Impact of Flexible Periodic Premiums on Variable Annuity Guarantees

35 Pages Posted: 29 Feb 2016  

Carole Bernard

Grenoble Ecole de Management

Zhenyu Cui

Stevens Institute of Technology

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Date Written: February 27, 2016

Abstract

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

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

Carole Bernard (Contact Author)

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

Zhenyu Cui

Stevens Institute of Technology ( email )

School of Business
Castle Point in the Hudson
Hoboken, NJ 07030
United States
(201) 216-3726 (Phone)

HOME PAGE: http://sites.google.com/site/zhenyucui86/

Steven Vanduffel

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

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