Guaranteed Annuity Options: Five Issues for Resolution

O’Brien, Christopher

doi:10.1017/s1357321700003834

Cited by 3 publications

(3 citation statements)

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“…Much of Equitable Life's assets were in equities, and although it did have a higher proportion of its assets in bonds than many other life insurers (Ranson and Headdon, 1989), this was not a strategy that gave protection against falling interest rates. A solution would have been a specially designed swaption (O'Brien, 2002), but this was not available when the policies were written. Equitable Life was therefore exposed to the risk that its surplus would be depleted to pay for the GAOs if interest rates fell.…”

Section: The Society's Risk Managementmentioning

confidence: 99%

“…After the House of Lord's judgment, policyholders with GAOs were better off as a result of the higher bonuses the Society had to declare; though policyholders without GAOs saw their bonuses cut, in an attempt to recoup the cost. This demonstrates the problems of participating policyholders with different rights; indeed, how bonuses should be calculated on policies with options is not straightforward (O'Brien, 2002).…”

Section: Participating Policies In Equitable Lifementioning

confidence: 99%

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The Downfall of Equitable Life in the United Kingdom: The Mismatch of Strategy and Risk Management

O’Brien¹

2006

Risk Manage Insurance Review

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This article considers the downfall of Equitable Life Assurance Society in the United Kingdom, founded in 1762 and the first life insurer to operate on an actuarial basis. Its failure to manage the risks implicit in guaranteed annuity options led to a financial crisis, and it ceased to write new business in 2000. We analyze the Society's risk management practices, and find that they were inconsistent with its strategy, which highlighted customer focus. It lacked the discipline to balance short-term advantage to customers with the long-term needs of the organization. We also highlight the use of participating policies, and the way in which they were used to transfer risk to policyholders. Finally, we draw some lessons for other life insurers from Equitable Life's experience.

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Section: The Society's Risk Managementmentioning

confidence: 99%

Section: Participating Policies In Equitable Lifementioning

confidence: 99%

The Downfall of Equitable Life in the United Kingdom: The Mismatch of Strategy and Risk Management

O’Brien¹

2006

Risk Manage Insurance Review

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“…Due to the significant increase in liabilities in these pension-type contracts, Equitable Life (a leading UK insurance firm) had to close for new business. Detailed accounts of the issues faced by the issuance of GAO's can be found in the review articles by O'Brien (2001) and Wilkie et al (2004).…”

Section: Introductionmentioning

confidence: 99%

Valuation of Guaranteed Annuity Options in Affine Term Structure Models

Chu

Kwok

2007

Int. J. Theor. Appl. Finan.

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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 circumvent the limitations of the onefactor interest rate model, we model the interest rate dynamics by a two-factor affine interest rate term structure model. The numerical accuracy and computational efficiency of these approximation methods are analyzed. We also investigate the value sensitivity of the guaranteed annuity option with respect to different parameters in the pricing model. JEL classification: G13; G23

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