The impact of management fees on the pricing of variable annuity guarantees

Sun, J; Shevchenko, PV; Fung, MC

The impact of management fees on the pricing of variable annuity guarantees

Sun, J Shevchenko, PV

Fung, MC

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Publication Type:: Journal Article
Citation:: Risks, 2018, 6 (3)
Issue Date:: 2018-09-01

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Field	Value	Language
dc.contributor.author	Sun, J	en_US
dc.contributor.author	Shevchenko, PV https://orcid.org/0000-0001-8104-8716	en_US
dc.contributor.author	Fung, MC	en_US
dc.date.issued	2018-09-01	en_US
dc.identifier.citation	Risks, 2018, 6 (3)	en_US
dc.identifier.uri	http://hdl.handle.net/10453/134480
dc.description.abstract	© 2018 by the authors. Licensee MDPI, Basel, Switzerland. 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.	en_US
dc.relation.ispartof	Risks	en_US
dc.relation.isbasedon	10.3390/risks6030103	en_US
dc.title	The impact of management fees on the pricing of variable annuity guarantees	en_US
dc.type	Journal Article
utslib.citation.volume	3	en_US
utslib.citation.volume	6	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
utslib.for	1503 Business and Management	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Science
utslib.copyright.status	open_access
pubs.issue	3	en_US
pubs.publication-status	Published	en_US
pubs.volume	6	en_US

Abstract:

© 2018 by the authors. Licensee MDPI, Basel, Switzerland. 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.

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http://hdl.handle.net/10453/134480