Variable Annuities: Risk Identification and Risk Assessment

Abstract

Life annuities and pension products usually involve a number of ‘guarantees’, such as, e.g., minimum accumulation rates, minimum annual payments and minimum total payout. Packaging different types of guarantees is the feature of the so-called Variable Annuities. Basically, these products are unit-linked investment policies providing deferred annuity benefits. The guarantees, commonly referred to as GMxBs (namely, Guaranteed Minimum Benefits of type ‘x’), include minimum benefits both in case of death and survival. Following a Risk Management-oriented approach, this paper first aims at singling out all sources of risk affecting Variable Annuities (‘risk identification phase’). Critical aspects arise from the interaction between financial and demographic issues. In particular, the longevity risk may have a dramatic impact on the technical equilibrium of a portfolio. Then, we deal with risk quantification (‘risk assessment phase’), mostly via stochastic simulation of financial and demographic scenarios. Our main contribution is to present an integrated approach to risks in Variable Annuity products, so providing a unifying and innovative point of view.