Valuation Perspectives and Decompositions for Variable Annuities with GMWB Riders
18 Pages Posted: 10 Jul 2013 Last revised: 17 Jan 2015
Date Written: December 27, 2013
Abstract
The guaranteed minimum withdrawal benefit (GMWB) rider, as an add on to a variable annuity (VA), guarantees the return of premiums in the form of periodic withdrawals while allowing policyholders to participate fully in any market gains. GMWB riders represent an embedded option on the account value with a fee structure that is different from typical financial derivatives. We consider fair pricing of the GMWB rider from a financial economic perspective. Particular focus is placed on the distinct perspectives of the insurer and policyholder and the unifying relationship. We extend a decomposition of the VA contract into components that reflect term-certain payments and embedded derivatives to the case where the policyholder has the option to surrender, or lapse, the contract early.
Keywords: variable annuity, GMWB, optimal stopping
JEL Classification: G12, G13, G22
Suggested Citation: Suggested Citation