The Impact of Management Fees on the Pricing of Variable Annuity Guarantees
Variable annuities, as a class of retirement income products, allow equity market exposure for a policyholder’s retirement fund with optional guarantees to limit the downside risk of the market. Management fees andguarantee insurance fees are charged respectively for the market exposure an...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
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MDPI AG
2018-09-01
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| Series: | Risks |
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| Online Access: | http://www.mdpi.com/2227-9091/6/3/103 |
| _version_ | 1818852404393672704 |
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| author | Jin Sun Pavel V. Shevchenko Man Chung Fung |
| author_facet | Jin Sun Pavel V. Shevchenko Man Chung Fung |
| author_sort | Jin Sun |
| collection | DOAJ |
| description | Variable annuities, as a class of retirement income products, allow equity market exposure for a policyholder’s retirement fund with optional guarantees to limit the downside risk of the market. Management fees andguarantee insurance fees are charged respectively for the market exposure and for the protection from the downside risk. We investigate the pricing of variable annuity guarantees under optimal withdrawal strategies when management fees are present. We consider from both policyholder’s and insurer’s perspectives optimal withdrawal strategies and calculate the respective fair insurance fees. We reveal a discrepancy where the fees from the insurer’s perspective can be significantly higher due to the management fees serving as a form of market friction. Our results provide a possible explanation of lower guarantee insurance fees observed in the market than those predicted from the insurer’s perspective. Numerical experiments are conducted to illustrate the results. |
| first_indexed | 2024-12-19T07:20:23Z |
| format | Article |
| id | doaj.art-6de4833378c048c988c2fa24549e509c |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-12-19T07:20:23Z |
| publishDate | 2018-09-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-6de4833378c048c988c2fa24549e509c2022-12-21T20:30:57ZengMDPI AGRisks2227-90912018-09-016310310.3390/risks6030103risks6030103The Impact of Management Fees on the Pricing of Variable Annuity GuaranteesJin Sun0Pavel V. Shevchenko1Man Chung Fung2Faculty of Sciences, University of Technology Sydney, Ultimo 2007, AustraliaDepartment of Actuarial Studies and Business Analytics, Macquarie University, North Ryde 2109, AustraliaData61, CSIRO—Commonwealth Scientific and Industrial Research Organisation, Canberra 2601, AustraliaVariable annuities, as a class of retirement income products, allow equity market exposure for a policyholder’s retirement fund with optional guarantees to limit the downside risk of the market. Management fees andguarantee insurance fees are charged respectively for the market exposure and for the protection from the downside risk. We investigate the pricing of variable annuity guarantees under optimal withdrawal strategies when management fees are present. We consider from both policyholder’s and insurer’s perspectives optimal withdrawal strategies and calculate the respective fair insurance fees. We reveal a discrepancy where the fees from the insurer’s perspective can be significantly higher due to the management fees serving as a form of market friction. Our results provide a possible explanation of lower guarantee insurance fees observed in the market than those predicted from the insurer’s perspective. Numerical experiments are conducted to illustrate the results.http://www.mdpi.com/2227-9091/6/3/103pricingvariable annuity guaranteesmanagement feesdynamic programming |
| spellingShingle | Jin Sun Pavel V. Shevchenko Man Chung Fung The Impact of Management Fees on the Pricing of Variable Annuity Guarantees Risks pricing variable annuity guarantees management fees dynamic programming |
| title | The Impact of Management Fees on the Pricing of Variable Annuity Guarantees |
| title_full | The Impact of Management Fees on the Pricing of Variable Annuity Guarantees |
| title_fullStr | The Impact of Management Fees on the Pricing of Variable Annuity Guarantees |
| title_full_unstemmed | The Impact of Management Fees on the Pricing of Variable Annuity Guarantees |
| title_short | The Impact of Management Fees on the Pricing of Variable Annuity Guarantees |
| title_sort | impact of management fees on the pricing of variable annuity guarantees |
| topic | pricing variable annuity guarantees management fees dynamic programming |
| url | http://www.mdpi.com/2227-9091/6/3/103 |
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