Guaranteed Annuity Options

By Phelim P. Boyle, Mary R. Hardy. ASTIN Bulletin: The Journal of the International Actuarial Association, 2003

135 citations recorded by the source corpus.

Under a guaranteed annuity option, an insurer guarantees to convert a policyholder's accumulated funds to a life annuity at a fixed rate when the policy matures. If the annuity rates provided under the guarantee are more beneficial to the policyholder than the prevailing rates in the market the insurer has to make up the difference. Such guarantees are common in many US tax sheltered insurance products. These guarantees were popular in UK retirement savings contracts issued in the 1970's and 1980's when long-term interest rates were high. At that time, the options were very far out of the money and insurance companies apparently assumed that interest rates would remain high and thus that the guarantees would never become active. In the 1990's, as long-term interest rates began to fall, the value of these guarantees rose. Because of the way the guarantee was written, two other factors influenced the cost of these guarantees. First, strong stock market performance meant that the amounts to which the guarantee applied increased significantly. Second, the mortality assumption implicit in the guarantee did not anticipate the improvement in mortality which actually occurred. The emerging liabilities under these guarantees threatened the solvency of some companies and led to the closure of Equitable Life (UK) to new business. In this paper we explore the pricing and risk management of these guarantees.

Subfields: Demography, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/fb3e7bef2aaff0395f7cc8c1fce36642428825c5

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Demography

1. A. Wilkie
2. H. Waters
3. Sharon S. Yang

In Economics and Econometrics

1. A. Wilkie
2. H. Waters
3. Sharon S. Yang

In Finance

1. A. Wilkie
2. H. Waters
3. Sharon S. Yang

Citations in the corpus

• Reserving, Pricing and Hedging For Policies with Guaranteed Annuity Options (2003, methodology): “12.13 Just as our paper was being competed we received a draft of a paper by Boyle and Hardy (2002), which covers the same subject as this paper, in a rather similar way.”
• Pricing and Hedging Guaranteed Annuity Options via Static Option Replication (2003, unknown): “Discussions on how to set up delta hedging strategies can be found in Boyle and Hardy (2003) and Wilkie, Waters and Yang (2003). Executing such a trading strategy in practice can be costly due to transaction costs or even unsuccessful due to inconsistencies in the model assumptions and the actual be”
• The fair value of guaranteed annuity options (2006, unknown): “The pricing of GAOs has been tackled by several authors, e.g. by Van Bezooyen, Exley and Mehta (1998), Milevsky and Promislow (2001), Ballotta and Haberman (2003b,a), Boyle and Hardy (2003), Olivieri and Pitacco (2003), Pelsser (2003) and Wilkie, Waters and Yang (2003).”
• Valuation of Guaranteed Annuity Conversion Options (2003, unknown): “An inspection of equations (4) and (5) (for the constant volatility model), and equations (14) and (18) (for the exponentially decaying volatility model) reveals that the expected present value of the annuity payment is a decreasing function of ρ.”
• The fair valuation problem of guaranteed annuity options: The stochastic mortality environment case (2006, unknown): “A sample trajectory of the Ornstein-Uhlenbeck process, Y, as specified by equation (9) , is represented alongside with the corresponding trajectory of the hazard rate, μ, in the top panels of Figure 1.”