Valuation of guaranteed annuity options using a stochastic volatility model for equity prices

Haastrecht, A. van; Plat, Richard; Pelsser, Antoon

doi:10.1016/j.insmatheco.2010.06.007

Cited by 12 publications

(1 citation statement)

References 28 publications

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“…A policyholder of a guaranteed minimum income benefit (GMIB) contract receives at least a pre-specified stream of lifetime income after annuitizing the VA. A guaranteed minimum withdrawal benefit (GMWB) ensures a steady stream of periodical withdrawals regardless of investment performance. There is a rich literature on the fair valuation and risk management of life insurance contracts with embedded guarantees, for example, Boyle and Hardy (2003), Pelsser (2003), Bauer et al (2008), Van Haastrecht et al (2010), Hyndman and Wenger (2014), Shen et al (2016), Mamon et al (2021) and Huang et al (2022). Stochastic optimal control problems for insurance policies with various forms of guaranteed minimum benefits have been studied in the literature.…”

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confidence: 99%

Hedging longevity risk in defined contribution pension schemes

2023

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Pension schemes all over the world are under increasing pressure to efficiently hedge longevity risk imposed by ageing populations. In this work, we study an optimal investment problem for a defined contribution pension scheme that decides to hedge longevity risk using a mortality-linked security, typically a longevity bond. The pension scheme promises a minimum guarantee which allows the members to purchase lifetime annuities upon retirement. The scheme manager invests in the risky and riskless assets available on the market, including the longevity bond. We transform the corresponding constrained optimal investment problem into a single investment portfolio optimization problem by replicating future contributions from members and the minimum guarantee provided by the scheme. We solve the resulting optimization problem using the dynamic programming principle. Through a series of numerical studies, we show that the longevity risk has an important impact on the investment strategy performance. Our results add to the growing evidence supporting the use of mortality-linked securities for efficient hedging of longevity risk.

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