Please use this identifier to cite or link to this item: http://scholarbank.nus.edu.sg/handle/10635/13821
Title: Valuation and optimal lapsation of protected variable annuities
Authors: FLORENCE BOUTEMY
Keywords: protected variable annuity, option pricing, backward induction, optimal stopping
Issue Date: 26-Apr-2004
Source: FLORENCE BOUTEMY (2004-04-26). Valuation and optimal lapsation of protected variable annuities. ScholarBank@NUS Repository.
Abstract: Variable annuities or unit-linked insurances are investments on financial assets that are made through a life insurance company. Some offer a guarantee on a minimum amount at maturity upon survival while some offer a minimum amount guarantee at death. If the account value of a protected variable annuity does not reach the guarantee, the insurance company will reimburse the shortfall to the policyholder at maturity or at death. The guarantee is funded via an initial premium and a periodic premium which is usually a percentage of the account value of the protected variable annuity. In addition, a deferred surrender charge (DSC) has been designed so that it minimizes the frequency of lapses while allowing lapses, which is a legal requirement in most countries.This thesis aims to understand the mechanism of lapses and its impact on the price of the protected variable annuity. While most companies see the DSC as both an incentive not to lapse and a protection against lapses, one can deal with the DSC as a premium to fund the guarantee. The most competitive rates of the DSC, which are a??faira?? to the policyholder and the insurer are called optimal rates. We work in the framework of Milevsky and Salisbury (2002) and provide an optimal lapsation boundary and an optimal continuous insurance fee and DSC using backward induction. We compare our numerical solution with the infinite horizon solution of Milevsky and Salisbury (2002). As an illustration, a a??faira?? price would be found for the AXA Re maturity and death protected variable annuity, namely the GMADB (Guaranteed Minimum Accumulation and Death Benefit).
URI: http://scholarbank.nus.edu.sg/handle/10635/13821
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