High‐water mark fee structure in variable annuities

Landriault, David; Li, Bin; Li, Dongchen; Wang, Yumin

doi:10.1111/jori.12345

Cited by 8 publications

(3 citation statements)

References 36 publications

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“…Under this proposal, the insurance charge decreases solely once a specific time threshold has been reached. Landriault et al [ 18 ] were pioneers in applying the novel high-mark fee structure to variable annuities embedded with GMDB and GMMB. Wang and Zou [ 19 ] delved into the intricate design of fee structures for variable annuities, framing it as a stochastic control problem.…”

Section: Introductionmentioning

confidence: 99%

Guaranteed minimum withdrawal benefits with high-water mark fee structure

Han,

Wu,

et al. 2024

PLoS ONE

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The Guaranteed Minimum Withdrawal Benefit (GMWB), an adjunct incorporated within variable annuities, commits to reimbursing the entire initial investment regardless of the performance of the underlying funds. While extensive research exists in financial and actuarial literature regarding the modeling and valuation techniques of GMWBs, much of it is founded on a static fee structure. Our study introduces an innovative fee structure based on the high-water mark (HWM) principle and a regime-switch jump-diffusion model for the pricing of GMWBs, employing numerical solutions through the Monte Carlo method for solving the stochastic differential equation (SDE). Furthermore, a companion piece of research addresses the risk management of GMWBs within the same analytical framework as the pricing component, an aspect that has received limited attention in the existing literature. In assessing the necessary capital reserves for unforeseen losses, our methodology involves the computation of two risk metrics associated with the tail distribution of net liability from the insurer’s perspective, Value-at-Risk (VaR) and Conditional-Tail-Expectation (CTE). Comprehensive numerical results and sensitivity analyses are also provided.

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Section: Introductionmentioning

confidence: 99%

Guaranteed minimum withdrawal benefits with high-water mark fee structure

Han,

Wu,

et al. 2024

PLoS ONE

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“…They demonstrate that such a time-dependent structure could help lower the fee rates of VAs without reducing the insurer's profit, thus making VAs more attractive to potential investors. Landriault et al (2021) generalize the fee rate proposal of and investigate the impact on VAs with a high-water mark (HWM) fee structure, which is commonly used in the hedge fund industry by rewarding the VA insurer when the fund outperforms the past. They find that under appropriate market conditions, the HWM structure can benefit the welfare for both policyholders and the insurer.…”

Section: Introductionmentioning

confidence: 99%

Optimal Static Hedging of Variable Annuities with Volatility-Dependent Fees

Tang

2023

Risks

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Variable annuities (VAs) and other long-term equity-linked insurance products are typically difficult to hedge in the incomplete markets. A state-dependent fee tied with market volatility for VAs is designed to contribute the risk-sharing mechanism between policyholders and insurers. Different from prior research, we discuss several aspects on a fair valuation, fee-rate determination and hedging with volatility-dependent fees from the perspective of a VA hedger. A method of efficient hedging strategy as a benchmark compared to other strategies is developed in the stochastic volatility setting. We illustrate this method in guaranteed minimum maturity benefits (GMMBs), but it is also applicable to other equity-linked insurance contracts.

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“…Habit formation has been systematically studied in mathematical finance. This concept has been considered as an inertia of the consumption process as a control variable in the economic growth [18], utility maximizing portfolio [19,20], annuities [21], and non-life insurance [22]. Risk assessment of the consumption of exhaustible resources has been modeled considering habit utility as a linear relaxation process [13].…”

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confidence: 99%

Time‐average stochastic control based on a singular local Lévy model for environmental project planning under habit formation

Yoshioka

Tsujimura

Hamagami

et al. 2023

Math Methods in App Sciences

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This study applies the theory of stochastic control to an environmental project planning to counteract against the sediment starvation problem in river environments. This can be considered as a time-average inventory problem to time-discretely control a continuous-time system driven by a non-smooth jump process under habit formation disturbing project implementation. The system is modeled such that the sediment storage dynamics are physically consistent with certain experimental results. Further, the habit formation is modeled as simple linear dynamics and serves as a constraint related to the replenishment amount of the sediment. We show that the time-average control problem is not necessarily ergodic. Consequently, the effective Hamiltonian may become a non-constant. Thereafter, ratcheting cases as extreme cases of the irreversible habit formation are considered, owing to them being unique exactly solvable non-ergodic control problems. The optimality equation associated with a regularized and hence well-defined control problem is verified. Furthermore, a finite difference scheme is examined against the exactly solvable case and then applied to more complicated cases.

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High‐water mark fee structure in variable annuities

Cited by 8 publications

References 36 publications

Guaranteed minimum withdrawal benefits with high-water mark fee structure

Guaranteed minimum withdrawal benefits with high-water mark fee structure

Optimal Static Hedging of Variable Annuities with Volatility-Dependent Fees

Time‐average stochastic control based on a singular local Lévy model for environmental project planning under habit formation

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