Impact of Flexible Periodic Premiums on Variable Annuity Guarantees

In this paper, we study the fair fee of a ﬂexible premium variable annuity (FPVA), in which the policyholder can choose to pay periodic premiums during the accumulation phase instead of a single initial premium. We are able to express fair fees using a fast and accurate approximation based on bounds on the price of the FPVA. We identify scenarios that are particularly costly for the insurer. Our study could help insurers estimate the magnitude of typical underpricing when offering ﬂexible premium variable annuities with the same fee as the corresponding single premium variable annuity.

Keywords: variable annuity, ﬂexible premium, GMAB, GMDB, Asian options, conditioning

Suggested Citation: Suggested Citation

Bernard, Carole and Cui, Zhenyu and Vanduffel, Steven, Impact of Flexible Periodic Premiums on Variable Annuity Guarantees (February 27, 2016). Available at SSRN: https://ssrn.com/abstract=2739145 or http://dx.doi.org/10.2139/ssrn.2739145