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A Study of the Guaranteed Lifetime Withdrawal Benefit in Variable Annuities

  • Journal of Insurance and Finance
  • 2013, 24(2), pp.141-172
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

김융희 1 Kim, Changki 1

1고려대학교

Accredited

ABSTRACT

The Guaranteed Lifetime Withdrawal Benefit (GLWB) allows minimum withdrawals from an invested amount in an annuity without having to annuitize the investment. The amount that can be withdrawn is based on a percentage of the total amount invested in the annuity. In addition, the GLWB is valuable in that it can induce consumers to purchase a variable annuity to provide for old age by providing death benefits and flexible liquidity. However, GLWB providers are exposed to high risk since they have liability to provide the annuity even after the annuity holders’ reserves become exhausted. Therefore, the appropriate pricing of GLWBs is crucial. In this study, we projected stock returns using the regime switching log normal model (RSLN) in consideration of the long maturity of the GLWB and estimated the survival rate using the Lee-Carter model to reflect the high longevity risk of option providers. After setting the assumptions, we priced the GLWB option price according to the formula. Moreover, we analyzed the effect of major assumptions such as stock volatility and survival rate on the guarantee risk of GLWB providers and proposed a product design to reduce the guarantee risk.

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