On the Propensity to Surrender a Variable Annuity Contract - An Empirical Analysis of Dynamic Policyholder Behaviour

Knoller, Christian; Kraut, Gunther; Schoenmaekers, Pascal

doi:10.2139/ssrn.1976203

Cited by 4 publications

(4 citation statements)

References 22 publications

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“…Even if insurers do not charge for optimality in practice it is still of interest to examine optimal behaviour to understand the worst case scenarios. Knoller et al (2011) conduct a statistical analysis of the Japanese VA marketplace to learn the extent to which rational lapsation occurs in the real world. The field of behavioural finance helps explain why policyholders may act irrationally.…”

Section: A Discussion On Imperfect Models and Subrational Behaviourmentioning

confidence: 99%

Pricing and Hedging GMWB Riders in a Binomial Framework

Hyndman¹,

Wenger²

2014

SSRN Journal

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The guaranteed minimum withdrawal benefit (GMWB) rider guarantees the return of premiums in the form of periodic withdrawals while allowing policyholders to participate fully in any market gains. The product has evolved into a lifetime version (GLWB) and is a vital component of the variable annuity marketplace, representing asset values of $294B as of September 2011.GMWB riders represent an embedded option on the account value with a fee structure that is different from typical financial derivatives. We present an in-depth study into pricing and hedging the GMWB rider from a financial economic perspective. Our main contributions are twofold. We construct a binomial asset pricing model for GMWBs under optimal policyholder behaviour which results in explicitly formulated perfect hedging strategies in a binomial world. The numerical toolbox for pricing GMWBs in a Black-Scholes world is expanded to include binomial methods.To motivate our work, we begin with a review of the continuous model and a comprehensive synthesis of results from the literature. Throughout, particular focus is placed on the unique perspectives of the insurer and policyholder and the unifying relationship. We also present an approximation algorithm that significantly improves efficiency of the binomial model while retaining accuracy. Several numerical examples are provided which illustrate both the accuracy and the tractability of the model. Finally, we explore the effect of deterministic mortality on pricing GMWBs, and run mortality simulations to obtain hedging results which support the diversification principle.

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Section: A Discussion On Imperfect Models and Subrational Behaviourmentioning

confidence: 99%

Pricing and Hedging GMWB Riders in a Binomial Framework

Hyndman¹,

Wenger²

2014

SSRN Journal

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“…Indeed, Knoller et al (2014) analyze policyholder surrender behavior for VAs with simple GMABs based on Japanese data. Unlike the results for conventional products, the authors find that the value of the embedded guarantee has by far the largest explanatory power-whereas they find mixed evidence for the EFH but mild support that financial literacy impacts surrender.…”

Section: Variable Annuities and Other Equity-linked Productsmentioning

confidence: 99%

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

et al. 2021

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The paper presents a review of structural models of policyholder behavior in life insurance. We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The paper should provide a foundation for future studies, and we describe some important directions for future research in the conclusion.

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“…However, it is undoubtedly hard to anticipate correctly the policyholder behaviour, e.g. to specify her policy as a function of the moneyness of the guarantees (see [26], [24] and [2] for the different factors influencing lapse rates). On the other hand, the dynamic approach overcomes this subjective side by taking a worst case scenario from the insurer's point of view, but is subject to the curse of dimensionality and hence very often forces to adopt a very simple setup.…”

Section: Review On the Literature On Gmwbsmentioning

confidence: 99%

The valuation of GMWB variable annuities under alternative fund distributions and policyholder behaviours

Bacinello

Millossovich

Montealegre

2014

Scandinavian Actuarial Journal

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Abstract. In this paper we present a dynamic programming algorithm for pricing variable annuities with Guaranteed Minimum Withdrawal Benefits (GMWB) under a general Lévy processes framework. The GMWB gives the policyholder the right to make periodical withdrawals from her policy account even when the value of this account is exhausted. Typically, the total amount guaranteed for withdrawals coincides with her initial investment, providing then a protection against downside market risk. At each withdrawal date, the policyholder has to decide whether, and how much, to withdraw, or to surrender the contract. We show how different policyholder's withdrawal behaviours can be modelled. We perform a sensitivity analysis comparing the numerical results obtained for different contractual and market parameters, policyholder behaviours, and different types of Lévy processes. Permanent

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On the Propensity to Surrender a Variable Annuity Contract - An Empirical Analysis of Dynamic Policyholder Behaviour

Cited by 4 publications

References 22 publications

Pricing and Hedging GMWB Riders in a Binomial Framework

Pricing and Hedging GMWB Riders in a Binomial Framework

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

The valuation of GMWB variable annuities under alternative fund distributions and policyholder behaviours

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