Taxation and Policyholder Behavior: The Case of Guaranteed Minimum Accumulation Benefits

43 Pages Posted: 10 Jul 2020

See all articles by Jennifer Alonso-García

Jennifer Alonso-García

Université Libre de Bruxelles (ULB) - Department of Mathematics; ARC Centre of Excellence in Population Ageing Research; Netspar

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

Samuel Thirurajah

KPMG

Jonathan Ziveyi

UNSW Australia

Date Written: June 17, 2020

Abstract

This paper considers variable annuity contracts embedded with guaranteed minimum accumulation benefit (GMAB) riders when policyholder's proceeds are taxed. These contracts promise the return of the premium paid by the policyholder, or a higher stepped up value, at the end of the investment period. A partial differential valuation framework, which exploits the numerical method of lines, is used to determine fair fees that render the policyholder and insurer profits neutral. Two taxation regimes are considered; one where capital gains are allowed to offset losses and a second where gains do not offset losses, reflecting stylized institutional arrangements in Australia and the US respectively. Most insurance providers highlight the tax-deferred feature of a variable annuity. We show that the regime under which the insurance provider is taxed significantly impacts supply and demand prices. If losses are allowed to offset gains then this enhances the market, narrowing the gap between fees, and even producing higher demand than supply fees. On the other hand, when losses are not allowed to offset gains, then the demand-supply gap increases. When charging the demand price, we show that insurance companies would be profitable on average. Low (high) Sharpe ratios are not as profitable as policyholders are more likely to stay long (surrender).

Keywords: taxation, retirement income, policyholder behavior, pricing, method of lines, surrender, variable annuity

JEL Classification: C61, D14, G22

Suggested Citation

Alonso-García, Jennifer and Sherris, Michael and Thirurajah, Samuel and Ziveyi, Jonathan, Taxation and Policyholder Behavior: The Case of Guaranteed Minimum Accumulation Benefits (June 17, 2020). Available at SSRN: https://ssrn.com/abstract=3629101 or http://dx.doi.org/10.2139/ssrn.3629101

Jennifer Alonso-García (Contact Author)

Université Libre de Bruxelles (ULB) - Department of Mathematics ( email )

Brussels
Belgium

ARC Centre of Excellence in Population Ageing Research ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

Samuel Thirurajah

KPMG ( email )

300 Barangaroo Avenue
Tower Three International Towers Sydney
Sydney, 2000
Australia

Jonathan Ziveyi

UNSW Australia ( email )

School of Risk and Actuarial Studies
Level 6 East Wing, Business School
Sydney, NSW 2052
Australia
+61 2 9385 8006 (Phone)
+61 2 9385 1883 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
4
Abstract Views
110
PlumX Metrics