arbitrage is possible. We then
describe some efficient numerical techniques and provide estimates of a typical
RCLA under a variety of realistic parameters.
The motivation for studying the RCLA on a stand-alone basis is two-fold.
First, it is implicitly embedded in approximately \$1 trillion worth of U.S.
variable annuity (VA) policies; which have recently attracted scrutiny from
financial analysts and regulators. Second, the U.S. administration - both
Treasury and Department of Labor - have been encouraging Defined Contribution
(401k) plans to offer stand-alone longevity insurance to participants, and we
believe the RCLA would be an ideal and cost effective candidate for that job
Annuities and their Derivatives: The Recent Canadian Experience
This chapter surveys recent developments within the Canadian “income annuity” marketplace. We start by computing the Money’s Worth Ratio (MWR) using a unique dataset which includes a decade of Canadian annuity payouts. We then move-on to discuss the Guaranteed Lifetime Withdrawal Benefit (GLWB) product which has recently become available in Canada. This important innovation is extremely popular and shares many characteristics with a conventional income annuity. Finally, we conclude with thoughts on the optimal product allocation within the context of the Canadian retirement portfolio
Optimal initiation of a GLWB in a variable annuity: no arbitrage approach
This paper offers a financial economic perspective on the optimal time (and
age) at which the owner of a Variable Annuity (VA) policy with a Guaranteed
Living Withdrawal Benefit (GLWB) rider should initiate guaranteed lifetime
income payments. We abstract from utility, bequest and consumption preference
issues by treating the VA as liquid and tradable. This allows us to use an
American option pricing framework to derive a so-called optimal initiation
region. Our main practical finding is that given current design parameters in
which volatility (asset allocation) is restricted to less than 20%, while
guaranteed payout rates (GPR) as well as bonus (roll-up) rates are less than
5%, GLWBs that are in-the-money should be turned on by the late 50s and
certainly the early 60s. The exception to the rule is when a non-constant GPR
is about to increase (soon) to a higher age band, in which case the optimal
policy is to wait until the new GPR is hit and then initiate immediately. Also,
to offer a different perspective, we invert the model and solve for the bonus
(roll-up) rate that is required to justify delaying initiation at any age. We
find that the required bonus is quite high and more than what is currently
promised by existing products. Our methodology and results should be of
interest to researchers as well as to the individuals that collectively have
over \$1 USD trillion in aggregate invested in these products. We conclude by
suggesting that much of the non-initiation at older age is irrational (which
obviously benefits the insurance industry.
Credit Implications of the Payout Annuity Market
Our paper will examine the growth prospects and accompanying risks for the insurance industry in the payout annuity marketplace. By answering market demands in the payout annuity market and providing equity market participation with downside protection over the life of an annuitant, an insurance company exposes itself to a number of risks. We examine potential risk management solutions, including reinsurance, insurance securitization and self-insurance by the pool participants
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