A Study on Consumer Choice between Fee Structures of Variable Annuity

Ick Jin

Journal of Insurance and Finance

2013, 24(3), pp.55-91
Publisher : Korea Insurance Research Institute
Research Area : Business Management

Ick Jin ¹

¹ 보험연구원

ABSTRACT

This paper investigates consumer choice between fee schemes of a variable annuity (VA). A consumer considering a purchase of a VA would evaluate how each fee scheme affects his or her expected utility. Assuming a risk-averse consumer, this paper intends to be a complement to previous studies which assume a risk-neutral consumer. According to simulation results, the back-end loaded fee of VAs appears to be relatively high compared with that of competing goods such as mutual funds. Requests for lower sales fees from consumers and regulators may continue until differential services can justify the gap. The portion of investment risk that is imposed on the consumer would be reduced under the back-end loading scheme. Attracted to the risk-sharing feature, the consumer may be willing to pay a higher sales fee. In this regard, the regulator could induce a more desirable outcome by expanding consumer choice rather than introducing indirect price regulation. Insurance companies would be better off diversifying sales fee schemes in order to explore additional demands on VAs from consumers with diverse risk appetites.
KEYWORDS

consumer choice , fee scheme , variable annuity , expected utility , risk averse , back-end loading , investment risk , price regulation
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