Systematic Mortality Risk: An Analysis of Guaranteed Lifetime Withdrawal Benefits in Variable Annuities

28 Pages Posted: 15 Jun 2013 Last revised: 30 Sep 2015

See all articles by Simon Man Chung Fung

Simon Man Chung Fung

Commonwealth Bank of Australia

Katja Ignatieva

University of New South Wales - Australian School of Business

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

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Date Written: March 22, 2014

Abstract

Guaranteed lifetime withdrawal benefits (GLWB) embedded in variable annuities have become an increasingly popular type of life annuity designed to cover systematic mortality risk while providing protection to policyholders from downside investment risk. This paper provides an extensive study of how different sets of financial and demographic parameters affect the fair guaranteed fee charged for a GLWB as well as the profit and loss distribution, using tractable equity and stochastic mortality models in a continuous time framework. We demonstrate the significance of parameter risk, model risk, as well as the systematic mortality risk component underlying the guarantee. We quantify how different levels of equity exposure chosen by the policyholder affect the exposure of the guarantee providers to systematic mortality risk. Finally, the effectiveness of a static hedge of systematic mortality risk is examined allowing for different levels of equity exposure.

Keywords: variable annuity, guaranteed lifetime withdrawal benefits (GLWB), systematic mortality risk, parameter risk, model risk, static hedging

JEL Classification: G22, G23, G13

Suggested Citation

Fung, Man Chung and Ignatieva, Katja and Sherris, Michael, Systematic Mortality Risk: An Analysis of Guaranteed Lifetime Withdrawal Benefits in Variable Annuities (March 22, 2014). UNSW Australian School of Business Research Paper No. 2013ACTL15. Available at SSRN: https://ssrn.com/abstract=2279274 or http://dx.doi.org/10.2139/ssrn.2279274

Man Chung Fung

Commonwealth Bank of Australia

CBP
Sydney, NSW 2064
Australia

Katja Ignatieva (Contact Author)

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

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