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arXiv · 1307.2562

Valuation Perspectives and Decompositions for Variable Annuities with GMWB riders

Cody B. Hyndman·Menachem Wenger
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Abstract

The guaranteed minimum withdrawal benefit (GMWB) rider, as an add on to a variable annuity (VA), guarantees the return of premiums in the form of peri- odic withdrawals while allowing policyholders to participate fully in any market gains. GMWB riders represent an embedded option on the account value with a fee structure that is different from typical financial derivatives. We consider fair pricing of the GMWB rider from a financial economic perspective. Particular focus is placed on the distinct perspectives of the insurer and policyholder and the unifying relationship. We extend a decomposition of the VA contract into components that reflect term-certain payments and embedded derivatives to the case where the policyholder has the option to surrender, or lapse, the contract early.

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Cody B. Hyndman, Menachem Wenger. 2013-12-27. Valuation Perspectives and Decompositions for Variable Annuities with GMWB riders. https://doi.org/10.1016/j.insmatheco.2014.02.004

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