Valuation and Hedging of the Ruin‐Contingent Life Annuity (Rcla)

30 Pages Posted: 17 May 2014

See all articles by H. Huang

H. Huang

York University

Moshe A. Milevsky

York University - Schulich School of Business

T. S. Salisbury

York University

Date Written: June 2014

Abstract

We analyze an insurance instrument called a ruin‐contingent life annuity (RCLA), which is a stand‐alone version of the option embedded inside a variable annuity (VA) but without the buyer having to transfer investments to the insurance company. The annuitant's payoff from an RCLA is a dollar of income per year for life, deferred until a certain wealth process hits zero. We derive the partial differential equation (PDE) satisfied by the RCLA value assuming no arbitrage, describe efficient numerical techniques, and provide estimates for RCLA values. The practical motivation is twofold. First, numerous insurance companies are now offering similar contingent deferred annuities (CDAs). Second, the U.S. Treasury and Department of Labor have encouraged DC plans to offer longevity insurance to participants and the RCLA might be the ideal product.

Suggested Citation

Huang, H. and Milevsky, Moshe Arye and Salisbury, Thomas S., Valuation and Hedging of the Ruin‐Contingent Life Annuity (Rcla) (June 2014). Journal of Risk and Insurance, Vol. 81, Issue 2, pp. 367-395, 2014, Available at SSRN: https://ssrn.com/abstract=2438130 or http://dx.doi.org/10.1111/j.1539-6975.2012.01509.x

H. Huang (Contact Author)

York University

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Moshe Arye Milevsky

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Thomas S. Salisbury

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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