Variable Annuities: A Unifying Valuation Approach

28 Pages Posted: 20 Apr 2011 Last revised: 5 Oct 2012

See all articles by Pietro Millossovich

Pietro Millossovich

The Business School (formerly Cass); University of Trieste - Dipartimento di Scienze Aziendali Economiche Matematiche e Statistiche B. de Finetti

Anna Rita Bacinello

University of Trieste - Dipartimento di Matematica Applicata

Annamaria Olivieri

University of Parma - Dipartimento di Scienze Economiche e Aziendali

Ermanno Pitacco

MIB Trieste School of Management

Date Written: April 15, 2011

Abstract

Life annuities and pension products usually involve a number of guarantees, such as minimum accumulation rates, minimum annual payments or a minimum total payout. Packaging different types of guarantees is the feature of so-called variable annuities. Basically, these products are unit-linked investment policies providing a post-retirement income. The guarantees, commonly referred to as GMxBs (namely, Guaranteed Minimum Benefits of type 'x'), include minimum benefits both in case of death and survival. In this paper we propose a unifying framework for the valuation of variable annuities under quite general model assumptions. We compute and compare contract values and fair fee rates under 'static' and 'mixed' valuation approaches, via ordinary and least squares Monte Carlo methods, respectively.

Keywords: Variable annuities, post-retirement income, risk management, guarantees, Least Square Monte Carlo

Suggested Citation

Millossovich, Pietro and Bacinello, Anna Rita and Olivieri, Annamaria and Pitacco, Ermanno, Variable Annuities: A Unifying Valuation Approach (April 15, 2011). Available at SSRN: https://ssrn.com/abstract=1810522 or http://dx.doi.org/10.2139/ssrn.1810522

Pietro Millossovich (Contact Author)

The Business School (formerly Cass) ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

University of Trieste - Dipartimento di Scienze Aziendali Economiche Matematiche e Statistiche B. de Finetti ( email )

Piazzale Europa, 1
Trieste, 34127
Italy

Anna Rita Bacinello

University of Trieste - Dipartimento di Matematica Applicata ( email )

Piazzale Europa, 1
Trieste, 34127
Italy

Annamaria Olivieri

University of Parma - Dipartimento di Scienze Economiche e Aziendali ( email )

via Kennedy 6
Parma, 43125
Italy

Ermanno Pitacco

MIB Trieste School of Management

Trieste, Trieste 34100
Italy

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