Valuation Perspectives and Decompositions for Variable Annuities with GMWB Riders

18 Pages Posted: 10 Jul 2013 Last revised: 17 Jan 2015

See all articles by Cody Blaine Hyndman

Cody Blaine Hyndman

Concordia University, Quebec - Department of Mathematics and Statistics

Menachem Wenger

Concordia University, Quebec - Department of Mathematics & Statistics

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

Hyndman, Cody Blaine and Wenger, Menachem, Valuation Perspectives and Decompositions for Variable Annuities with GMWB Riders (December 27, 2013). Insurance: Mathematics and Economics, Vol. 55, 2014, Available at SSRN: https://ssrn.com/abstract=2291724 or http://dx.doi.org/10.2139/ssrn.2291724

Cody Blaine Hyndman (Contact Author)

Concordia University, Quebec - Department of Mathematics and Statistics ( email )

Concordia University
1455 boulevard de Maisonneuve Ouest
Montreal, Quebec H3G 1M8
Canada
514-848-2424 (Phone)

Menachem Wenger

Concordia University, Quebec - Department of Mathematics & Statistics ( email )

Canada

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