Variable Annuity Hedging

Variable annuities are a popular financial product that allow investors to realize tax-deferred returns which convert into a stable annuity after retirement.

Variable annuity hedging. Interest in equity derivative products as tools for hedging has also increased with the diminished availability of reinsurance alternatives and increased scrutiny from rating agencies regarding unhedged insurance risks. A method to hedge variable annuities in the presence of basis risk is developed. With Variable Annuities VA a product concept that combines aspects of unit-linked and traditional life insurance has found its way from the Northern American and Japanese market also to Europe.

Variable annuities turn out to be exposed to a variety of risks mortality risk market risks and policyholder behavioral risks as we will discuss in full details. I analyze whether the. At the core of these programs are the so-called Greeks.

Variable annuity hedges are often complex financial derivatives such as futures options and more exotic derivatives such as cliquets and basket options. IFRS 17 Implementation Considerations for Variable Annuity VA with a focus on Hedging. EFFECT ON THE VALUE OF A COMPANY.

A variable annuity VA is an equity-linked annuity that provides investment guarantees to its policyholder and its contributions are normally invested in multiple underlying assets eg mutual funds which exposes VA liability to significant market risks. Deep hedging is one of the first applications of real machine learning to front office pricing and risk problems and requires modern machine learning tools to execute efficiently. Life insurers began offering enhanced guarantees for variable annuity contracts in the early 2000s especially guaranteed minimum living benefits GMLBs in addition to the existing death benefit guarantees GMDBs.

Variable annuity guarantee hedging. While the basic construction is unit-linked variable annuities allow flexible product designs that move parts of the financial risk away from the insured. Those subtle issues typical for variable annuities should be reflected in a model which is used for pricing and hedging of variable annuities.

Death Insurance and annuity payments. Since discrete hedging and the underlying model consid-. By Ken Mungan FSA MAAA and Poojan Shah FSA CERA CFA MAAA.