We propose three analytic approximation methods for numerical valuation of the guaranteed annuity options in deferred annuity pension policies. The approximation methods include the stochastic duration approach, Edgeworth expansion and analytic approximation in affine diffusions. The payoff structure in the annuity policies is similar to a quanto call option written on a coupon bearing bond. To...

The global reforms to public pension schemes over the last thirty years have progressively reduced individuals’ post-retirement social security income. In order compensate for this, individuals join funds and individual plans increase their wealth at retirement. These types of fully funded generally give opportunity withdraw capital accumulated into scheme or convert it an annuity. this paper, ...

Many insurance products provide benefits that are contingent on the combined survival status of two lives. To value such benefits accurately, we require a statistical model for the impact of the survivorship of one life on another. In this paper, we first set up two models, one Markov and one semi-Markov, to model the dependence between the lifetimes of a husband and wife. From the models we ca...

Abstract This paper examines two behavioral factors that diminish people's ability to value a lifetime income stream or annuity, drawing on randomized experiment with about 4,000 adults in U.S. nationally representative sample. We find increasing the complexity of annuity choice reduces respondents' measured by difference between sell and buy values they assign annuity. When we limit narrow bra...

We conduct a neutral-context laboratory experiment to systematically investigate the role of the hit-by-bus concern in explaining the annuitization puzzle: the low rate of retirement-asset annuitization relative to the predictions of standard models. We vary endowed asset (annuity vs. stock of wealth vs. no explicit endowment), and find a strong endowment effect. Furthermore, we find that the o...

In this paper, we offer a new method of managing the risk of unexpected changes in mortality underlying annuities and life insurance. This method maximizes the insurer’s profit margin, subject to constraints on its downside mortality risk. We also show how to determine bounds on mortality margins when information on the moments of the distributions is known. We provide numerical examples to ill...

Abstract: A common feature of retirement income products is that their payouts depend on the lifetime of policyholders. A typical example is a life annuity policy which promises to provide benefits regularly as long as the retiree is alive. Consequently, insurers have to rely on “best estimate” life tables, which consist of age-specific mortality rates, in order to price these kind of products ...

Valuation and risk management of large portfolios of variable annuity policies are a big challenge to insurance companies because pricing a large portfolio of variable annuity policies is a time consuming task. Recently, a method based on clustering and kriging has been proposed to address the computational problem arising from this area. In this method, the value of the portfolio is estimated ...