Coping with Longevity via Hedging: Fair Dynamic Valuation of Variable Annuities

37 Pages Posted: 14 Dec 2022

See all articles by Ze Chen

Ze Chen

Renmin University of China - School of Finance

Runhuan Feng

University of Illinois at Urbana-Champaign

Hong Li

University of Guelph

Tianyu Yang

Shanghai University of Finance and Economics

Date Written: November 28, 2022

Abstract

This paper proposes a fair valuation approach to price variable annuity liabilities and embedded guarantee riders in a dynamic multi-period setting. The focus of the paper is on variable annuity with the Guaranteed Lifetime Withdrawal Benefit(GLWB) rider with exposure to both equity and longevity risks, and to offer a market-, actuarial-, and time-consistent fair dynamic valuation method.We find that the proposed approach is able to obtain fair management fee rates in line with those in the existing literature and surveys. Moreover, the fair valuation of liability, and in turn the price of the GLWB rider, can be substantially reduced if longevity risk in the annuity portfolio is appropriately managed.

Keywords: Dynamic fair valuation, Market-consistency, Variable annuity, Actuarial-consistency, Longevity risk, Time-consistency

Suggested Citation

Chen, Ze and Feng, Runhuan and Li, Hong and Yang, Tianyu, Coping with Longevity via Hedging: Fair Dynamic Valuation of Variable Annuities (November 28, 2022). Available at SSRN: https://ssrn.com/abstract=4287409 or http://dx.doi.org/10.2139/ssrn.4287409

Ze Chen

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

Runhuan Feng

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL Champaign 61820
United States

Hong Li

University of Guelph ( email )

Guelph
Canada

Tianyu Yang (Contact Author)

Shanghai University of Finance and Economics ( email )

China

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